<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INTERNATIONAL NETWORK SERVICES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
CALIFORNIA 7379 77-0289509
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
INTERNATIONAL NETWORK SERVICES
1213 INNSBRUCK DRIVE
SUNNYVALE, CA 94089
(408) 542-0100
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DONALD K. MCKINNEY
CHIEF EXECUTIVE OFFICER
INTERNATIONAL NETWORK SERVICES
1213 INNSBRUCK DRIVE
SUNNYVALE, CA 94089
(408) 542-0100
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
ELIZABETH R. FLINT, ESQ. GREGORY M. GALLO, ESQ
BRIAN C. ERB, ESQ. DENNIS C. SULLIVAN, ESQ.
SUSAN L. STAPLETON, ESQ. SCOTT M. STANTON, ESQ.
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 400 HAMILTON AVENUE
PALO ALTO, CA 94304 PALO ALTO, CA 94301
(415) 493-9300 (415) 328-6561
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value................. $20,000,000 $6,897
================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL NETWORK SERVICES
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
------------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus............. Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus............ Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges..................... Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds....................... Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price................................ Outside Front Cover Page;
Underwriters
6. Dilution.............................. Dilution
7. Selling Security Holders.............. Not Applicable
8. Plan of Distribution.................. Outside and Inside Front Cover
Pages; Underwriters
9. Description of Securities to
be Registered........................ Prospectus Summary; Dividend
Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. Not Applicable
11. Information with Respect to
the Registrant....................... Outside and Inside Front Cover
Pages; Prospectus Summary; The
Company; Risk Factors; Use of
Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal
Shareholders; Description of
Capital Stock; Shares Eligible for
Future Sale; Legal Matters;
Experts; Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities....... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued July 31, 1996
Shares
[LOGO]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS
BEEN MADE TO LIST THE SHARES FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "INSS."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $860,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Gray Cary Ware & Freidenrich, counsel for the Underwriters. It is expected
that delivery of the Shares will be made on or about , 1996 at the office
of Morgan Stanley & Co. Incorporated, New York, New York, against payment
therefor in immediately available funds.
-----------
MORGAN STANLEY & CO.
Incorporated
ALEX. BROWN & SONS
Incorporated
ROBERTSON, STEPHENS & COMPANY
, 1996
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR
SUCH PERSON TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
The Company.............................................................. 4
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 20
Management............................................................... 31
Certain Transactions..................................................... 37
Principal Shareholders................................................... 38
Description of Capital Stock............................................. 40
Shares Eligible for Future Sale.......................................... 42
Underwriters............................................................. 44
Legal Matters............................................................ 45
Experts.................................................................. 45
Additional Information................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>
----------------
International Network Services, INS, EnterprisePRO, "Providing the Power of
Operable Networks" and "Providing the Power of Predictable Networks" are
trademarks of the Company. This Prospectus also includes product names and
other trade names and trademarks of the Company and of other organizations.
----------------
Except as otherwise noted herein, all information in this Prospectus (i)
assumes the conversion of all outstanding shares of the Company's Mandatorily
Redeemable Convertible Preferred Stock (the "Preferred Stock") into shares of
Common Stock, which will occur automatically upon the closing of this
offering, (ii) assumes no exercise of the Underwriters' over-allotment option,
(iii) assumes the issuance of 237,053 shares upon the exercise of warrants
upon the closing of this offering and (iv) reflects an increase in the
authorized number of shares of Common Stock from 45,000,000 to 75,000,000
shares and the establishment of 5,000,000 shares of undesignated Preferred
Stock which will be effected upon the closing of this offering. See
"Description of Capital Stock" and "Underwriters." The Company's fiscal year
is composed of four 13-week quarters, each of which ends on the last Sunday of
the final fiscal month of the quarter, with the fiscal year ending on the
Sunday closest to June 30th. For presentation purposes, each fiscal quarter
and year is titled as ending on the last date of the applicable month.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
THE GROWTH OF NETWORK TRAFFIC . . .
Many businesses are increasingly using client/server based applications, e-
mail, remote access, the Internet, corporate Intranets, video, graphics and
audio. The increase in amount of data generated by these applications combined
with the larger number of users connected to networks has increased traffic
and placed higher demands on networks.
(Photograph of large room of workers using computer)
HAS LED TO INCREASINGLY COMPLEX NETWORKS . . .
Network hardware and software companies are rapidly developing sophisticated
new technologies such as routers, inverse multiplexers, switches, ATM and
virtual LANs to accommodate the increase in data traffic. In addition, the
complexity of networks is magnified by the need to integrate these new
technologies with legacy network systems.
(Photograph that represents complex networks)
THAT REQUIRE A FULL RANGE OF SERVICES AND EXPERTISE.
INS is a leading provider of services for complex enterprise networks. The
Company provides services for the full life cycle of a network, including
planning, design, implementation, operations and optimization, and maintains
special expertise in the most complex network technologies and multivendor
environments.
(Graphic showing life cycle of services, planning, design, implementation,
operations and optimization)
TECHNOLOGY EXPERTISE
.Wide area networks
.Network management
.Network and host security
.High performance LANs and virtual LANs
.Frame relay
.ATM
.TCP/IP
.SNA
.Switching
.SNMP
<PAGE>
SERVING A BROAD RANGE OF LARGE CLIENTS . . .
The Company provides professional .AT&T
services for clients with large .EDS
complex networks across a broad .Georgia Pacific
range of industries. Clients .Kaiser Permanente
include: .MCI
REQUIRES COLLABORATION BY EXPERTS . . .
The Company's network systems engineers together have expertise in a wide array
of computer and network systems. Knowledge Network, the Company's on-line
solutions resource, enables the Company to leverage the collective talents of
its experts to provide proven and cost-effective solutions to clients network
services needs.
(Photograph of engineers looking at INS Knowledge Network on a computer)
FROM A LEADING SERVICE PROVIDER.
With 425 employees and offices in 17 cities, INS is a leading provider of
services for complex enterprise networks.
(Graphic of map of United States with dot for each city in which the Company
has an office)
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus, including under "Risk Factors."
THE COMPANY
International Network Services ("INS" or the "Company") is a leading provider
of services for complex enterprise networks. The Company provides services for
the full life cycle of a network, including planning, design, implementation,
operations and optimization, and maintains expertise in the most complex
network technologies and multivendor environments. Areas of expertise include
WANs, network management, network and host security and high performance LANs.
As a services only provider, the Company believes that it is able to provide
unbiased assessments and optimal solutions for its clients. The Company offers
its services on a long or short term basis in any or all phases of the network
life cycle. The Company's services are particularly well suited to clients who
out-task a portion of their information technology infrastructure. The Company
has developed an on-line solutions resource, Knowledge Network, through which
the Company's network systems engineers communicate and collaborate to provide
proven and cost-effective solutions to clients' complex enterprise network
needs. The Company is leveraging its expertise in complex networks to develop
electronic services for certain repetitive network management tasks, such as
network monitoring and network performance reporting. The Company's current
electronic service, EnterprisePRO, is designed to collect data, generate
reports and compile network information for use in the optimization of
networks. The Company's clients include AT&T, EDS, Georgia Pacific, Kaiser
Permanente and MCI. The Company serves its clients, many of which have multi-
location enterprise networks, through its nationwide network of 17 offices. As
of June 30, 1996, the Company had 334 network systems engineers.
THE OFFERING
Common Stock offered................. shares
Common Stock to be outstanding after
the offering........................ shares(1)
Use of proceeds...................... For repayment of debt and general
corporate purposes, including working
capital and capital expenditures.
Proposed Nasdaq National Market
symbol.............................. INSS
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 19, 1991 YEAR ENDED JUNE 30,
(INCEPTION) TO ---------------------------------
JUNE 30, 1992 1993 1994 1995 1996
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue..................... $ 186 $ 1,479 $ 7,565 $15,549 $44,092
Total operating expenses.... 877 3,556 8,929 14,733 39,378
Net income (loss)........... (701) (2,161) (1,394) 775 2,877
Net income per share (2).... $ 0.03 $ 0.09
Shares used to compute net
income per share (2)........ 29,357 30,529
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 869 $
Working capital........................................ 6,060
Total assets........................................... 18,072
Notes payable, less current portion.................... 316
Mandatorily Redeemable Convertible Preferred Stock..... 12,427
Shareholders' equity (deficit)......................... (2,544)
</TABLE>
- --------
(1) Based on shares outstanding as of June 30, 1996. Includes 237,053 shares of
Common Stock to be issued upon the exercise of warrants upon the closing of
this offering. Excludes (i) 2,169,460 shares of Common Stock issuable upon
exercise of options outstanding as of June 30, 1996 at a weighted average
exercise price of $1.52 per share, of which 720,910 shares were exercisable
as of June 30, 1996, (ii) 212,879 shares of Common Stock reserved for
future issuance under the Company's Amended and Restated 1992 Flexible
Stock Incentive Plan and (iii) 63,291 shares issuable upon exercise of
outstanding warrants at an exercise price of $0.79 per share. In July 1996,
the Company adopted the 1996 Stock Plan and 1996 Employee Stock Purchase
Plan, under which 5,500,000 shares and 1,200,000 shares have been reserved
for future grant, respectively. See "Management--Stock Plans," "Description
of Capital Stock" and Notes 5 and 9 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used to compute net income per share.
(3) Adjusted to reflect (i) the sale of shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share and application of the net proceeds therefrom (after deducting
estimated underwriting discounts and commissions and offering expenses
payable by the Company), (ii) the exercise of warrants to purchase 237,053
shares of Common Stock at $0.10 per share upon the closing of this offering
and (iii) the conversion of all outstanding Preferred Stock of the Company
into an aggregate of 16,734,889 shares of Common Stock upon consummation of
the offering. See "Capitalization."
3
<PAGE>
THE COMPANY
INS is a leading provider of services for complex enterprise networks. The
Company provides services for the full life cycle of a network, including
planning, design, implementation, operations and optimization, and maintains
expertise in the most complex network technologies and multivendor
environments. Areas of expertise include wide area networks ("WANs"), network
management, network and host security and high performance local area networks
("LANs"). As a services only provider, the Company believes that it is able to
provide unbiased assessments and optimal solutions for its clients. The
Company offers its services on a long or short term basis in any or all phases
of the network life cycle. The Company's services are particularly well suited
to clients who out-task a portion of their information technology
infrastructure. The Company has developed an on-line solutions resource,
Knowledge Network, through which the Company's network systems engineers
communicate and collaborate to provide proven and cost-effective solutions to
clients' complex enterprise network needs. The Company is leveraging its
expertise in complex networks to develop electronic services for certain
repetitive network management tasks, such as network monitoring and network
performance reporting. The Company's current electronic service,
EnterprisePRO, is designed to collect data, generate reports and compile
network information for use in the optimization of networks.
As network traffic has grown, the technology underlying networks has become
increasingly complex. Network hardware and software companies are rapidly
developing sophisticated new technologies such as routers, inverse
multiplexers, switches, ATM and virtual LANs ("VLANs") to accommodate the
increase in data traffic. The implementation of these technologies requires
significant expertise. In addition, the complexity of networks is magnified by
the need to integrate these new technologies with legacy network systems. As a
result, it is increasingly difficult for network managers to ensure the
reliability, performance and security of these large, heterogeneous networks.
Furthermore, the tools available to manage today's networks are themselves
very complex and require investments in hardware, software, personnel and
training.
Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity has made it difficult for
companies to implement and manage their large multivendor network
environments. In addition, to remain competitive, companies are increasingly
focused on their core business competencies and often turn to third-party
service providers for non-core functions, such as those related to their
computing environments. While some companies "out-source" their entire
computing environment, an increasing number of companies are pursuing an
approach to more actively manage their computing environments by "selectively
out-sourcing" or "out-tasking" only a limited set of services. The rapid
technological changes in networking and the move to out-tasking have created
increased demand for third-party network services.
The Company's objective is to become the premier provider of services for
complex enterprise networks. The Company's strategy to achieve this objective
includes building and strengthening client relationships, expanding its client
base in existing and new markets, attracting and retaining high quality
network systems engineers, developing and expanding its corporate
infrastructure, expanding its electronic services and pursuing strategic
acquisitions.
The Company serves its clients, many of which have multi-location enterprise
networks, through its nationwide network of 17 offices. The Company's clients
represent a broad range of industries, including many of the world's leaders
in telecommunications, technology, financial services, consumer products,
manufacturing and systems integration. These clients include AT&T, EDS Georgia
Pacific and Kasier Permanente and MCI. As of June 30, 1996, the Company had
334 network systems engineers.
The Company was incorporated in California in 1991. The Company's principal
executive office is located at 1213 Innsbruck Dr., Sunnyvale, California 94089
and its telephone number is (408) 542-0100. Except as otherwise noted herein,
all references to "INS" or the "Company" shall mean International Network
Services, a California corporation.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Company's business, prospective
investors should consider carefully the following factors in addition to the
other information set forth in this Prospectus.
Variability of Quarterly Operating Results. Substantially all of the
Company's revenue is derived from professional services, which are generally
provided on a "time and expenses" basis. Revenue is recognized only when
network systems engineers are engaged on client projects. In addition, a
substantial majority of the Company's operating expenses, particularly
personnel and related costs, depreciation and rent, are relatively fixed in
advance of any particular quarter. As a result, any underutilization of
network systems engineers may cause significant variations in operating
results in any particular quarter and could result in losses for such quarter.
Factors which could cause such underutilization include the reduction in size,
delay in commencement, interruption, or termination of one or more significant
projects, the completion during a quarter of one or more significant projects,
the overestimation of resources required to complete new or ongoing projects,
the timing and extent of training, weather related shut-downs, vacation days
and holidays. The Company's revenue and earnings may also fluctuate from
quarter to quarter based on a variety of factors including the loss of key
employees, reductions in billing rates, write-offs of work performed for
clients, competition, timing of employment taxes, the initial or ongoing
market acceptance of EnterprisePRO, the development and introduction of new
services and general economic conditions. In addition, the Company plans to
continue to expand its operations by hiring additional network systems
engineers and other employees, and adding new offices, systems and other
infrastructure. The resulting increase in operating expenses would have a
material adverse effect on the Company's operating results if revenue were not
to increase to support such expenses. Based upon all of the foregoing, the
Company believes that quarterly revenue and operating results are likely to
vary significantly in the future and that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied on
as indications of future performance. Furthermore, it is likely that in some
future quarter the Company's revenue or operating results will be below the
expectations of public market analysts or investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Risks Associated with Client Concentration. The Company has derived a
significant portion of its revenue from a limited number of large clients and
expects this concentration to continue. The Company's largest client, MCI
Corp. ("MCI"), accounted for approximately $7.5 million, or 17%, of the
Company's revenue in fiscal 1996 and approximately $1.1 million, or 6.9%, of
the Company's revenue in fiscal 1995. In fiscal 1994, First United Bank
accounted for approximately $2.3 million, or 30.3% of the Company's revenue,
and AirTouch Communications accounted for approximately $1.0 million, or 13.3%
of the Company's revenue. No other client accounted for more than 10% of the
Company's revenue in fiscal 1996 or 1995. There can be no assurance that
revenue from MCI or other clients that have accounted for significant revenue
in past periods, individually or as a group, will continue, or if continued
will reach or exceed historical levels in any future period. The Company does
not have a long-term services contract with MCI or any of its other clients.
Any significant reduction in the scope of the work performed for MCI, any
other significant client or a number of smaller clients, the failure of
anticipated projects to materialize, or deferrals, modifications or
cancellations of ongoing projects by any of these clients could have a
material adverse effect on the Company's business, operating results and
financial condition. See "--Absence of Long-Term Agreements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Key Employees. The Company's success will depend in part on
the continued services of its key employees. The Company does not have
employment or non-competition agreements with any of its employees. The loss
of services of one or more of the Company's key employees could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, if one or more key employees joins a
competitor or forms a competing company, the loss of such employees and any
resulting loss
5
<PAGE>
of existing or potential clients to any such competitor could have a material
adverse effect on the Company's business, operating results and financial
condition. In the event of the loss of any such employee, there can be no
assurance that the Company would be able to prevent the unauthorized
disclosure or use of the Company's or its clients' technical knowledge,
practice or procedures by such personnel or that such disclosure or use would
not have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Human Resources" and "--
Intellectual Property."
Need to Attract and Retain Qualified Network Systems Engineers. The
Company's future success will depend in large part on its ability to hire,
train and retain network systems engineers who together have expertise in a
wide array of network and computer systems and a broad understanding of the
industries the Company serves. Competition for network systems engineers is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In particular, competition is intense
for the limited number of qualified managers and senior network systems
engineers. The Company is currently experiencing and is likely to continue to
experience high rates of turnover among its network systems engineers. Any
inability of the Company to hire, train and retain a sufficient number of
qualified network systems engineers could impair the Company's ability to
adequately manage and complete its existing projects or to obtain new
projects, which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
any inability of the Company to attract and retain a sufficient number of
qualified network systems engineers in the future could impair the Company's
planned expansion of its business. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Human
Resources."
Dependence on Professional Services; Uncertainty of Market Acceptance of
Electronic Services. To date, substantially all of the Company's revenue has
been derived from professional services related to complex enterprise
networks. The Company believes that professional services will continue to
represent the substantial majority of its revenue for the foreseeable future.
As a result, the Company's business depends in large part on the continued
growth and acceptance of complex computer networks and the continued trend
among businesses with complex computer networks to use third-party network
support services. In addition, the Company's business will depend on the
Company's ability to fulfill the increasingly sophisticated needs of its
clients. Any decline in demand for the Company's professional services or the
inability of the Company to satisfy its clients' requirements would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Services--Professional Services."
The Company's long-term strategy is to derive a portion of its revenue from
electronic services. The Company has in the past offered, on a limited basis,
an electronic service that has not achieved significant market acceptance or
generated significant revenue. The Company has expended, and expects to
continue to expend, substantial amounts in the development and marketing of
its electronic services. The Company has recently introduced EnterprisePRO, an
enhanced version of the prior electronic service. The introduction of
EnterprisePRO and any other electronic services that the Company may develop
in the future will be subject to risks generally associated with new service
introductions, including delays in development, testing or introduction, or
the failure to satisfy clients' requirements. There can be no assurance that
EnterprisePRO will gain market acceptance on a timely basis or at all. The
failure of EnterprisePRO, or any other new electronic services that the
Company may develop, to gain market acceptance on a timely basis could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Services--Electronic Services."
Management of Growth. The Company has recently experienced a period of rapid
revenue and client growth and an increase in the number of its employees and
offices and the scope of its supporting infrastructure. The Company's revenue
was approximately $7.6 million, $15.5 million and $44.1 million in fiscal
1994, 1995 and 1996, respectively. The Company's headcount was 77,120 and 425
at the end of fiscal 1994, 1995 and 1996, respectively. The Company does not
believe these rates of growth are sustainable. In addition, the Company opened
four new offices in fiscal 1996 and expects to open additional offices in the
future. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant
strain on the Company's management and operating and financial systems. The
Company will
6
<PAGE>
be required to continue to implement and improve its systems on a timely basis
and in such a manner as is necessary to accommodate the increased number of
transactions and clients and the increased size of the Company's operations.
There can be no assurance that the Company's management or systems will be
adequate to support the Company's existing or future operations. Any failure
to implement and improve the Company's systems or to hire and retain the
appropriate personnel to manage its operations would have a material adverse
effect on the Company's business, operating results and financial condition.
In addition, an increase in the Company's operating expenses from its planned
expansion would have a material adverse effect on the Company's business,
operating results and financial condition if revenue does not increase to
support such expansion. See "--Potential International Expansion,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Human Resources."
Absence of Long-Term Agreements. The Company's clients are generally able to
reduce or cancel their use of the Company's services without penalty and with
little or no notice. As a result, the Company believes that the number and
size of its existing projects are not reliable indicators or measures of
future revenue. The Company has in the past provided, and is likely in the
future to provide, services to clients without a written commitment or
contract. When a client defers, modifies or cancels a project, the Company
must be able to rapidly redeploy network systems engineers to other projects
in order to minimize the underutilization of employees and the resulting
adverse impact on operating results. In addition, the Company's operating
expenses are relatively fixed and cannot be reduced on short notice to
compensate for unanticipated variations in the number or size of projects in
progress. As a result, any termination, significant reduction or modification
of its business relationships with any of its significant clients or with a
number of smaller clients could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Marketing."
Competition. The network services industry is comprised of a large number of
participants and is subject to rapid change and intense competition. The
Company faces competition from system integrators, value added resellers
("VARs"), local and regional network services firms, telecommunications
vendors, networking vendors and computer systems vendors, many of which have
significantly greater financial, technical and marketing resources, greater
name recognition, and generate greater service revenue than does the Company.
The Company has faced, and expects to continue to face, additional competition
from new entrants into its markets. Increased competition could result in
price reductions, fewer client projects, underutilization of employees,
reduced operating margins and loss of market share, any of which could
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able
to compete successfully against current or future competitors. The failure of
the Company to compete successfully would have a material adverse effect on
the Company's business, operating results and financial condition.
In addition, most of the Company's clients have internal network support
services capabilities and could choose to satisfy their network support
services needs through internal resources rather than through outside service
providers. As a result, the decision by the Company's clients or potential
clients to perform network services internally could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Competition."
Relationship with Cisco Systems. Although the Company is a vendor-
independent provider of network services, the Company has a significant
relationship with Cisco Systems, Inc. ("Cisco") and believes that maintaining
and enhancing this relationship is important to the Company's business due to
Cisco's leading position in the large scale, enterprise internetworking
market. The Company has entered into direct relationships with clients as a
result of referrals from Cisco and has from time to time performed services
for Cisco, including as a subcontractor. In addition, Cisco is an investor in
the Company and after this offering will own approximately % of the
Company's Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). An officer of Cisco is also a member of the Company's
Board of Directors. Although the Company believes that its relationship with
Cisco is good, there can be no assurance that the Company will be able to
maintain or enhance its relationship with Cisco. Any deterioration in the
Company's relationship with
7
<PAGE>
Cisco could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, should the Company's
relationship with Cisco be perceived as compromising the Company's ability to
provide unbiased solutions, the Company's relationship with existing or
potential clients could be materially adversely affected. See "Business--Sales
and Marketing."
Project Risks. Many of the Company's projects are critical to the operations
of its clients' businesses. The Company has in the past been and may in the
future be required to render additional services at no charge as a result of
the Company's failure to meet its clients' expectations in the performance of
its services. The failure to perform services that meet a client's
expectations may result in the Company not being paid for services rendered
and may damage the Company's reputation and adversely affect its ability to
attract new business. In addition, a liability claim brought against the
Company could have a material adverse effect on the Company's business,
operating results and financial condition. The Company maintains errors and
omissions insurance, and to date has not submitted any claims thereunder. The
Company is also subject to claims by its clients for the actions of its
employees arising from damages to clients' business or otherwise. Such claims
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Services."
Rapid Technological Change. The Company has derived, and expects to continue
to derive, a substantial portion of its revenue from projects based on complex
enterprise networks. The networking and network services markets are
continuing to develop and are subject to rapid change. The Company's success
will depend in part on its ability to offer services that keep pace with
continuing changes in technology, evolving industry standards and changing
client preferences and to hire, train and retain network systems engineers who
can fulfill the increasingly sophisticated needs of its clients. There can be
no assurance that the Company will be successful in addressing these
developments in a timely manner. Any delay or failure by the Company to
address these developments could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there can be no assurance that products or technologies developed by third
parties will not render certain of the Company's services noncompetitive or
obsolete. See "Business--Services."
Potential Acquisitions. As part of its business strategy, the Company may
make acquisitions of, or significant investments in, complementary companies,
products or technologies, although no such acquisitions or investments are
currently pending. Any such future transactions would be accompanied by the
risks commonly encountered in making acquisitions of companies, products and
technologies. Such risks include, among others, the difficulty associated with
assimilating the personnel and operations of acquired companies, the potential
disruption of the Company's ongoing business, the distraction of management's
time or other resources, the inability of management to maximize the financial
and strategic position of the Company through the successful integration of
acquired personnel, technology and rights, the maintenance of uniform
standards, controls, procedures and policies, and the impairment of
relationships with employees and clients as a result of the integration of new
management personnel. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with any such acquisitions. In addition, future acquisitions by the
Company could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities, and amortization expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition or on the market price of the Company's Common Stock. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Potential International Expansion. A component of the Company's long-term
strategy is to expand into international markets, although the Company does
not have any immediate or pending plans to do so. If the Company opens any
international offices and the revenue generated by these offices are not
adequate to offset the expense of establishing and maintaining these foreign
operations, the Company's business, operating results and financial condition
could be materially adversely affected. To date, the Company has provided
limited professional services to certain of its United States clients in
foreign locations, but has no direct international experience. There can be no
assurance that the Company will be able to successfully market, sell and
deliver its services in these markets. In addition to the uncertainty as to
the Company's ability to expand into international markets, there are certain
risks inherent in conducting business on an international level, such as
unexpected changes in regulatory requirements, export restrictions, tariffs
and other trade barriers, difficulties in staffing and
8
<PAGE>
managing foreign operations, employment laws and practices in foreign
countries, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity during
the summer months in Europe and certain other parts of the world, and
potentially adverse tax consequences, any of which could adversely impact the
success of the Company's international operations. There can be no assurance
that one or more of these factors will not have a material adverse effect on
the Company's future international operations and, consequently, on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete effectively in these
markets. See "Business--Sales and Marketing."
Intellectual Property Rights. The Company's success is dependent in part on
its information technology, some of which is proprietary to the Company, and
other intellectual property rights. The Company relies on a combination of
nondisclosure and other contractual arrangements, technical measures, and
trade secret and trademark laws to protect its proprietary rights. The Company
has one patent application pending and holds one registered trademark. The
Company enters into confidentiality agreements with its employees and attempts
to limit access to and distribution of proprietary information. There can be
no assurance that the steps taken by the Company in this regard will be
adequate to deter misappropriation of proprietary information or that the
Company will be able to detect unauthorized use or take appropriate steps to
enforce intellectual property rights. The Company has in the past entered into
services contracts with clients that assign rights to certain aspects of the
work performed under such contracts to such clients. The Company does not
believe that such contracts will limit the Company's ability to render its
services to other clients. However, there can be no assurance that the Company
will not receive communications in the future from third parties or clients
asserting that the Company has infringed or misappropriated the proprietary
rights of such parties. Any such claims, with or without merit, could be time
consuming, result in costly litigation and diversion of technical and
management personnel or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all. In the event of a successful claim of infringement or
misappropriation against the Company and failure or inability of the Company
to develop non-infringing technology or license the infringed, misappropriated
or similar technology, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business--Intellectual
Property."
Concentration of Stock Ownership. Upon completion of this offering, the
present directors, executive officers and their respective affiliates will
beneficially own approximately % of the outstanding Common Stock ( % if the
Underwriters' over-allotment option is exercised in full). As a result, these
shareholders will be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal Shareholders" and "Description of
Capital Stock."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public trading market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiation between the Company and the
representatives of the Underwriters based upon several factors. The market
price of the Company's Common Stock is likely to be highly volatile and could
be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations or new services
by the Company or its competitors, changes in financial estimates by public
market analysts, or other events or factors. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation could result in substantial costs and a diversion of
9
<PAGE>
management's attention and resources, which would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Underwriters--Pricing of the Offering."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock prevailing from time to time. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
Effect of Certain Charter Provisions. The Board of Directors of the Company
has the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue shares of
Preferred Stock. See "Description of Capital Stock--Preferred Stock."
Dilution. Investors participating in this offering will incur immediate
dilution of $ per share in the net tangible book value of the Common Stock.
The Company believes that to attract and retain qualified employees it will
need to offer a greater number of options as a percent of total shares
outstanding than non-service high technology companies. The Company has in the
past granted a substantial number of options to purchase Common Stock to
employees as part of compensation packages, and the Company expects that it
will continue to grant a substantial number of options in the future. In
addition, the Company has adopted an Employee Stock Purchase Plan which will
provide employees an opportunity to purchase shares below prevailing market
value. The Company may also issue shares of its Common Stock in connection
with strategic acquisitions or international expansion which could also result
in dilution to shareholders. See "Dilution," "Business--Human Resources" and
"Management--Stock Plans."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock being offered hereby are estimated to be approximately $ million
(approximately $ million if the Underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of $ per
share. The principal purposes of this offering are to obtain additional
capital, to create a public market for the Company's Common Stock and to
facilitate future access by the Company to public equity markets. The Company
expects to use the net proceeds from this offering to repay approximately $1.7
million of indebtedness outstanding as of June 30, 1996 and for general
corporate purposes, including working capital and capital expenditures. The
indebtedness bears interest at rates ranging from the lender's prime rate plus
1.00% to 1.25% per annum and is otherwise scheduled to be repaid through 1998.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. The Company has no present plans, agreements or
commitments and is not currently engaged in any negotiations with respect to
any such transactions. Pending use of the net proceeds for the above purposes,
the Company intends to invest such funds in short-term, interest-bearing,
investment grade obligations.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock or other
securities and does not intend to pay cash dividends for the forseeable
future. In addition, the Company's credit facility prohibits the payment of
dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth the short-term indebtedness and
capitalization of the Company as of June 30, 1996 and as adjusted to reflect
(i) the sale of shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $ per share and application of the
net proceeds therefrom (after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company), (ii) the exercise
of warrants to purchase 237,053 shares of Common Stock at $0.10 per share upon
the closing of this offering and (iii) the conversion of all outstanding
Mandatorily Redeemable Convertible Preferred Stock of the Company into an
aggregate of 16,734,889 shares of Common Stock upon the closing of the
offering.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term indebtedness, including current portion
of notes payable (1)............................... $ 1,399 $ --
=========== ==========
Notes payable, less current portion (1)............. $ 316 $ --
----------- ----------
Mandatorily Redeemable Convertible Preferred Stock.. 12,427 --
Shareholders' equity (deficit):
Preferred Stock, no par value; no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares issued or
outstanding, as adjusted......................... -- --
Common Stock, no par value; 45,000,000 shares
authorized, 11,426,875 shares issued and
outstanding, actual; 75,000,000 shares
authorized, shares issued and outstanding, as
adjusted (2)..................................... 2,394
Accretion of Mandatorily Redeemable Convertible
Preferred Stock.................................. (2,454) --
Notes receivable from shareholders................ (1,880) (1,880)
Accumulated deficit............................... (604) (604)
----------- ----------
Total shareholders' equity (deficit)............. (2,544)
----------- ----------
Total capitalization............................ $ 10,199 $
=========== ==========
</TABLE>
- --------
(1) See Note 8 of Notes to Financial Statements.
(2) Based on shares outstanding as of June 30, 1996. Includes 237,053 shares
of Common Stock to be issued upon the exercise of warrants upon the
closing of this offering. Excludes (i) 2,169,460 shares of Common Stock
issuable upon exercise of options outstanding as of June 30, 1996 at a
weighted average exercise price of $1.52 per share, of which 720,910
shares were exercisable as of June 30, 1996, (ii) 212,879 shares of Common
Stock reserved for future issuance under the Company's Amended and
Restated 1992 Flexible Stock Incentive Plan and (iii) 63,291 shares
issuable upon exercise of outstanding warrants at an exercise price of
$0.79 per share. Subsequent to June 30, 1996, the Board of Directors
granted options to purchase an additional 167,300 shares of Common Stock.
In July 1996, the Company adopted the 1996 Stock Plan and 1996 Employee
Stock Purchase Plan under which 5,500,000 and 1,200,000 shares have been
reserved for future grant, respectively. See "Management--Stock Plans,"
"Description of Capital Stock" and Notes 5 and 9 of Notes to Financial
Statements.
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
$ or $ per share of Common Stock. Pro forma net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock (assuming the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exercise of warrants to purchase
237,053 shares of Common Stock upon the closing of this offering.) After
giving effect to the sale by the Company of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $ per share
and after deductions of estimated underwriting discounts and commissions and
offering expenses), the Company's adjusted pro forma net tangible book value
at June 30, 1996 would have been approximately $ or $ per share. This
represents an immediate increase in net tangible book value to existing
shareholders of $ per share and an immediate dilution to new investors of
$ per share. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of June 30, 1996.. $
Increase in pro forma net tangible book value per share
attributable to new investors...................................
----
Pro forma net tangible book value per share after this offering....
----
Dilution per share of common stock to new investors................ $
====
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1996 the
difference between the number of shares of Common Stock purchased from the
Company (assuming conversion of all outstanding shares of Preferred Stock into
Common Stock and the exercise of warrants to purchase 237,053 shares of Common
Stock upon the closing of this offering) of the total consideration paid, and
the average price per share paid by existing shareholders and by the new
investors at an assumed initial public offering price of $ per share (before
deductions of estimated underwriting discounts and commissions and offering
expenses).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,398,817 % $12,433,000 % $0.44
New investors..................
---------- --- ----------- ---
Total........................ % $ %
========== === =========== ===
</TABLE>
The foregoing analysis assumes no exercise of the Underwriters' over-
allotment option and no exercise of stock options outstanding at June 30,
1996. As of June 30, 1996, there were options outstanding to purchase a total
of 2,169,460 shares of Common Stock at a weighted average exercise price of
$1.52 per share, and 212,879 shares were reserved for grant of future options
under the Company's Amended and Restated 1992 Flexible Stock Incentive Plan.
Subsequent to June 30, 1996, the Board of Directors granted options to
purchase an additional 167,300 shares of Common Stock. In addition, in July
1996 the Board of Directors adopted the 1996 Stock Plan and the 1996 Employee
Stock Purchase Plan, under which 5,500,000 and 1,200,000 shares have been
reserved for future grant, respectively. No options or shares had been issued
under any of these plans. As of June 30, 1996, there were warrants outstanding
to purchase a total of 63,291 shares of Common Stock at $0.79 per share. To
the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization," "Management--Stock
Plans" and Notes 5 and 9 of Notes to Financial Statements.
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended June 30, 1994, 1995 and 1996 and the balance sheet data
as of June 30, 1995 and 1996 are derived from financial statements of the
Company that have been audited by Price Waterhouse LLP, independent
accountants, and are included elsewhere in this Prospectus. The balance sheet
data as of June 30, 1994 are derived from financial statements of the Company
that have been audited and are not included herein. The statement of
operations data for the period ended June 30, 1992 and for the fiscal year
ended June 30, 1993 and the balance sheet data as of June 30, 1992 and 1993
are derived from unaudited financial statements of the Company that are not
included herein. The historical results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 19, 1991 YEAR ENDED JUNE 30,
(INCEPTION) TO ---------------------------------
JUNE 30, 1992 1993 1994 1995 1996
--------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue..................... $ 186 $ 1,479 $ 7,565 $15,549 $44,092
Operating expenses:
Professional personnel..... 178 876 3,319 6,654 19,892
Sales and marketing........ 407 1,724 2,774 3,843 7,990
General and
administrative............ 131 432 1,588 1,890 5,049
Other costs................ 161 524 1,248 2,346 6,447
----- ------- ------- ------- -------
Total operating expenses.. 877 3,556 8,929 14,733 39,378
----- ------- ------- ------- -------
Income (loss) from
operations................. (691) (2,077) (1,364) 816 4,714
Interest and other, net..... (10) (84) (30) 17 3
----- ------- ------- ------- -------
Income (loss) before income
taxes...................... (701) (2,161) (1,394) 833 4,717
Provision for income taxes.. -- -- -- 58 1,840
----- ------- ------- ------- -------
Net income (loss)........... $(701) $(2,161) $(1,394) $ 775 $ 2,877
===== ======= ======= ======= =======
Net income per share (1).... $ 0.03 $ 0.09
======= =======
Shares used to compute net
income per share (1)....... 29,357 30,529
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
1992 1993 1994 1995 1996
----- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 90 $ 823 $ 2,414 $ 4,161 $ 869
Working capital (deficit).......... (663) 1,072 2,850 6,103 6,060
Total assets....................... 391 1,852 5,112 9,967 18,072
Notes payable, less current
portion........................... -- -- 447 732 316
Mandatorily Redeemable Convertible
Preferred Stock................... -- 4,007 7,413 11,292 12,427
Shareholders' deficit.............. (454) (2,513) (4,296) (4,395) (2,544)
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used to compute net income per share.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Since its inception in August 1991, INS has focused on becoming a leading
provider of services for complex enterprise networks. Substantially all of the
Company's revenue is derived from professional services, which are generally
provided to clients on a "time and expenses" basis. Professional services
revenue is recognized as services are performed. Any payments received in
advance of services performed are recorded as deferred revenue. The Company
also performs a limited number of fixed-price projects under which revenue is
recognized using the percentage-of-completion method. The Company also derives
revenue from electronic services; however, such revenue has not been
significant to date. Electronic services revenue is recognized ratably over
the term of the contract. The Company has expended, and expects to continue to
expend, substantial amounts in the development and marketing of its electronic
services. The Company's clients are generally able to reduce or cancel their
use of the Company's services without penalty and with little or no notice.
Since revenue is recognized by the Company only when network systems
engineers are engaged on client projects, the utilization of network systems
engineers is important in determining the Company's operating results. In
addition, a substantial majority of the Company's operating expenses,
particularly personnel and related costs, depreciation and rent, are
relatively fixed in advance of any particular quarter. As a result, any
underutilization of network systems engineers may cause significant variations
in operating results in any particular quarter and could result in losses for
such quarter. Factors which could cause such underutilization include the
reduction in size, delay in commencement, interruption, or termination of one
or more significant projects, the completion during a quarter of one or more
significant projects, the overestimation of resources required to complete new
or ongoing projects, timing and extent of training, weather related shut-
downs, vacation days and holidays.
The Company's revenue and earnings may also fluctuate from quarter to
quarter based on a variety of factors including the loss of key employees,
reductions in billing rates, write-offs of work performed for clients,
competition, timing of employment taxes, the initial or ongoing market
acceptance of EnterprisePRO, the development and introduction of new services
and general economic conditions. In addition, the Company plans to continue to
expand its operations by hiring additional network systems engineers and other
employees, and adding new offices, systems and other infrastructure. The
resulting increase in operating expenses would have a material adverse effect
on the Company's operating results if revenue were not to increase to support
such expenses. Based upon all of the foregoing, the Company believes that
quarterly revenue and operating results are likely to vary significantly in
the future and that period-to-period comparisons of its operating results are
not necessarily meaningful and should not be relied on as indications of
future performance. Furthermore, it is likely that in some future quarter the
Company's revenue or operating results will be below the expectations of
public market analysts or investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
15
<PAGE>
ANNUAL RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percent of revenue:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenue................................................ 100.0% 100.0% 100.0%
Operating expenses:
Professional personnel................................ 43.9 42.8 45.1
Sales and marketing................................... 36.7 24.7 18.1
General and administrative............................ 21.0 12.1 11.5
Other costs........................................... 16.5 15.1 14.6
------ ------ ------
Total operating expenses............................. 118.1 94.7 89.3
------ ------ ------
Income (loss) from operations.......................... (18.1) 5.3 10.7
Interest and other, net................................ (0.3) 0.1 --
------ ------ ------
Income (loss) before income taxes...................... (18.4) 5.4 10.7
Provision for income taxes............................. -- 0.4 4.2
------ ------ ------
Net income (loss)...................................... (18.4)% 5.0% 6.5%
====== ====== ======
</TABLE>
REVENUE
Substantially all of the Company's revenue is derived primarily from fees
for professional services. The Company also derives revenue from electronic
services; however, such revenue has not been significant to date. Revenue was
$7.6 million, $15.5 million and $44.1 million in fiscal 1994, 1995 and 1996,
respectively, representing increases of 105.5% from fiscal 1994 to fiscal 1995
and 183.6% from fiscal 1995 to fiscal 1996. Revenue increased primarily due to
increases in both the number and size of professional services projects from
both existing and new offices. The Company does not believe these rates of
growth are sustainable. In fiscal 1996, the Company's largest client, MCI,
accounted for approximately 17% of revenue. In fiscal 1994, First Union Bank
and AirTouch Communications accounted for approximately 30.3% and 13.3% of the
Company's revenue, respectively. No other client accounted for more than 10%
of revenue in fiscal 1994, 1995 or 1996. The Company's revenue is dependent in
large part on its ability to attract, retain and utilize qualified network
systems engineers. See "Risk Factors--Need to Attract and Retain Qualified
Network Systems Engineers" and "--Risks Associated with Client Concentration."
OPERATING EXPENSES
Professional Personnel. Professional personnel expenses consist primarily of
compensation and benefits of the Company's employees engaged in the delivery
of professional services and electronic services. Professional personnel
expenses were $3.3 million, $6.7 million and $19.9 million in fiscal 1994,
1995 and 1996, respectively, representing increases of 100.5% from fiscal 1994
to fiscal 1995 and 198.9% from fiscal 1995 to fiscal 1996. These increases
were attributable primarily to an increase in the number of network systems
engineers. Professional personnel headcount was 51, 120 and 334 at the end of
fiscal 1994, 1995 and 1996, respectively. Professional personnel expenses were
43.9%, 42.8%, and 45.1% of revenue in fiscal 1994, 1995 and 1996,
respectively. Professional personnel expenses were higher as a percent of
revenue in fiscal 1996 than fiscal 1995 due primarily to the implementation of
a bonus plan that became effective at the beginning of fiscal 1996.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation, including commissions, and benefits of sales and marketing
personnel as well as outside marketing expenses. Sales and marketing expenses
were $2.8 million, $3.8 million and $8.0 million in fiscal 1994, 1995 and
1996, respectively, representing increases of 38.5% from fiscal 1994 to fiscal
1995 and 107.9% from fiscal 1995 to fiscal 1996. The increase in each year was
due primarily to the growth in sales and marketing headcount and commissions
resulting from increased revenue. Sales and marketing expenses were 36.7%,
24.7% and 18.1% of revenue in
16
<PAGE>
fiscal 1994, 1995 and 1996, respectively. The decreases, on a percentage
basis, were due primarily to increases in revenue.
General and Administrative. General and administrative expenses consist of
expenses associated with executive staff, the finance department, corporate
facilities, information systems and the human resources department. General
and administrative expenses were $1.6 million, $1.9 million and $5.0 million
in fiscal 1994, 1995 and 1996, respectively, representing increases of 19.0%
from fiscal 1994 to fiscal 1995 and 167.1% from fiscal 1995 to fiscal 1996.
General and administrative expenses have increased in absolute dollars in each
year as the Company has continued to build the infrastructure required to
support the growth of the Company. General and administrative expenses were
21.0%, 12.1% and 11.5% of revenue in fiscal 1994, 1995 and 1996, respectively.
The decreases from year to year on a percentage basis were due primarily to
economies of scale achieved as a result of increasing revenue. The Company
expects that general and administrative expenses will continue to increase in
absolute dollars to support the planned expansion of operations.
Other Costs. Other costs consist of expenses related to professional
personnel (other than compensation and benefits), including travel and
entertainment, certain recruiting and professional development expenses, field
facilities, depreciation, expensed equipment, supplies and research and
development expenses related to electronic services. Other costs were $1.2
million, $2.3 million and $6.4 million in fiscal 1994, 1995 and 1996,
respectively, representing increases of 88.0% from fiscal 1994 to fiscal 1995
and 174.8% from fiscal 1995 to fiscal 1996. Other costs increased as a result
of increases in professional personnel headcount, field facilities and
research and development. Other costs were 16.5%, 15.1%, and 14.6% of revenue
in fiscal 1994, 1995 and 1996, respectively. Research and development expenses
increased from $78,000 or 0.5% of revenue in fiscal 1995 to $879,000 or 2.0%
of revenue in fiscal 1996, as a result of the Company's development of
EnterprisePRO, the Company's electronic service that was released in July
1996.
INTEREST AND OTHER, NET
Interest and other, net consists of interest income and expense. Interest
expense consists of interest associated with bank borrowings. Interest income
consists primarily of interest on cash and cash equivalents and notes
receivable from shareholders.
PROVISION FOR INCOME TAXES
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities. The Company did not provide for income taxes in fiscal 1994
as the Company incurred net operating losses during that period. The effective
tax rates for fiscal 1995 and 1996 were 7% and 39%, respectively. In fiscal
1995, the Company's effective tax rate of 7% was less than the combined
federal and state statutory rates primarily as a result of the utilization of
operating loss carryforwards and represented federal and state alternative
minimum income taxes. The Company's fiscal 1996 effective tax rate
approximated the combined federal and state statutory rates, net of federal
benefits. The Company expects that its fiscal 1997 effective tax rate will
approximate the combined federal and state statutory rates.
17
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present quarterly operating results for each quarter of
fiscal 1995 and 1996, as well as such data expressed as a percent of the
Company's revenue for each quarter. This information has been derived from
unaudited financial statements and has been prepared on the same basis as the
Company's audited financial statements which appear elsewhere in this
Prospectus. In the opinion of the Company's management, this information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. The operating results for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996
------------------------------------- -------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,566 $3,127 $4,116 $5,740 $7,506 $9,610 $12,170 $14,806
Operating expenses:
Professional
personnel............. 1,155 1,331 1,781 2,387 3,347 4,448 5,435 6,662
Sales and marketing.... 648 737 1,102 1,356 1,449 1,701 2,193 2,647
General and
administrative........ 378 440 542 530 593 922 1,573 1,961
Other costs............ 422 434 623 867 1,180 1,321 1,834 2,112
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses.............. 2,603 2,942 4,048 5,140 6,569 8,392 11,035 13,382
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. (37) 185 68 600 937 1,218 1,135 1,424
Interest and other,
net.................... (9) 7 18 1 7 16 (2) (18)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... (46) 192 86 601 944 1,234 1,133 1,406
Provision for income
taxes.................. -- 12 8 38 368 481 442 549
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ (46) $ 180 $ 78 $ 563 $ 576 $ 753 $ 691 $ 857
====== ====== ====== ====== ====== ====== ======= =======
Net income per share.... $ 0.01 $ 0.00 $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.03
====== ====== ====== ====== ====== ======= =======
Shares used to compute
net income per share... 29,047 29,007 29,806 30,218 30,450 30,519 30,550
====== ====== ====== ====== ====== ======= =======
AS A PERCENT OF REVENUE:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional
personnel............. 45.0 42.6 43.3 41.6 44.6 46.3 44.7 45.0
Sales and marketing.... 25.3 23.6 26.8 23.6 19.3 17.7 18.0 17.9
General and
administrative........ 14.7 14.1 13.2 9.2 7.9 9.6 12.9 13.2
Other costs............ 16.4 13.8 15.0 15.1 15.7 13.7 15.1 14.3
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses.............. 101.4 94.1 98.3 89.5 87.5 87.3 90.7 90.4
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) from
operations............. (1.4) 5.9 1.7 10.5 12.5 12.7 9.3 9.6
Interest and other,
net.................... (0.4) 0.3 0.4 -- 0.1 0.1 -- (0.1)
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes...........
Provision for income
taxes.................. -- 0.4 0.2 0.7 4.9 5.0 3.6 3.7
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... (1.8)% 5.8% 1.9% 9.8% 7.7% 7.8% 5.7% 5.8%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
Although the Company has achieved significant quarter to quarter revenue
growth for the periods presented, the Company does not believe this growth
rate is sustainable. Throughout fiscal 1995 and 1996, the Company's headcount
steadily increased each quarter, with total headcount increasing from 77 at
the end of fiscal 1994 to 436 at the end of fiscal 1996.
A significant portion of the Company's expenses relate to compensation.
Certain compensation-based employment taxes are limited per employee per
calendar year and, as a result, the Company experiences a decrease in
employment taxes as a percent of revenue through the calendar year and an
increase in employment taxes as a percent of revenue from the second fiscal
quarter to the third fiscal quarter.
18
<PAGE>
As a percent of revenue, professional personnel expenses fluctuated from
quarter to quarter due primarily to fluctuations in utilization and billing
rates and to a lesser extent employment taxes. In addition, professional
personnel expenses increased as a percent of revenue in the first quarter of
fiscal 1996 and remained at a higher level throughout fiscal 1996 due
primarily to the implementation of a bonus plan that became effective at the
beginning of 1996.
As a percent of revenue, sales and marketing expenses generally decreased
over the eight quarters due primarily to increases in revenue. The decrease in
sales and marketing expenses as a percent of revenue from the fourth quarter
of fiscal 1995 to the first quarter of fiscal 1996 was due primarily to
revised commission rates that became effective in fiscal 1996. The increase in
sales and marketing expenses as a percent of revenue in the third quarter of
fiscal 1995 was due primarily to an increase in marketing expenses and
employment taxes. The increase in sales and marketing expenses as a percent of
revenue in the third quarter of fiscal 1996 was due primarily to an increase
in employment taxes.
General and administrative expenses were lower as a percent of revenue
during the three quarters ended December 31, 1995 because the Company's
revenue base expanded more rapidly than its general infrastructure. In the
third and fourth quarters of fiscal 1996, the Company hired a significant
number of employees to support the growth in its operations, which resulted in
these expenses increasing as a percent of revenue.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of cash generated from operations, the private sale of equity
securities, private debt and bank borrowings. As of June 30, 1996, the Company
had raised $10.0 million from the private sale of equity securities. At June
30, 1996, the Company had $869,000 in cash and cash equivalents as well as a
bank credit facility. The credit facility includes a revolving line of credit
that provides for borrowings equal to the lesser of $6.0 million or 80% of
eligible accounts receivable and a term facility that provides for borrowings
up to $3.0 million for capital equipment purchases. Advances under the
revolving line of credit and term facility bear interest at the bank's prime
rate plus 1.00% and 1.25%, respectively. As of June 30, 1996, borrowings under
the revolving line of credit totaled $1.0 million. There were no borrowings
under the term facility at June 30, 1996. The credit facility expires in June
1997, is secured by substantially all of the assets of the Company, and
contains customary covenants and restrictions. As of June 30, 1996, the
Company was in compliance with all such covenants and restrictions.
Net cash used in operations in fiscal 1994 was $1.9 million. Net cash
provided by operations was $359,000 in fiscal 1995 and $347,000 in fiscal
1996. The change in cash provided by operations from fiscal 1994 to fiscal
1995 and fiscal 1996 primarily reflects the Company's increased profitability
offset by increases in accounts receivable. Although the Company believes its
collections experience is within industry standards, the Company's inability
to collect for its services on a timely basis in the future could have a
material adverse affect on the Company's business, operating results and
financial condition. Net cash used in investing activities, primarily for
computer equipment and software, in fiscal 1994, 1995 and 1996 was $553,000,
$1.6 million and $4.4 million, respectively. Financing activities provided
cash of $4.0 million and $3.0 million in fiscal 1994 and 1995, respectively,
primarily from the issuance of capital stock. Financing activities in fiscal
1996 provided cash of $760,000 through borrowings under the Company's credit
facility, which were principally offset by repayments on long-term debt.
The Company believes the net proceeds from this offering, together with
available funds, will be sufficient to meet its capital requirements for at
least the next twelve months. The Company may also utilize cash to acquire or
invest in complementary businesses or to obtain the right to use complementary
technologies, although the Company does not have any pending plans to do so.
The Company may sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity or convertible debt
securities will result in additional dilution to the Company's shareholders.
19
<PAGE>
BUSINESS
INS is a leading provider of services for complex enterprise networks. The
Company provides services for the full life cycle of a network, including
planning, design, implementation, operations and optimization, and maintains
expertise in the most complex network technologies and multivendor
environments. Areas of expertise include WANs, network management, network and
host security and high performance LANs. As a services only provider, the
Company believes that it is able to provide unbiased assessments and optimal
solutions for its clients. The Company offers its services on a long or short
term basis in any or all phases of the network life cycle. The Company's
services are particularly well suited to clients who out-task a portion of
their information technology infrastructure. The Company has developed an on-
line solutions resource, Knowledge Network, through which the Company's
network systems engineers communicate and collaborate to provide proven and
cost-effective solutions to clients' complex enterprise network needs. The
Company is leveraging its expertise in complex networks to develop electronic
services for certain repetitive network management tasks, such as network
monitoring and network performance reporting. The Company's current electronic
service, EnterprisePRO, is designed to collect data, generate reports and
compile network information for use in the optimization of networks. The
Company's clients include AT&T, EDS, Georgia Pacific, Kaiser Permanente and
MCI. The Company serves its clients, many of which have multi-location
enterprise networks, through its nationwide network of 17 offices. As of June
30, 1996, the Company had 334 network systems engineers.
BACKGROUND
The ability of businesses to exchange information both internally and
externally is a competitive advantage in many industries. To exchange
information, many businesses are increasingly using client/server based
applications, e-mail, remote access by mobile workers, the Internet, corporate
Intranets, video, graphics and audio. The amount of data generated by these
applications combined with the larger number of users connected to networks,
has increased traffic and placed higher demand on networks. In this
environment, companies that have the most responsive and reliable information
systems networks will have a competitive advantage.
As network traffic has grown, the technology underlying networks has become
increasingly complex. Network hardware and software companies are rapidly
developing sophisticated new technologies such as routers, inverse
multiplexers, switches, ATM and VLANs to accommodate the increase in data
traffic. The implementation of these technologies requires significant
expertise. In addition, the complexity of networks is magnified by the need to
integrate these new technologies with legacy network systems. As a result, it
is increasingly difficult for network managers to ensure the reliability,
performance and security of these large, heterogeneous networks. Furthermore,
the tools available to manage today's networks are themselves very complex and
require investments in hardware, software, personnel and training.
Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity have made it difficult
for companies to implement and manage their large multivendor network
environments. In addition, to remain competitive, companies are increasingly
focused on their core business competencies and often turn to third-party
service providers for non-core functions, such as those related to their
computing environments. While some companies "out source" their entire
computing environment, an increasing number of companies are pursuing an
approach to more actively manage their computing environments by "selectively
out-sourcing" or "out-tasking" only a limited set of services. The rapid
technological changes in networking and the move to out-tasking have created
increased demand for third- party network services.
To date, it has been difficult for businesses to find adequate third-party
solutions for their complex network services needs. Although there are many
suppliers of network services, few focus on services for complex multivendor
networks. For example, some network equipment vendors provide services;
however they focus on distributing their own products and often lack the
skills to implement solutions in multivendor environments.
20
<PAGE>
Systems integrators and VARs have historically focused on legacy computing
environments and often do not have sufficient expertise in distributed
client/server network environments. Telecommunications providers are often
called upon to provide complex multivendor data network services as part of
total communication solutions; however, they often do not have adequate or
available expertise and therefore often look to other third-party service
providers.
INS SOLUTION
INS is a leading provider of services for complex enterprise networks. The
Company provides services for the full life cycle of a network, including
planning, design, implementation, operations and optimization, and maintains
expertise in the most complex network technologies and multivendor
environments. As a services-only provider, the Company believes that it is
able to provide unbiased assessments and optimal solutions for its clients. In
addition, the Company provides a focused, flexible approach to assisting
clients in any or all phases of the network life cycle. The Company's services
are particularly well suited to out-tasking. The Company has developed an on-
line solutions resource, Knowledge Network, through which the Company's
network systems engineers communicate and collaborate to provide efficient,
effective solutions to clients' complex enterprise network needs. In addition
to professional services the Company is developing electronic services that
provide clients with cost-effective solutions for repetitive management tasks.
The Company's current electronic service, EnterprisePRO, is designed to
collect data, generate reports and compile network information to be used in
the optimization of networks. The Company serves its clients, many of which
have multi-location enterprise networks, through its nationwide network of 17
offices.
STRATEGY
The Company's objective is to become the premier provider of services for
complex enterprise networks. To achieve its objective, the Company is pursuing
the following strategies:
Build and Strengthen Client Relationships. The Company believes that
continuing to deliver dependable, high-quality services is critical to
strengthening its relationships with existing clients, gaining repeat business
and generating new business from referrals. The Company seeks to establish
long-term relationships with its clients by becoming an integral part of their
network operations. The Company also plans to continue to build and strengthen
relationships with hardware and software vendors, system integrators, and
telecommunications providers to assist them in providing total networking
solutions to their customers.
Expand Client Base in Existing and New Markets. The Company's strategy is to
expand its presence in the geographic markets it currently serves and to enter
new markets where it views the opportunity as attractive. The Company
currently offers its services through a network of 17 offices throughout the
United States. The Company believes that a broad presence will strengthen its
competitive position within the network services market and enable it to
better service its clients and enter new markets in the United States and
internationally.
Attract and Retain High Quality Network Systems Engineers. The Company
believes that its network systems engineers are critical to its success. The
Company's strategy is to continue to attract and retain the most qualified
network systems engineers by providing a rich environment and culture, and by
offering professional development and financial opportunities. The Company
generally recruits network systems engineers that have significant technical
expertise and offers them professional training as well as the opportunity to
accelerate their career development by working on difficult problems and
collaborating with other network systems engineers to implement sophisticated
technology in complex enterprise networks. The Company promotes its corporate
culture with stated values that encourage employees to be their best, work as
a team and continually learn. The Company intends to continue to build its
nationwide recruiting organization and to invest heavily in training and
development.
Develop and Expand Corporate Infrastructure. The Company believes that its
corporate infrastructure provides it with a competitive advantage in
delivering consistent, high-quality services while enabling it to
21
<PAGE>
expand its operations. This infrastructure includes services, such as
recruiting, training and professional development, collaboration tools, such
as Knowledge Network, and management information systems to give management
the information necessary to make timely and accurate decisions. The Company
believes that by continuing to develop and refine its employee recruiting and
training infrastructure, strengthening its operational management reporting
systems and controls, and expanding its information resources, it will be
well-positioned to deliver high quality network services and support any
growth in its operations.
Expand Electronic Services. The Company intends to leverage its expertise in
complex networks by developing electronic services for certain repetitive
network management tasks, such as network monitoring and network performance
reporting. In addition to the potential of recurring revenue from monthly
service fees, electronic services are designed to build and maintain client
relationships and provide opportunities for additional professional services.
The Company introduced EnterprisePRO, its current electronic service, in July
1996.
Pursue Strategic Acquisitions. The Company intends to pursue acquisitions to
expand within existing markets, enter new markets, increase the range of
services, add industry and technical expertise, and acquire technology that
can be used in electronic services.
SERVICES
The Company provides professional services and technology expertise for all
phases of the network life cycle and provides electronic services for routine
network management tasks.
Professional Services
The Company had 334 network systems engineers engaged in providing services
for complex enterprise networks, as of June 30, 1996. The Company has both the
breadth of expertise required to support the full life cycle of a network,
which includes planning, design, implementation, operations and optimization,
and the depth of expertise required to address complex and rapidly changing
technology. The Company offers its services on a long or short term basis in
any or all phases of the network life cycle. The Company's services maximize
flexibility in meeting customer requirements, offer added value, and can be
clearly described and presented.
In order to meet the challenge of providing consistent, quality service, the
Company staffs each project with a complement of network systems engineers
with requisite technical and management experience. The Company works with the
client to create a plan that defines what will be delivered as well as how
success or completion will be measured. To encourage quality assurance the
Company involves the service management team in all aspects of delivery and
also coordinates content reviews and progress reviews. Further, the Company
uses Knowledge Network to bring the expertise and experience of many talented
network systems engineers to bear on an assignment.
The Company's services are provided either as discrete projects or as part
of ongoing relationships. Project content and scope range from simple task-
oriented engineering and value-added implementation efforts to large- scale
programs involving multiple resources across several client locations. The
Company generates revenue from its professional services on a time and
expenses basis; however, some projects with well-defined content may be
delivered on a fixed-price basis.
22
<PAGE>
Network Life Cycle Services
The Company provides services for any or all phases of the network life
cycle which includes planning, design, implementation, operations and
optimization.
Network Planning. The network planning phase of the network life cycle
focuses on providing clients with strategic and tactical reviews of their
current network operations and future network requirements. Network planning
services encompass a number of critical planning elements:
. Defining client business requirements
. Developing strategic information architectures
. Performing network baseline audits
. Preparing capacity plans for the physical network, logical transport and
services
. Selecting preferred technology
. Conducting network security audits and planning
Network Design. The network design phase includes services that assist in
the design of physical, logical and operational information infrastructures.
These services involve detailing the network specifications and implementation
tactics necessary to achieve clients' business objectives. The Company
generates a set of working papers that identify the specific technologies to
be used and how these technologies will be configured and implemented. These
services also take into consideration how the new technology will integrate
into the client's existing hardware and software and how it will be managed on
an ongoing basis. Examples of services provided by the Company in the network
design phase include:
. Defining functional requirements
. Developing multivendor integration plans
. Preparing technical design documentation
. Developing engineering specifications and documents
. Preparing RFP specifications or other make/buy criteria
. Providing detailed component purchasing lists
Network Implementation. The network implementation phase includes high
value-added services, such as IP addressing and router configuration, and, to
a much lesser extent, traditional system integrator functions, such as
hardware installation. The Company believes it has built significant
implementation expertise in integrating new systems without disrupting ongoing
business operations, thereby creating substantial added value and reducing
risk to clients. The Company customizes an implementation plan for each
client, which may include the following activities:
. Project management
. Integrating new hardware and software products and systems
. Building network operations and management centers
. Re-configuring and upgrading network elements, systems and facilities
. Implementing installation documentation, conformance testing and
compliance certification
23
<PAGE>
Network Operations. The network operations phase includes ongoing tasks
necessary to keep the client's network fully operational. The Company has
considerable experience in delivering operations services to a range of
clients, including those with legacy (SNA) networks intermingled with newer
client/server networks running both Internet (TCP/IP) and workgroup (Novell
and Microsoft) protocols. Specific operations activities are delivered
according to individual client requirements drawing from a well-understood set
of operating practices. Examples of these practices include:
. Network administration, including management of user accounts, service
levels, and client administrative or accounting practices
. Network utilization analysis, involving ongoing measurement of network
activity against established network baselines
. Ongoing management of documentation, including physical assets, logical
topologies, policies and procedures
. Network troubleshooting, involving fault detection, isolation, repair and
restoration
. Alarm management including setting of alarm levels, cross-correlation,
problem diagnosis and dispatch of service resources
. Network backup, including design and supervision of backup processes and
policies, and exercise of disaster recovery procedures
. Routine moves, additions, and changes to network elements, infrastructure
and services
Network Optimization. The network optimization phase involves maximizing the
rate of return of enterprise network investments on behalf of the client by
such methods as reducing operating costs and increasing network utilization.
Although optimization may be viewed as a separate stage of the network life
cycle, optimization is closely linked with the other phases of the network
life cycle. Optimization services can be long-term in nature, address issues
such as cost containment and utilization, and are often aimed at optimizing
LAN infrastructure. These services can also be packaged as discrete projects,
designed to present alternatives for optimization of workgroup, departmental,
building, or campus network investments. Finally, the Company can assist in
optimizing "logical" networks, wherein the Company addresses a protocol,
service or application operating in the larger context of the client's
enterprise network. Examples of the Company's network optimization services
include:
. Recommendations for efficient allocation of bandwidth
. Network traffic analysis, identification of bottlenecks and
recommendations for change
. Network process re-engineering
. Knowledge transfer to client operations personnel on topics, such as
basic practices, or operation of network management tools and stations
Technology Expertise
The Company has developed expertise in a number of areas, including WANs,
network management, network and host security, high performance LANs and
VLANs.
Wide Area Networks. Wide area network design and optimization has special
value in multi-protocol, multi-vendor enterprise network environments. The
Company has substantial expertise in the design and optimization of shared
transport SNA and TCP/IP networks. The Company's network systems engineers
have demonstrated proficiency in both legacy and emerging networking
disciplines, spanning more than 20 years of network technology. Subject matter
expertise includes commercial transport technologies (frame relay, ATM, T1/T3
leased lines with HDLC, SONET, SMDS, ISDN, and X.25), interior and exterior
routing protocols (IGRP, EIGRP, CIDR, BGP-4, OSPF, RIP, and RIPv2), and
commonly used network protocols (SNA, TCP/IP, IPX, Apple, DECnet, VINES).
24
<PAGE>
Network Management. Network management practices include design and
implementation of network operations/management centers, design of distributed
network management systems, selection, installation, and integration of
network management platforms and integration with alarm managers, trouble
ticket systems and "manager of managers" tools. Subject matter expertise
includes SNMP, SNMPv2, RMON, RMON-II, HPOV, Optivity, Netview 6000, SunNet
Manager, Spectrum, Seagate NerveCenter, Remedy ARS and broad-based skills in
network management concepts and functions (fault, performance, configuration,
accounting, security).
Network and Host Security. Network and host security practices include
research and documentation of security policies, selection and installation of
Internet and Intranet firewalls, secure remote access solutions,
identification and installation of various security tools, audits of server
and workstation security, and training of clients on security topics. Subject
matter expertise includes firewall design, remote access design,
authentication, server, host, and workstation industry best practices, new
security protocols (S/WAN, SHTTP, SSL), cryptography and encryption, and high
performance secure platforms.
High Performance Local Area Networks and Virtual Local Area
Networks. Consulting on design and implementation of high-performance LANs and
VLANs requires maintaining state of the art expertise on a broad array of
topics. The Company has expertise in switching technology and products,
performance tuning, ATM technology and applications, ATM migration, full-
duplex LANs, and other high speed LAN components.
Electronic Services
The Company is leveraging its expertise in complex networks to develop
electronic services for certain repetitive network management tasks, such as
network monitoring and network performance reporting. The Company's current
electronic service, EnterprisePRO, is designed to collect data, generate
reports and compile network information for use in the optimization of
networks. EnterprisePRO enables clients to obtain important network trending
data without investing in costly network performance hardware and software or
devoting valuable staff time. The Company believes that EnterprisePRO can
reduce network administration costs, improve operating efficiencies and
provide a better perspective on network performance.
EnterprisePRO is designed to be a "turn-key" service for network reporting
and analysis. The service includes continuous monitoring of device
availability and network capacity, proactive notification regarding device
availability and 11 daily quality checks customized to clients' networks. The
Company installs the EnterprisePRO server at the client site and connects it
to the INS operations center at the Company's headquarters. The EnterprisePRO
server software provides a proprietary network data collection system and an
intuitive Web-based user interface. A single server polls each device every
five minutes and can monitor up to 5,000 device interfaces. The Web-based
interface provides customizable network views that allow clients to do network
diagnosis, interactive decision support, and management information for fact-
based network architecture and upgrade planning. EnterprisePRO reports include
utilization statistics for frame relay, WAN, LAN and router CPU, device
uptime, and RMON statistics, including top transmitters and protocol
distribution. The INS operations center includes additional proprietary
software. The EnterprisePRO server automatically connects to the operations
center by modem and downloads the data. Operations center personnel back up
the data and view the data in order to do daily quality checks and provide
client support. The operations center also prints summary reports that are
sent to clients on a weekly basis and performs updates to client
configurations, troubleshooting of EnterprisePRO servers and downloads of
software fixes and updates.
EnterprisePRO was introduced in July 1996 and has been installed at 20
client sites nationwide as of July 31, 1996. The Company generally receives a
one-time installation fee and a monthly service fee that varies with the size
of the network being monitored. The Company has in the past offered on a
limited basis an electronic service that has not achieved significant market
acceptance or generated significant revenue. EnterprisePRO is an enhanced
version of the prior service. No assurance can be given that EnterprisePRO, or
any other electronic service that the Company may develop in the future, will
achieve market acceptance on a timely basis, or at all.
The Company believes that its professional services and electronic services
complement one another. The cumulative expertise of the Company's professional
services staff provides valuable information upon which
25
<PAGE>
electronic services may be based. Electronic services are designed to build
and maintain client relationships and provide opportunities for additional
professional services.
KNOWLEDGE NETWORK
Knowledge Network is the Company's on-line solutions resource. Knowledge
Network combines the Company's proprietary information stored in a document
management system, a library of industry and manufacturer product information
and specifications, periodicals, databases and CDs from vendors providing
additional technical support, and a means by which the Company's network
systems engineers can communicate and collaborate in resolving clients'
complex enterprise network issues. Network problems encountered by INS network
systems engineers and the ultimate solutions are catalogued and stored on a
confidential central database for use by INS network systems engineers and
management only. INS network systems engineers are able to query the Knowledge
Network for precedents, conversation threads and other possible solutions for
difficult network issues and can send e-mail through the Knowledge Network to
other INS network systems engineers for assistance in resolving these issues.
Knowledge Network enables the Company to leverage the collective talents and
experience of network experts in the organization to provide clients with
proven and cost-effective solutions to their network services needs. The
Company believes that the Knowledge Network provides it with a competitive
advantage over other network services providers.
CLIENTS
The Company performs professional services for a variety of clients across a
broad range of industries. Set forth below is a representative list of the
Company's clients, each of which represented at least $100,000 in revenue in
fiscal 1996.
<TABLE>
<CAPTION>
TELECOMMUNICATIONS FINANCIAL SERVICES SYSTEMS INTEGRATION
- ------------------ ------------------ -------------------
<S> <C> <C>
AT&T Corporation Alliance Capital Bell Atlantic Network Integration
AirTouch Cellular Bank of California EDS
BellSouth Citicorp International NCR
Cable and Wireless, Inc. Countrywide Home Loans Science Applications International
GTE MasterCard International SHL Systems House Corp.
LA Cellular Telephone Company Pershing Stream International, Inc.
MCI Telecommunications Quotron Systems, Inc.
MFS Datanet, Inc. UJB Financial OTHER
Nynex Service Corp. -----
Southwestern Bell Telephone USAA
Sprint American Honda Motor Co., Inc.
WorldCom Network Services, Inc. MEDIA Carolina Power and Light Company
----- The Clorox Company
Harvard University
TECHNOLOGY Continental Cablevision, Inc Kaiser Permanente
- ---------- Cox Communications McKesson Corporation
Sony Pictures Entertainment Robert Half International, Inc.
Ascend Communications, Inc. Turner Broadcasting System The Stride-Rite Corporation
Cambio Networks, Inc. Taylor Made Office Systems, Inc.
Cascade Communications, Inc. MANUFACTURING TransQuest Information Solutions
Cisco Systems, Inc. ------------- UniHealth Information Services
Compaq
Lam Research Corporation Caterpillar, Inc.
Oracle Corporation Georgia Pacific Corporation
Ford Motor Company
</TABLE>
Although each client project differs, the following examples illustrate how
certain clients of the Company have used the Company's services.
Telecommunications. The Company provides a variety of services to several
telecommunication providers, including support for their managed network
services offerings. Managed network services are carrier-delivered,
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<PAGE>
"turn-key" solutions which include transport access, equipment procurement and
deployment, management capabilities, and professional services. Interexchange
carriers are experiencing increasing demand for high-speed managed network
services such as frame relay. INS has been retained to accelerate the
development, deployment, and management of frame relay services. The services
provided include pre- and post-sales support, staffing for complex network
engagements and the design and implementation of network operations centers.
Pre-sales support includes network evaluations and designs for the
telecommunications providers' customers. Post-sales support includes
implementation and deployment, project management, staging and configuration
of the routing files, ongoing network management, second-tier and third-tier
helpdesk support and troubleshooting assistance. Staffing for complex network
engagements includes INS consultants working in conjunction with client
account representatives to meet the unique requirements of the client's major
customers.
Health Care. The Company began a project for a major health maintenance
organization with a single consultant to assist the client with WAN
troubleshooting. After helping to stabilize and improve the efficiency of the
network, the client has given INS an increasingly broad array of networking
assignments that include local and wide area design projects, network modeling
and bandwidth studies, ATM and other new technology assessments and ongoing
router network optimization and implementation. Throughout the course of the
project, network systems engineers have used Knowledge Network for access to
critical information created by other INS network systems engineers in
comparable engagements.
Education. The Company was originally retained by a major university to
develop and test proposed designs and pilot alternative technology solutions
for the implementation of a new generation routing technology for the
university's enterprise data communications network. The purpose of the new
technology was to strengthen the high-speed backbone network and facilitate
end-user Internet access throughout the university's departments, schools and
affiliated hospitals. After successfully completing the initial project, the
Company was retained for additional projects including development of a
customized IBM NetView AIX network management solution to oversee the new
router-based network and ongoing consultative assistance on high-level network
troubleshooting and optimization issues.
The Company has derived a significant portion of its revenue from a limited
number of large clients and expects this concentration to continue. The
Company's largest client, MCI, accounted for approximately $7.5 million, or
17%, of the Company's revenue in fiscal 1996 and approximately $1.1 million,
or 6.9%, of the Company's revenue in fiscal 1995. In fiscal 1994, First Union
Bank accounted for approximately $2.3 million, or 30.3% of the Company's
revenue, and AirTouch Communications accounted for approximately $1 million,
or 13.3% of the Company's revenue. No other client accounted for more than 10%
of the Company's revenue in fiscal 1994, fiscal 1995 or fiscal 1996. See "Risk
Factors--Risks Associated with Client Concentration."
SALES AND MARKETING
The Company employs account managers who identify and sell to clients and
manage client relationships. Many members of the Company's account management
team have significant experience selling complex network and computer products
and services. The Company also has a marketing group which provides sales
support materials and marketing communications. Account managers generally
identify clients through direct marketing and referrals. The Company employs a
team selling approach, whereby account managers collaborate with field and
technical managers and network systems engineers to assess potential
engagements and communicate the specific knowhow of the Company's consultants
to potential clients. In addition to other marketing strategies, the Company
believes that delivering dependable, high-quality services is critical to
strengthening its relationships with existing clients, gaining repeat business
and generating new business from referrals. The Company seeks to establish
long-term relationships with its clients by becoming an integral part of their
network operations.
The Company markets its professional services directly to large end-user
clients who have chosen to out-task network services, and indirectly through
third parties, including large telecommunications carriers, systems
integrators, hardware and software vendors, and VARs. In addition, the Company
has developed a significant relationship with Cisco, pursuant to which the
Company has entered into direct relationships with clients as a
27
<PAGE>
result of referrals from Cisco and has from time to time performed services
for Cisco, including as a subcontractor. The Company believes that maintaining
and enhancing its relationship with Cisco is important to the Company's
business due to Cisco's leading position in the large scale, enterprise
internetworking market. Although the Company believes that its relationship
with Cisco is good, there can be no assurance that the Company will be able to
maintain or enhance its relationship with Cisco. Any deterioration in the
Company's relationship with Cisco could have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore,
although the Company has a relationship with Cisco, the Company is an
independent provider of network services and seeks to provide the best
solution for its clients regardless of network platform or vendor. Therefore,
should the Company's relationship with Cisco be perceived as compromising the
Company's ability to provide unbiased solutions, the Company's relationship
with existing or potential clients could be materially adversely affected.
The Company's current electronic service, EnterprisePRO, is marketed through
the Company's account managers and through resellers and OEMs. EnterprisePRO
resellers will identify potential clients and negotiate the services contracts
and are responsible for installation and first level support of the client
installation. The Company provides the back office automation and service to
the client. The Company recently entered into reseller agreements with the
network services divisions of each of GE Capital and Pacific Bell to offer
EnterprisePRO to end-users. The success of these contracts will depend in part
on the level of commitment and effort of these resellers. Electronic services
may be sold under the Company's name or under a private label of the reseller.
The Company's clients are generally able to reduce or cancel their use of
the Company's services without penalty and with little or no notice. As a
result, the Company believes that the number and size of its existing projects
are not reliable indicators or measures of future revenue. The Company has in
the past provided, and is likely in the future to provide, services to clients
without a written commitment or contract. When a client defers, modifies or
cancels a project, the Company must be able to rapidly redeploy network
systems engineers to other projects in order to minimize the underutilization
of employees and the resulting adverse impact on operating results. In
addition, the Company's operating expenses are relatively fixed and cannot be
reduced on short notice to compensate for unanticipated variations in the
number or size of projects in progress. As a result, any termination,
significant reduction or modification of its business relationships with any
of its significant clients or with a number of smaller clients could have a
material adverse effect on the Company's business, operating results and
financial condition.
HUMAN RESOURCES
The Company believes that its success in recruiting and retaining
experienced, highly-qualified and highly-motivated personnel will depend in
part on its ability to provide a rich environment and culture and to offer
professional development and financial opportunities. As of June 30, 1996, the
Company employed 425 persons, including 334 network systems engineers and
managers.
Recruiting. The success of the Company is dependent in part on attracting
and retaining talented, creative and motivated personnel at all levels. The
Company dedicates significant resources to its recruiting efforts. The Company
generally seeks to meet its hiring needs through referrals from existing INS
employees, through a nationwide network of recruiters and through the
Company's recently implemented new college graduate program. The Company's
network systems engineers together have expertise in a wide array of computer
and network systems of the Company's clients and a broad understanding of the
industries in which the Company's clients are involved.
Corporate Culture. The Company believes that developing a rich environment
and culture is critical to its success in achieving its mission of becoming
the premier provider of services for complex enterprise networks. The Company
actively fosters a set of basic values which were developed by its employees.
These values include a dedication to being the best, respecting others and
working as a team, continuous learning and development, trustworthiness and
empowerment. The Company encourages employees to use these values in daily
decision
28
<PAGE>
making and balance the interests of clients, shareholders and employees to
maximize long-term Company value. The Company believes that its growth and
success are attributable in large part to its high-caliber employees and the
Company's adherence to the values upon which its success has been based.
Professional Development. Professional development includes career
opportunities and on-the-job challenges, as well as training programs. The
Company has two career tracks for consultants, a technical track and a
management track. The Company has established a training program, called INS
University, which includes national and local consultative approach workshops,
collaboration workshops, new management training and technical training. In
support of its INS University curriculum, the Company offers advanced training
through on-site simulation labs and numerous computer-based training modules.
In addition, Knowledge Network serves as an additional training and
information resource. The Company's personnel keep apprised of technological
advances and developments through a combination of on-the-job exposure to
relevant technology, special training programs, peer review and discussions,
and supervision by seasoned technical personnel.
Compensation. The Company believes that by linking employee compensation to
the success of the Company through its incentive compensation programs, the
Company encourages an owner attitude which the Company believes results in
decisions that maximize Company value and employee retention. The Company's
compensation package consists of a combination of salary, performance-based
incentive compensation, stock options and benefit plans.
The Company's success will depend in part on the continued services of its
key employees. The Company does not have employment or non-competition
agreements with any of its employees. The loss of services of one or more of
the Company's key employees could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, if
one or more key employees joins a competitor or forms a competing company, the
loss of such employees and any resulting loss of existing or potential clients
to any such competitor could have a material adverse effect on the Company's
business, operating results and financial condition. In the event of the loss
of any such employee, there can be no assurance that the Company would be able
to prevent the unauthorized disclosure or use of the Company's or its clients'
technical knowledge, practice or procedures by such personnel or that such
disclosure or use would not have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's future success will also depend in large part on its ability
to hire, train and retain network systems engineers who together have
expertise in a wide array of the network and computer systems and a broad
understanding of the industries the Company serves. Competition for network
systems engineers is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. In particular,
competition is intense for the limited number of qualified managers and senior
network systems engineers. The Company is currently experiencing and is likely
to continue to experience high rates of turnover among its network systems
engineers. Any inability of the Company to hire, train and retain a sufficient
number of qualified network systems engineers could impair the Company's
ability to adequately manage and complete its existing projects or to obtain
new projects, which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
any inability of the Company to attract and retain a sufficient number of
qualified network systems engineers in the future could impair the Company's
planned expansion of its business.
COMPETITION
The network services industry is comprised of a large number of participants
and is subject to rapid change and intense competition. The Company faces
competition from system integrators, VARs, local and regional network services
firms, telecommunications vendors, networking vendors and computer systems
vendors, many of which have significantly greater financial, technical and
marketing resources, greater name recognition and generate greater service
revenue than does the Company. The Company has faced, and expects to continue
to face, additional competition from new entrants into its markets. Increased
competition could result in price reductions, fewer client projects,
underutilization of employees, reduced operating margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial
29
<PAGE>
condition. There can be no assurance that the Company will be able to compete
successfully against current or future competitors. The failure of the Company
to compete successfully would have a material adverse effect on the Company's
business, operating results and financial condition.
In addition, most of the Company's clients have internal network support
services capabilities and could choose to satisfy their network support
services needs through internal resources rather than through outside service
providers. As a result, the decision by the Company's clients or potential
clients to perform network services internally could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company believes that the principal competitive factors in the market in
which it competes include the nature of the services offered, quality of
service, client responsiveness, marketing, management, corporate culture,
client relationships, knowledge base, infrastructure and price. The Company
believes it competes favorably with respect to these factors. The Company
believes that its focus, depth and breadth of expertise and experience,
infrastructure and management distinguish it from its competitors.
INTELLECTUAL PROPERTY
The Company's success is dependent in part on its information technology,
some of which is proprietary to the Company, and other intellectual property
rights. The Company relies on a combination of nondisclosure and other
contractual arrangements, technical measures, and trade secret and trademark
laws to protect its proprietary rights. The Company has one patent application
pending and holds one registered trademark. The Company enters into
confidentiality agreements with its employees and attempts to limits access to
and distribution of proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of proprietary information or that the Company will be able
to detect unauthorized use or take appropriate steps to enforce intellectual
property rights. The Company has in the past entered into services contracts
with clients that assign rights to certain aspects of the work performed under
such contracts to such clients. The Company does not believe that such
contracts will limit the Company's ability to render its services to other
clients. However, there can be no assurance that the Company will not receive
communications in the future from third parties or clients asserting that the
Company has infringed or misappropriated the proprietary rights of such
parties. Any such claims, with or without merit, could be time consuming,
result in costly litigation and diversion of technical and management
personnel or require the Company to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the event of a successful claim of infringement or misappropriation against
the Company and failure or inability of the Company to develop non-infringing
technology or license the infringed, misappropriated, or similar technology,
the Company's business, operating results and financial condition could be
materially adversely affected.
FACILITIES
The Company's principal administrative, sales, marketing and service
development facilities are located in an approximately 31,000 square foot
building in Sunnyvale, California pursuant to a lease which expires in 2001.
In addition, the Company leases field support offices in 17 cities. The field
offices range from small executive offices to a 2,700 square foot facility.
Lease terms range from month-to-month on certain executive offices to five
years on certain direct leases. Because the Company's professional services
are generally performed at the client site, field facilities are generally
small and accommodate a large number of consulting network systems engineers.
Field facilities are generally used for periodic meetings, training and
administration and by account managers. The Company has field facilities in
Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; Costa Mesa,
California; Dallas, Texas; Detroit, Michigan; El Segundo, California; Houston,
Texas; Iselin, New Jersey; Mountain View, California; New York, New York;
Raleigh, North Carolina; San Francisco, California; San Ramon, California;
Tulsa, Oklahoma; Washington, D.C. and Woodland Hills, California. The Company
is continually evaluating the adequacy of existing facilities and facilities
in new cities and believes that suitable additional space will be available in
the future on commercially reasonably terms as needed.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, and
their ages and positions as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<C> <C> <S>
Donald K. McKinney............. 47 Chairman of the Board and Chief Executive
Officer
John L. Drew................... 40 President, Chief Operating Officer and
Director
David M. Butze................. 39 Vice President, Western Operations
Fred J. Farinacci.............. 49 Vice President, Central Operations
Kevin J. Laughlin.............. 35 Vice President, Finance, Chief Financial
Officer and Secretary
Noel Marie Leca................ 39 Vice President, Electronic Services
Peter J. Licata................ 49 Vice President, Southern Operations
Ralph S. Troupe................ 35 Vice President, Eastern Operations
Steven R. Umphreys............. 43 Vice President, Human Resources
Steven L. Waldbusser........... 30 Principal Architect, Electronic Services
Vernon R. Anderson(1)(2)....... 65 Director
David Carlick(1)............... 46 Director
Lawrence G. Finch (1).......... 62 Director
Donald A. LeBeau............... 48 Director
Douglas Leone (2).............. 39 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Donald K. McKinney. Mr. McKinney, the founder of the Company, served as
President and Chief Executive Officer and Director from the Company's
inception in August 1991 until January 1996 and has since served as Chairman
of the Board and Chief Executive Officer. Mr. McKinney served as the Vice
President of Sales and Marketing of Electronics for Imaging, Inc., a provider
of hardware and software products for the digital color imaging market from
May 1989 to February 1991. Mr. McKinney has also served in various sales,
management and consulting positions at Sequoia Capital, Silicon Graphics,
Inc., Chromatics and IBM.
John L. Drew. Mr. Drew served as Vice President of Operations from June 1994
to January 1996 and has since served as President and Chief Operating Officer.
Mr. Drew is also a Director of the Company. Prior to joining the Company, Mr.
Drew was Vice President and General Manager for the Network Enable Division of
Unisys Corporation from April 1991 to June 1994. Mr. Drew also served in other
finance, marketing and management positions for Unisys Corporation from July
1984 to March 1991.
David M. Butze. Mr. Butze has been the Vice President of Western Operations
since April 1995. Prior to joining the Company, Mr. Butze was Vice President
of Sales and Marketing of Valence Technology, Inc., a battery technology
company, from May 1992 to March 1995. Mr. Butze was Vice President of JWP
Information Services, a systems integrator, from March 1989 to May 1992. Mr.
Butze has also held sales and sales management positions at Sperry Corporation
and Hercules Incorporated.
Fred J. Farinacci. Mr. Farinacci has been the Vice President of Central
Operations since March 1996. Prior to joining the Company, Mr. Farinacci held
various sales, sales management and general management positions at Unisys
Corporation for 19 years, most recently as Vice President and General Manager
of Transportation Market Segment from April 1995 to March 1996 and Group Vice
President, Central Group from January 1991 to March 1995.
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<PAGE>
Kevin J. Laughlin. Mr. Laughlin joined the Company in August 1993 as
Director of Finance and Secretary, became Vice President of Finance in August
1994, and Chief Financial Officer in July 1996. Mr. Laughlin was Controller of
Electronics for Imaging, Inc., a provider of hardware and software products
for the digital color imaging market, from November 1989 to July 1993. Mr.
Laughlin also served as an Accounting Manager at Oracle Corporation and in
various positions at Ernst & Young.
Noel Marie Leca. Ms. Leca has been the Vice President of Electronic Services
since March 1996. Prior to joining the Company, Ms. Leca held various
management positions at Sybase, Inc., a database software company, from
October 1989 to February 1996, most recently as Vice President from September
1995 to February 1996, Vice President, Multimedia Products from September 1993
to August 1995 and Vice President, Tools Products from October 1992 to August
1993.
Peter J. Licata. Mr. Licata joined the Company in February 1992 and has
served in various management positions, most recently Vice President of
Southern Operations. Prior to joining the Company, Mr. Licata was Vice
President of Sales, Marketing and Customer Service at Ultra Network
Technology, a networking company, from April 1987 to January 1992. Mr. Licata
has also held various sales and sales management positions at ROLM
Corporation, Cray Computer and Control Data Corporation.
Ralph S. Troupe. Mr. Troupe joined the Company in January 1993 and has
served in various sales and operations management positions, most recently,
Vice President of Eastern Operations. Prior to joining the Company, Mr. Troupe
was a Regional Manager of Lexcel Network Management Software Company, a
software company, from November 1990 to January 1993. Mr. Troupe has also held
sales and sales management positions at Management Visuals, 3M Corporation and
NCR Corporation.
Steven R. Umphreys. Mr. Umphreys has served as Vice President of Human
Resources since November 1995. Prior to joining the Company, Mr. Umphreys was
Director of Human Resources at Octel Corporation, a voice processing company,
from October 1990 to October 1995. Prior to Octel, Mr. Umphreys held various
human resource positions at 3Com Corporation, Quantum Corporation, and
Hewlett-Packard Company and a consulting position with Towers, Perrin,
Forester & Crosby.
Steven L. Waldbusser. Mr. Waldbusser has served as the Principal Architect,
Electronic Services for the Company since May 1995. Prior to joining the
Company, Mr. Waldbusser was the network architect at Carnegie Mellon
University from June 1987 to April 1995. Mr. Waldbusser is a Working Group
Chair of the Internet Engineering Task Force (IETF) and is the author of the
RMON and RMON2 standards as well as a co-author of the SNMPv2 standard and
many other standards.
Vernon R. Anderson. Mr. Anderson has served as a member of the Company's
Board of Directors since April 1992 and as Chairman of the Board from April
1992 to January 1996. Mr. Anderson has been a private investor and management
advisor since January 1994. Mr. Anderson was the President, Chief Executive
Officer and Vice Chairman of Axel Johnson, Inc., a diversified industrial
company, from March 1988 to October 1989, and Vice Chairman from October 1989
to December 1993. Mr. Anderson was a founder, President and Chief Executive
Officer of Silicon Graphics, Inc., Collagen Corporation and Vidar Corporation.
David Carlick. Mr. Carlick has served as a member of the Board of Directors
since April 1992. Mr. Carlick was the founder of Carlick Advertising in 1980,
which merged with Poppe Tyson in 1993. Mr. Carlick is currently an Executive
Vice President and Director of Poppe Tyson. Mr. Carlick is on the board of
directors of several privately held companies.
Lawrence G. Finch. Mr. Finch has served as a member of the Board of
Directors since June 1993. Mr. Finch has been a partner of Sigma Partners
since 1989. Mr. Finch is on the Board of Directors of Phoenix Technologies
Ltd. and several privately held companies.
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<PAGE>
Donald A. LeBeau. Mr. LeBeau has served as a member of the Board of
Directors since October 1994. Mr. LeBeau has served as Senior Vice President,
Worldwide Sales of Cisco, since August 1994 and Vice President of North
American Sales from July 1992 to August 1994. Prior to joining Cisco, Mr.
LeBeau was Vice President of Western Operations at Wang Laboratories.
Douglas Leone. Mr. Leone has served as a member of the Board of Directors
since June 1993. Mr. Leone is a partner of Sequoia Capital and has been with
that firm since July 1988. Mr. Leone is on the Board of Directors of Arbor
Software and several privately held companies.
Certain of the current directors of the Company were nominated and elected
in accordance with voting rights which terminate upon the closing of this
offering.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. Certain directors have been granted options to
purchase Common Stock in the past and options may be granted to directors of
the Company in the future. See "--Stock Plans" and "Certain Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves the compensation
and benefits for the Company's executive officers, administers the Company's
stock purchase and stock option plans and makes recommendations to the Board
of Directors regarding such matters. For fiscal 1996, the Compensation
Committee consisted of Messrs. Anderson and Finch. The committee is currently
composed of Messrs. Anderson and Leone. No interlocking relationship exists
between the Company's Board of Directors or Compensation Committee and the
Board of Directors or compensation committee of any other company, nor has any
such interlocking relationship existed in the past. See "Certain
Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Articles of Incorporation limit the
liability of the Company's directors for monetary damages to the maximum
extent permitted by California law. Such limitation of liability has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission.
The Company's Amended and Restated Bylaws provide that the Company will
indemnify its directors and officers and may indemnify its employees and
agents (other than officers and directors) against certain liabilities to the
maximum extent permitted by California law. The Company has entered into
indemnification agreements with each of its current directors and officers and
certain of its key employees that provide for indemnification of, and
advancement of expenses to, such persons to the maximum extent permitted by
California law, including by reason of action or inaction occurring in the
past and circumstances in which indemnification and advancement of expenses
are discretionary under California law.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding that may result in a claim for such
indemnification.
33
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned during the fiscal
year ended June 30, 1996 for (i) the Company's Chief Executive Officer and
(ii) the Company's other executive officers whose salary and bonus for such
fiscal year exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
NAME AND -------------------- UNDERLYING
PRINCIPAL POSITION(1) SALARY ($) BONUS ($) OPTIONS (#)
- --------------------- ---------- --------- ------------
<S> <C> <C> <C>
Donald K. McKinney
Chairman of the Board and Chief Executive
Officer.................................... $200,000 $60,000 600,000
John L. Drew
President and Chief Operating Officer....... 200,000 60,000 250,000
Kevin J. Laughlin
Vice President, Finance, Chief Financial
Officer and Secretary...................... 118,077 24,000 50,000
</TABLE>
- --------
(1) Mr. Drew was appointed President and Chief Operating Officer in January
1996 and Mr. Laughlin was appointed Chief Financial Officer in July 1996.
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 1996.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(5)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL 1996(2) PER SHARE(3) DATE(4) 5% ($) 10% ($)
---- ---------- ---------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald K. McKinney...... 600,000 17.2% $ .25 09/01/00 $ 94,334 $239,061
John L. Drew............ 250,000 7.2 .50 11/15/05 78,612 199,218
Kevin J. Laughlin....... 50,000 1.4 .50 11/15/05 15,722 39,844
</TABLE>
- --------
(1) These options were granted pursuant to the Company's Amended and Restated
1992 Flexible Stock Incentive Plan. The options were immediately
exercisable; however, the shares purchased under such options are subject
to repurchase by the Company at the original exercise price paid per share
upon the optionee's cessation of service prior to the vesting of such
shares. In this context, "vesting" means that the shares subject to
options are no longer subject to repurchase by the Company. A total of 24%
of the options vest upon completion of 12 months of service with the
Company, and the remaining shares vest at the rate of two percent per
month over the next 38 months of service.
(2) In fiscal 1996, the Company granted options to purchase an aggregate of
3,486,350 shares.
(3) In determining the fair market value of the Company's Common Stock, the
Board of Directors considered various factors, including the Company's
financial condition and business prospects, its operating results, the
absence of a market for its Common Stock and the risks normally associated
with technology companies.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's
death or disability.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices.
34
<PAGE>
The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during fiscal 1996 and the
number of shares subject to both exercisable and unexercisable stock options
as of June 30, 1996. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of June 30, 1996.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF VALUE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES (MARKET PRICE AT OPTIONS AT JUNE 30, 1996 (1) JUNE 30, 1996 (1)
ACQUIRED ON EXERCISE LESS ---------------------------------- -------------------------
NAME EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald K. McKinney...... 600,000 $ -- -- -- $ -- $ --
John L. Drew............ 250,000 -- -- -- -- --
Kevin J. Laughlin....... 200,000 25,500 -- -- -- --
</TABLE>
- --------
(1) The Options granted to the Named Executive Officers under the Company's
Amended and Restated 1992 Flexible Stock Incentive Plan were immediately
exercisable. The Named Executive Officers have exercised all options
granted to them; however, unvested shares are subject to repurchase by the
Company.
STOCK PLANS
1992 Flexible Stock Incentive Plan
The Company's 1992 Flexible Stock Incentive Plan (the "1992 Plan") provides
for the granting to employees (including officers and employee directors) of
incentive stock options and for the granting to employees, directors and
consultants of nonstatutory stock options and stock appreciation rights. As of
June 30, 1996, options to purchase an aggregate of 2,169,460 shares of Common
Stock were outstanding under the 1992 Plan and 212,879 shares remained
available for future grants under the 1992 Plan. Options granted under the
1992 Plan before the effective date of the 1996 Plan described below will
remain outstanding in accordance with their terms, but no further options will
be granted under the 1992 Plan after the effective date of this offering.
1996 Stock Plan
The Company's 1996 Stock Plan ( the "1996 Plan") was approved by the Board
of Directors in July 1996, subject to shareholder approval, but will not
become effective until the effective date of this offering. The 1996 Plan
provides for the granting to employees (including officers and employee
directors) of incentive stock options and for the granting to employees,
directors (including non-employee directors) and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). A total of 5,500,000 shares
of Common Stock has been reserved for issuance under the 1996 Plan, plus any
unused or cancelled shares under the 1992 Plan.
The 1996 Plan may be administered by the Board of Directors or a committee
designated by the Board (the "Administrator"). Options and SPRs granted under
the 1996 Plan are transferable by the optionee only at the discretion of the
Administrator or by will or by the laws of descent and distribution. Options
that are not transferable are exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 1996 Plan generally must be
exercised within three months of the end of optionee's status as an employee,
director or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term. The exercise price of all nonstatutory stock
options granted under the 1996 Plan will be determined by the Administrator.
With respect to any participant who owns stock possessing more than ten
percent of the voting power of all classes of the Company's outstanding
capital stock (a "10% Shareholder"), the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date. The exercise price of incentive stock options for all other employees
shall be no less than 100% of the fair market value per share on the date of
the grant. The
35
<PAGE>
maximum term of an option granted under the 1996 Plan may not exceed ten years
from the date of grant (five years in the case of an incentive stock option
granted to a 10% Shareholder). In the case of SPRs, unless the Administrator
determines otherwise, the Company shall have a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment
with the Company for any reason (including death or disability). Such
repurchase option will lapse at a rate determined by the Administrator. The
purchase price for shares repurchased by the Company will be the original
price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors in July 1996, subject to shareholder
approval, but will not become effective until the effective date of this
offering. The Company has reserved a total of 1,200,000 shares of Common Stock
for issuance under the 1996 Purchase Plan. Under the 1996 Purchase Plan, which
is intended to qualify under Section 423 of the Internal Revenue Code of 1986,
as amended, eligible employees of the Company are granted the right to
purchase Common Stock through payroll deductions of up to 15% of their
compensation (including commissions, overtime, shift premium, and performance
bonuses). The employee's right to purchase stock may accrue at a rate that
does not exceed $25,000 of stock per calendar year. The maximum number of
shares that an employee may purchase during any six-month purchase period is
limited to 2,000 shares. The price of Common Stock purchased under the 1996
Purchase Plan will be 85% of the lower of the fair market value of the Common
Stock on the last trading day prior to the first day of each offering period
or the last trading day of each six-month purchase period. Employees may end
their participation in the 1996 Purchase Plan at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with the Company. Rights
granted under the 1996 Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the plan. The 1996 Purchase Plan will be implemented by an
initial offering period of approximately 26 months commencing on the first
trading day on or after the effective date of this offering and ending on the
last trading day in the period ending October 31, 1998. Special offering
periods that end on the same date as the first offering period will begin on
November 29, 1996 and February 14, 1997. Subsequent offering periods will last
24 months and will commence on the first trading day on or after May 1 and
November 1 of each year during which the 1996 Purchase Plan is in effect, and
will terminate on the last trading day in the periods ending 24 months later.
Each 24-month offering period will consist of four purchase periods of
approximately six months duration. The 1996 Purchase Plan will be administered
by the Board of Directors or by a committee appointed by the Board.
401(k) PLAN
The Company has a 401(k) Plan, pursuant to which eligible employees may
elect to reduce their current salary by up to the statutorily prescribed
annual limit ($9,500 in 1996) and have the amount of such reduction
contributed to the 401(k) Plan. Certain Named Executive Officers participate
in the 401(k) Plan.
36
<PAGE>
CERTAIN TRANSACTIONS
Since inception in August 1991, the Company has issued, in private placement
transactions to certain 5% shareholders, directors and entities affiliated
with directors, shares of Preferred Stock as follows: an aggregate of
2,848,000 shares of the Company's Series A Preferred Stock at a price of $.603
per share in June 1993; an aggregate of 6,848,922 shares of the Company's
Series B Preferred Stock at a price of $.336 per share in June 1993; and an
aggregate of 5,722,178 shares of the Company's Series C Preferred Stock at a
price of $.79 per share in July 1994. The purchasers of the Preferred Stock
were as follows:
<TABLE>
<CAPTION>
SHARES OF SERIES A SHARES OF SERIES B SHARES OF SERIES C
NAME PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Canaan Capital entities.................... -- -- 1,708,862
Sequoia Capital entities................... -- 2,977,792 957,632
Sigma Partners entities.................... -- 2,977,792 957,632
Vernon R. Anderson(1)...................... -- 297,779 127,408
Donald K. McKinney......................... 2,848,000 -- 439,073
Cisco Systems, Inc......................... -- -- 1,265,823
</TABLE>
- --------
(1) Does not include 297,779 shares of Series B and 75,875 shares of Series C
Preferred Stock purchased by Brenton Anderson, the son of Vernon R.
Anderson.
The Preferred Stock purchased by these directors and affiliates was
purchased on the same terms and conditions as the Preferred Stock purchased by
other investors. The Preferred Stock is convertible into Common Stock of the
Company at the rate of one share of Common Stock for each share of Preferred
Stock.
In March 1994, the Company borrowed an aggregate of $1,000,000 from certain
holders of its Preferred Stock. The promissory notes bore interest at the rate
of 7% per annum. The outstanding principal balance of these notes, plus
accrued interest, was converted into 1,291,798 shares of Series C Preferred
Stock on the closing of the sale of Series C Preferred Stock. In addition to
the promissory notes evidencing the loans, the Company issued to the lenders,
on a pro-rata basis, warrants to purchase an aggregate of 253,163 shares of
the Company's Common Stock at an exercise price per share of $.10. The
following shareholders who beneficially own more than 5% of the Company's
outstanding Common Stock and directors (or entities affiliated with directors)
hold warrants issued in this transaction: Mr. McKinney holds a warrant to
purchase 75,949 shares of the Company's Common Stock and entities affiliated
with Sequoia Capital and Sigma Partners each hold warrants to purchase 80,552
shares of the Company's Common Stock. In addition, Mr. Vernon and his son, Mr.
Brenton Anderson, exercised their warrants and each purchased 8,055 shares of
the Company's Common Stock in August 1995. The remaining warrants terminate
upon the closing of this offering if not exercised. The Company has assumed
that each of these warrants will be exercised in full for purposes of this
Prospectus.
In June 1994, the Company issued a warrant to purchase 1,315,789 shares of
Series C Preferred Stock at an exercise price of $1.14 to Cisco. Cisco
exercised the warrant in full in June 1995. The Company generated revenue of
$741,000 and $207,000 from services provided to Cisco, including as a
subcontractor, in fiscal 1995 and 1996.
The Company made loans to certain of its executive officers related to the
exercise of stock options. The notes are collateralized by the underlying
stock and the stock is subject to a right of repurchase by the Company in the
event of termination. As of June 30, 1996, the amounts outstanding for
principal and interest on these loans were $157,018 and $162,580 for Messrs.
McKinney and Drew, respectively.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
37
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1996 and as
adjusted to reflect the sale of the Common Stock offered hereby for (i) each
person or entity who is known by the Company to beneficially own five percent
or more of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
-------------------------
NAME OR GROUP OF NUMBER OF SHARES BEFORE AFTER
BENEFICIAL OWNERS BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------- --------------------- ----------- ----------
<S> <C> <C> <C>
Donald K. McKinney (2)....... 10,578,182 37.2%
c/o International Network
Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Sequoia Capital (3).......... 4,015,976 14.1
Douglas Leone
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Sigma Partners (4)........... 4,015,976 14.1
Lawrence G. Finch
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
Cisco Systems, Inc. (5)...... 2,581,612 9.1
Donald A. LeBeau
170 West Tasman Drive
San Jose, CA 95134
Canaan Partners (6).......... 1,708,862 6.0
2884 Sand Hill Road,
Suite 115
Menlo Park, CA 94025
John L. Drew (7)............. 966,000 3.4
Vernon R. Anderson (8)....... 462,442 1.6
Kevin J. Laughlin (9)........ 300,000 1.1
David Carlick (10)........... 60,000 *
All directors and executive
officers as a group
(8 persons) (11) ........... 23,580,188 83.0
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
(1) Based on 28,398,817 shares outstanding as of June 30, 1996, which
includes 237,053 shares of Common Stock to be issued upon the exercise of
warrants concurrently with the consummation of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of June 30, 1996 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each shareholder named in the table
has sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.
38
<PAGE>
(2) Includes 10,502,233 shares held by the McKinney Family Trust, of which
Mr. McKinney is a trustee. Of these shares, 444,000 shares were subject
to a repurchase option in favor of the Company as of June 30, 1996. Also
includes 75,949 shares issuable upon exercise of a warrant held by the
McKinney Family Trust.
(3) Includes 3,600,389 shares held by Sequoia Capital V, 177,619 shares held
by Sequoia Technology Partners V, 119,111 shares held by Sequoia XXIII
and 38,305 shares held by Sequoia XXIV. Also includes 74,913, 2,417 and
3,222 shares issuable upon exercise of warrants held by Sequoia Capital
V, Sequoia Technology Partners V and Sequoia XXIV, respectively. Mr.
Leone is a partner of Sequoia Capital and disclaims beneficial ownership
of all shares except to the extent of his pecuniary interest in the
partnerships.
(4) Includes 276,900 shares held by Sigma Associates II, L.P. and 3,658,524
shares held by Sigma Partners II, L.P. Also includes 5,671 and 74,881
shares issuable upon exercise of warrants held by Sigma Associates II,
L.P. and Sigma Partners II, L.P., respectively. Mr. Finch is a partner of
Sigma Partners and disclaims beneficial ownership of all shares except to
the extent of his pecuniary interest in the partnerships.
(5) Mr. LeBeau, a director of the Company, is Senior Vice President,
Worldwide Operations of Cisco. Mr. LeBeau disclaims beneficial ownership
of such shares.
(6) Includes 182,849 shares held by Canaan Capital Limited Partnership and
1,526,013 shares held by Canaan Capital Offshore Limited Partnership,
C.V.
(7) Includes 640,000 shares subject to a repurchase option in favor of the
Company as of June 30, 1996.
(8) Includes 462,442 shares held by the Vernon R. & Lysbeth W. Anderson
Family Trust of which Mr. Anderson is a trustee. Of these shares, 15,000
shares were subject to a repurchase option in favor of the Company as of
June 30, 1996.
(9) Includes 166,000 shares subject to a repurchase option in favor of the
Company as of June 30, 1996.
(10) Includes 10,000 shares issuable upon exercise of options, all of which
would be subject to a repurchase option in favor of the Company as of
June 30, 1996, if issued.
(11) Includes 10,000 shares issuable upon exercise of options, all of which
would be subject to a repurchase option in favor of the Company as of
June 30, 1996, if issued, 1,265,000 shares subject to a repurchase option
in favor of the Company as of June 30, 1996 and 237,053 shares issuable
upon exercise of warrants.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 75,000,000 shares of Common Stock, no par value, and
5,000,000 shares of Preferred Stock, no par value, after giving effect to the
amendment of the Company's Amended and Restated Articles of Incorporation to
delete references to Series A, B and C Preferred Stock following the
conversion of such Preferred Stock into Common Stock upon the closing of this
offering.
COMMON STOCK
As of June 30, 1996, there were 28,398,817 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock and
exercise of all warrants which would otherwise terminate upon the consummation
of this offering) held of record by 93 shareholders. Holders of Common Stock
are entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon consummation of the offering will be fully paid
and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, 5,000,000 shares of undesignated
Preferred Stock will be authorized, and no shares will be outstanding. The
Board of Directors of the Company has the authority to issue the shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock and to fix the number of shares constituting any series and
the designations of such series, without any further vote or action by the
shareholders. Although it presently has no intention to do so, the Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company.
WARRANTS
Upon the closing of this offering, the Company will have one warrant
outstanding to purchase 63,291 shares of the Company's Common Stock at a
purchase price of $0.79 per share. The warrant expires on July 1, 1999.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The Company's Amended and Restated Articles of Incorporation provide that
upon qualification of the Company as a "listed corporation," as defined in the
California Corporations Code, cumulative voting for the election of directors
will be eliminated. The Company's Amended and Restated Articles of
Incorporation also provide that all shareholder action must be effected at a
duly called meeting of shareholders and not by a consent in writing. The
Company's Amended and Restated Bylaws provide that shareholders may only make
director nominations and bring business before the Company's annual meeting
upon prior written notice. Such provisions may have the effect of delaying or
preventing a change in control of the Company.
REGISTRATION RIGHTS
The holders or their permitted transferees (the "Holders") of approximately
24,338,052 shares of Common Stock and warrants to purchase approximately
63,291 shares of Common Stock are entitled to certain rights with respect to
the registration of such shares under the Securities Act. Under the terms of
an agreement between the
40
<PAGE>
Company and such holders, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders, the holders are entitled to notice of the
registration and are entitled to include shares of such Common Stock therein.
In addition, the holders of sufficient shares with registration rights may
require the Company at its own expense, on not more than two occasions, to
file a registration statement under the Securities Act, with respect to their
shares of Common Stock, and the Company is required to use its best efforts to
effect the registration, subject to certain conditions and limitations.
Further, the Holders may require the Company, at its expense, to register the
shares on Form S-3 when such form becomes available to the Company, subject to
certain conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act ("Affiliates"). The remaining 28,398,817 shares of Common
Stock held by existing shareholders are "restricted securities" as that term
is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rules 144, 144(k) and 701, additional shares will be available for sale in the
public market as follows: (i) no shares will be eligible for immediate sale on
the date of this Prospectus, (ii) 25,284,488 shares will be eligible for sale
upon expiration of lock-up agreements and other contractual restrictions 180
days after the date of this Prospectus, (iii) 1,331,899 shares will be
eligible for sale upon expiration of their respective two-year holding periods
and (iv) 1,782,430 shares which are subject to a repurchase option in favor of
the Company will be eligible for sale as such shares vest.
Upon completion of this offering, the holders of 24,338,052 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
All officers and directors and certain other shareholders of the Company
have entered into "lock-up" agreements that provide that they will not sell,
make any short sale of, grant any option for the purchase of, or otherwise
transfer or dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period
of 180 days after the date of this Prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated. Pursuant to pre-existing
agreements with the Company, all other holders of Common Stock and options to
purchase Common Stock have agreed not to sell shares of Common Stock for 180
days after the date of this Prospectus, and the Company has agreed in the
Underwriting Agreement not to release such holders without the consent of
Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements. Morgan Stanley & Co.
Incorporated currently has no plans to release any portion of the securities
subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the number of shares of Common
Stock then outstanding (which will equal approximately shares immediately
after this offering) or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell
42
<PAGE>
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.. In general, under Rule
701 of the Securities Act as currently in effect, any employee, consultant or
advisor of the Company who purchased shares from the Company in connection
with a compensatory stock or option plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such modifications will have a material
effect on the times when shares of the Company's Common Stock become eligible
for resale.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
1992 Plan, 1996 Plan and 1996 Purchase Plan. Based on the number of options
outstanding and options and shares reserved for issuance under all such plans,
such registration statement would cover approximately 9,082,339 shares. See
"Management--Stock Plans." Such registration statement is expected to be filed
and become effective as soon as practicable after the consummation of this
offering. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to shares acquired by
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements or
contractual restrictions described above. As of June 30, 1996, options to
purchase 2,169,460 shares of Common Stock were issued and outstanding under
the 1992 Plan, and no options to purchase shares had been granted under the
Company's 1996 Plan and 1996 Employee Purchase Plan. Subsequent to June 30,
1996, the Board of Directors granted options to purchase an additional 167,300
shares of Common Stock. See "Management--Director Compensation" and "--Stock
Plans."
43
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated and Robertson,
Stephens & Company LLC are serving as Representatives, have severally agreed
to purchase, and the Company has agreed to sell to them, the respective number
of shares of the Company's Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................
Alex. Brown & Sons Incorporated...................................
Robertson, Stephens & Company LLC.................................
----
Total...........................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and
pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the initial public at the public offering
price set forth on the cover page hereof and part to certain dealers at a
price which represents a concession not in excess of $ per share under the
initial public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other Underwriters
or to certain other dealers.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional shares of Common Stock at the
initial public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
the sale of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriters' name in
the preceding table bears to the total number of shares of Common Stock
offered hereby to the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend sales to discretionary accounts to exceed five percent of the total
number of shares of Common Stock offered by them.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers and directors of the Company and certain
other shareholders of the Company have agreed not to sell, make any short sale
of, grant any option for the purchase of, or otherwise transfer or dispose of,
any shares of Common Stock or
44
<PAGE>
any securities convertible into or exercisable or exchangeable for Common
Stock for a period of 180 days after the date of this Prospectus, without the
prior written consent of Morgan Stanley & Co. Incorporated. Pursuant to pre-
existing agreements with the Company, all other holders of Common Stock and
options to purchase Common Stock have agreed not to sell shares of the
Company's Common Stock for 180 days after the date of the Prospectus, and the
Company has agreed in the Underwriting Agreement not to release such holders
without the prior consent of Morgan Stanley & Co. Incorporated. The Company
has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable for
Common Stock, for a period of 180 days after the date of this Prospectus,
except under certain circumstances.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined by
negotiation between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price will be the
future prospects of the Company and its industry in general, sales, earnings
and certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of the Company.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Gray Cary Ware & Freidenrich, A Professional Corporation,
Palo Alto, California.
EXPERTS
The financial statements of the Company at June 30, 1995 and 1996 and for
each of the three years in the period ended June 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Certain
items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement, and the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
45
<PAGE>
INTERNATIONAL NETWORK SERVICES
----------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheets at June 30, 1995 and 1996................................. F-3
Statements of Operations for the Years Ended June 30, 1994, 1995 and
1996.................................................................... F-4
Statements of Shareholders' Deficit for the Years Ended June 30, 1994,
1995 and 1996........................................................... F-5
Statements of Cash Flows for the Years Ended June 30, 1994, 1995 and
1996.................................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
International Network Services
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in
all material respects, the financial position of International Network
Services at June 30, 1995 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
July 19, 1996
F-2
<PAGE>
INTERNATIONAL NETWORK SERVICES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,161 $ 869
Accounts receivable, net................................... 4,164 11,821
Deferred income taxes...................................... -- 857
Prepaid expenses and other assets.......................... 116 386
------- -------
Total current assets..................................... 8,441 13,933
Property and equipment, net.................................. 1,526 4,139
------- -------
$ 9,967 $18,072
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................... $ 652 $ 1,908
Accrued expenses........................................... 954 3,704
Income taxes payable....................................... 58 250
Deferred revenue........................................... 342 612
Borrowings under line of credit............................ -- 1,000
Current portion of notes payable........................... 332 399
------- -------
Total current liabilities................................ 2,338 7,873
------- -------
Notes payable, less current portion.......................... 732 316
------- -------
Mandatorily Redeemable Convertible Preferred Stock........... 11,292 12,427
------- -------
Commitments (Notes 7 and 8)
Shareholders' deficit:
Common Stock, no par value, 45,000,000 shares authorized;
8,394,320 and 11,426,875 shares issued and outstanding.... 435 2,394
Accretion of Mandatorily Redeemable Convertible Preferred
Stock..................................................... (1,319) (2,454)
Notes receivable from shareholders......................... (30) (1,880)
Accumulated deficit........................................ (3,481) (604)
------- -------
Total shareholders' deficit.............................. (4,395) (2,544)
------- -------
$ 9,967 $18,072
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTERNATIONAL NETWORK SERVICES
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenue............................................... $ 7,565 $15,549 $44,092
------- ------- -------
Operating expenses:
Professional personnel.............................. 3,319 6,654 19,892
Sales and marketing................................. 2,774 3,843 7,990
General and administrative.......................... 1,588 1,890 5,049
Other costs......................................... 1,248 2,346 6,447
------- ------- -------
Total operating expenses.......................... 8,929 14,733 39,378
------- ------- -------
Income (loss) from operations......................... (1,364) 816 4,714
Interest and other, net............................... (30) 17 3
------- ------- -------
Income (loss) before income taxes..................... (1,394) 833 4,717
Provision for income taxes............................ -- 58 1,840
------- ------- -------
Net income (loss)..................................... $(1,394) $ 775 $ 2,877
======= ======= =======
Net income per share.................................. $ 0.03 $ 0.09
======= =======
Shares used to compute net income per share........... 29,357 30,529
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERNATIONAL NETWORK SERVICES
STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCRETION OF
MANDATORILY
NOTES REDEEMABLE
COMMON STOCK RECEIVABLE CONVERTIBLE
------------------ FROM PREFERRED ACCUMULATED
SHARES AMOUNTS SHAREHOLDERS STOCK DEFICIT TOTAL
---------- ------- ------------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1993................... 6,750,000 $ 383 $ -- $ (33) $(2,862) $(2,512)
Issuance of Common
Stock upon exercise
of stock options..... 1,172,800 43 (30) -- -- 13
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (403) -- (403)
Net loss.............. -- -- -- -- (1,394) (1,394)
---------- ------ ------- ------- ------- -------
Balance at June 30,
1994................... 7,922,800 426 (30) (436) (4,256) (4,296)
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (883) -- (883)
Issuance of Common
Stock upon exercise
of stock options,
net.................. 471,520 9 -- -- -- 9
Net income............ -- -- -- -- 775 775
---------- ------ ------- ------- ------- -------
Balance at June 30,
1995................... 8,394,320 435 (30) (1,319) (3,481) (4,395)
Accretion of
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- (1,135) -- (1,135)
Issuance of Common
Stock upon exercise
of stock options and
warrants............. 3,032,555 1,959 (1,850) -- -- 109
Net income............ -- -- -- -- 2,877 2,877
---------- ------ ------- ------- ------- -------
Balance at June 30,
1996................... 11,426,875 $2,394 $(1,880) $(2,454) $ (604) $(2,544)
========== ====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTERNATIONAL NETWORK SERVICES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,394) $ 775 $ 2,877
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation...................................... 275 784 1,786
Changes in assets and liabilities:
Accounts receivable.............................. (1,350) (2,245) (7,657)
Deferred income taxes............................ -- -- (857)
Prepaid expenses and other assets................ (41) (37) (270)
Accounts payable................................. 109 352 1,256
Accrued expenses................................. 385 471 2,692
Income taxes payable............................. -- 58 250
Deferred revenue................................. 141 201 270
------- ------- -------
Net cash provided by (used for) operating
activities..................................... (1,875) 359 347
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment................. (553) (1,610) (4,399)
------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable........................ 2,071 600 --
Borrowings under line of credit.................... -- -- 1,000
Payments on notes payable.......................... -- (607) (349)
Payments on advances from shareholder.............. (48) -- --
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock....................... 1,983 2,996 --
Proceeds from issuance of Common Stock, net........ 13 9 109
------- ------- -------
Net cash provided by financing activities....... 4,019 2,998 760
------- ------- -------
Increase (decrease) in cash......................... 1,591 1,747 (3,292)
Cash and cash equivalents at beginning of period.... 823 2,414 4,161
------- ------- -------
Cash and cash equivalents at end of period.......... $ 2,414 $ 4,161 $ 869
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. $ 35 $ 87 $ 103
Cash paid for income taxes......................... $ -- $ -- $ 2,470
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes and interest payable to shareholders
exchanged for Mandatorily Redeemable Convertible
Preferred Stock................................... $ 1,020 $ -- $ --
Issuance of Common Stock in exchange for notes
receivable from shareholders...................... $ 30 $ -- $ 1,850
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
International Network Services (the "Company") was incorporated in
California in August 1991. The Company is a leading provider of services for
complex enterprise networks. The Company provides services for complex
networks, and maintains expertise in the most complex network technologies and
multivendor environments. The Company operates in one industry segment.
SIGNIFICANT ACCOUNTING POLICIES
Fiscal year
The Company's fiscal year is composed of four 13-week quarters, each of
which ends on the last Sunday of the final fiscal month of the quarter, with
the fiscal year ending on the Sunday closest to June 30. For financial
statement presentation purposes, each fiscal year end is titled June 30th.
Cash and cash equivalents
All highly liquid investments with a maturity of three months or less from
the date of purchase are considered cash equivalents. Cash equivalents were
$2,646,000 and $311,000 at June 30, 1995 and 1996, respectively and consisted
of money market deposits with two institutions.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, ranging from two to five years.
Revenue recognition
Substantially all of the company's revenue is derived from professional
services which are generally provided to clients on a "time and expenses"
basis. Revenue is recognized as services are performed. Payments received in
advance of services performed are recorded as deferred revenue. The Company
also performs a limited number of fixed-price engagements under which revenue
is recognized using the percentage-of-completion method (based on the ratio of
costs incurred to total estimated project costs). Provision for estimated
losses on engagements is made during the period in which the loss becomes
probable and can be reasonably estimated. To date, such losses have been
insignificant. The Company reports revenue net of reimbursable expenses which
are billed to and collected from clients. The Company also derives revenue
from electronic services. Electronic services revenue is recognized ratably
over the term of the contract.
OPERATING EXPENSES
Professional personnel
Professional personnel expenses include compensation and benefits of the
Company's employees engaged in the delivery of professional and electronic
services.
Other costs
Other costs include expenses related to professional personnel, other than
compensation and benefits, including travel and entertainment, certain
recruiting and professional development expenses, field facilities,
F-7
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
depreciation, expensed equipment, supplies and research and development
expenses related to electronic services. Research and development expenses
were $29,000, $78,000 and $879,000 for fiscal years 1994, 1995 and 1996,
respectively. All research and development expenses, including software
development costs, are charged to expense as incurred. Statement of Financial
Accounting Standard No. 86 ("SFAS 86") requires the capitalization of certain
software development costs once technological feasibility is established,
which the Company defines as the completion of a working model. The
capitalized costs are then amortized on a straight line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, costs incurred subsequent to
achieving technological feasibility and prior to the general commercial
release of the electronic services have not been significant. Accordingly, the
Company has not capitalized any software development costs.
INCOME TAXES
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are derived from revenue earned from
customers primarily located in the United States. The Company performs ongoing
credit evaluations of its customers and to date has not experienced any
material losses. In fiscal 1994 two customers accounted for 30% and 13%
respectively of revenue. In fiscal 1995 no one customer accounted for more
than 10% of revenues. In fiscal 1996, one customer accounted for 17% of
revenue.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
and common equivalent shares ("weighted average shares") outstanding during
the period. Common equivalent shares consist of Mandatorily Redeemable
Convertible Preferred Stock (using the if converted method) and stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is antidilutive. However,
pursuant to the requirements of the Securities and Exchange Commission, common
and common equivalent shares issued one year prior to the initial public
offering date have been included in the computation as if they were
outstanding for all periods presented, even if antidilutive (using the
treasury stock method and the assumed initial public offering price).
Net loss per share for fiscal 1994 has not been presented as such
information is not considered meaningful due to the antidilutive effect of
Common Stock equivalents and the significant change in the Company's capital
structure that will occur in connection with the initial public offering.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
establishes a fair value method of accounting for stock based compensation
plans, and requires additional disclosures for those companies who elect not
to adopt the new method of accounting. The Company currently expects to elect
to continue to measure compensation costs using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
and to comply with the pro forma disclosure requirements of SFAS 123. If the
Company makes this election, SFAS 123 will have no impact on the Company's
financial statements.
F-8
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED)
On July 18, 1996, the Board of Directors authorized the Company to proceed
with an initial public offering of the Company's Common Stock (the
"Offering"). If the Offering contemplated by this Prospectus is consummated,
all of the Mandatorily Redeemable Convertible Preferred Stock outstanding as
of the closing date will automatically be converted on a one for one basis
into an aggregate of 16,734,889 shares of Common Stock as of June 30, 1996. In
addition, 237,053 shares of Common Stock will be issued upon the exercise of
Common Stock warrants at $0.10 per share. Unaudited pro forma shareholders'
equity at June 30, 1996, adjusted for the conversion of the Preferred Stock
and issuance of Common Stock upon exercise to outstanding warrants is as
follows (in thousands):
<TABLE>
<S> <C>
Preferred stock, no par value, 5,000,000 shares authorized; no
shares issued and outstanding.................................... $ --
Common stock, no par value, 75,000,000 shares authorized;
28,398,817 shares issued and outstanding......................... 12,391
Notes receivable from shareholders................................ (1,880)
Accumulated deficit............................................... (604)
-------
$9,907
=======
</TABLE>
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Trade.................................................... $ 4,385 $12,375
Less: allowance for doubtful accounts.................... (221) (554)
------- -------
$ 4,164 $11,821
======= =======
Property and equipment:
Computer equipment....................................... $ 2,557 $ 6,511
Furniture and fixtures................................... 167 612
------- -------
2,724 7,123
Less: accumulated depreciation........................... (1,198) (2,984)
------- -------
$ 1,526 $ 4,139
======= =======
Accrued expenses:
Accrued compensation and employee benefits............... $ 905 $ 3,356
Other liabilities........................................ 49 348
------- -------
$ 954 $ 3,704
======= =======
</TABLE>
F-9
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 17,000,000 shares of Mandatorily Redeemable
Convertible Preferred Stock, of which 2,848,000, 6,849,000 and 7,037,967
shares were designated as Series A, B and C, respectively.
In March 1994, the Company issued $1,000,000 of convertible notes payable to
existing shareholders which bore interest at 7%. In June, 1994, the notes,
plus accrued interest of $20,000, were converted at $.79 ("Original Issue
Price") per share into 1,291,798 shares of Series C Preferred Stock. In
addition, the Company issued an additional 2,531,645 shares of Series C
Preferred Stock at $.79 per share for aggregate proceeds, net of issuance
costs, of $1,983,000. In connection with the issuance of the Series C
Preferred Stock, the Company issued to warrants to one investor to purchase up
to an additional 1,315,789 shares of Series C Preferred Stock at $1.14 per
share through July 1, 1995. No value was assigned to these warrants as their
fair value at the time of issuance was considered nominal. The warrant was
exercised in June 1995, resulting in aggregate proceeds, net of issuance
costs, of $1,496,000.
In July 1994, the Company issued 1,898,735 shares of Series C Preferred
Stock at a purchase price of $.79 per share for aggregate proceeds of
$1,500,000.
The Series A, B and C Mandatorily Redeemable Convertible Preferred Stock
together are hereinafter referred to as Preferred Stock. The Company has
reserved 16,734,889 shares of Common Stock for the conversion of Preferred
Stock upon the closing of the offering.
A summary of Preferred Stock activity is a follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Balance at June 30, 1993......................... 9,696,922 $ 4,007
Issuance of Series C Preferred Stock for cash,
net of expenses............................... 3,823,443 3,003
Accretion of Preferred Stock................... -- 403
---------- -------
Balance at June 30, 1994......................... 13,520,365 7,413
Issuance of Series C Preferred Stock for cash,
net of expenses............................... 3,214,524 2,996
Accretion of Preferred Stock................... -- 883
---------- -------
Balance at June 30, 1995......................... 16,734,889 11,292
Accretion of Preferred Stock................... 1,135
---------- -------
Balance at June 30, 1996......................... 16,734,889 $12,427
========== =======
</TABLE>
Holders of Preferred Stock have certain rights, preferences and restrictions
with respect to dividends, redemption, conversion, liquidation and voting as
set forth in the Articles of Incorporation and summarized below.
DIVIDEND RIGHTS
Holders of Preferred Stock are entitled to receive a non-cumulative dividend
of 8% of the respective Original Issue Prices per year, if and when declared
by the Board of Directors.
VOTING RIGHTS
Each share of Preferred Stock is entitled to one vote for each share of
Common Stock into which the Preferred Stock is convertible. Holders of Series
B Preferred Stock are entitled to elect two directors only when and if at
least 4,000,000 shares of Series B Preferred Stock are outstanding. Holders of
Series A Preferred Stock
F-10
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
are entitled to elect one director only when and if at least 1,500,000 shares
of Series A Preferred Stock are outstanding. In addition, certain matters, as
defined in the Company's Articles of Incorporation, require the approval of
the holders of Series B and C Preferred Stock, provided the requisite number
of each class are outstanding.
LIQUIDATION RIGHTS
In the event of liquidation and to the extent assets are available, the
holders of Preferred Stock are entitled to a liquidation preference
distribution of an amount equal to the sum of the Original Issue Price plus
all declared but unpaid dividends. After the liquidation preference
distribution, remaining assets shall be distributed to all holders of Common
and Preferred Stock on a as-if-converted basis, except that the maximum total
distribution to holders of Series A, Series B and Series C Preferred Stock
will not exceed $1.007 per share, $1.007 per share, and $1.14 per share,
respectively.
REDEMPTION
At any time after May 19, 1998, a vote of two-thirds of the then outstanding
shares of Series B and Series C Preferred Stock, voting together as a single
class, may require the Company to redeem all outstanding Preferred Stock at a
per share price equal to the Original Issue Price plus a 10% accretion per
year, compounded annually. The redemption amount shall be payable in three
equal annual installments. Accretion of Preferred Stock was $403,000, $883,000
and $1,135,000 for fiscal 1994, 1995 and 1996, respectively.
CONVERSION RIGHTS
Each share of Preferred Stock is convertible at any time into one share of
Common Stock, subject to adjustments in the case of certain dilutive events.
Each share of Preferred Stock will automatically convert upon the affirmative
vote of the holders of a majority of the outstanding shares of Series B and
Series C Preferred Stock, voting together as a single class, or upon the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, for which the gross proceeds are at least $7,500,000 and the price
per share is at least $1.65.
NOTE 4--COMMON STOCK:
In connection with the Notes issued in March 1994, the Company issued
warrants to purchase a total of 253,163 of the Company's Common Stock at $0.10
per share. The warrants expire on the earlier of the consummation of the
initial public offering or on March 1, 1999. No value was ascribed to these
warrants as their fair value at the time of issuance was considered nominal.
In August 1995, 16,110 shares were issued in connection with the exercise of
certain of these warrants. The Company has reserved 237,053 shares of Common
Stock for issuance upon the exercise of certain of the remaining warrants.
Certain Common Stock option holders (see Note 5) have the right to exercise
unvested options, subject to a repurchase right held by the Company. At June
30, 1996, 2,394,890 of the shares issued on the exercise of options were
subject to repurchase by the Company at the original purchase price in the
event of employee termination.
NOTES RECEIVABLE FROM SHAREHOLDERS
In exchange for the issuance of Common Stock upon exercise of options in
fiscal 1994 and 1996, the Company received notes receivable from shareholders
which bear interest at rates varying from 5.33% to 5.91% per annum. Principal
and interest are due and payable at different dates between 1998 and 1999. The
outstanding balance of such notes receivable has been included in
shareholders' deficit.
F-11
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--STOCK OPTION PLAN:
Under the Company's 1992 Flexible Stock Incentive Plan (the "1992 Plan"),
8,000,000 shares of Common Stock have been reserved for issuance pursuant to
options, stock and stock appreciation rights and may be granted to employees,
directors and consultants. Incentive stock options must be granted at fair
market value at the date of grant, and nonstatutory stock options and stock
appreciation rights may be granted at not less than 85% of fair market value
on the date of grant. Options generally vest over a 50 month period and expire
over terms not exceeding ten years from the date of grant.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
---------- ----------
<S> <C> <C>
Balance at June 30, 1993............................ 1,771,500 $0.01-0.04
Granted........................................... 1,599,500 $ 0.04
Exercised......................................... (1,172,800) $0.01-0.04
Canceled.......................................... (217,700) $ 0.01
----------
Balance at June 30, 1994............................ 1,980,500 $0.01-0.04
Granted........................................... 1,441,475 $0.08-0.25
Exercised......................................... (539,520) $0.01-0.08
Canceled.......................................... (205,480) $0.01-0.25
----------
Balance at June 30, 1995............................ 2,676,975 $0.01-0.25
Granted........................................... 3,486,350 $0.25-7.00
Exercised......................................... (3,016,445) $0.01-4.50
Canceled.......................................... (977,420) $0.01-4.50
---------- ----------
Balance at June 30, 1996............................ 2,169,460 $0.01-7.00
========== ==========
</TABLE>
At June 30, 1996, 720,910 options were fully vested and exercisable at
prices ranging from $0.01 to $2.50 and 212,879 options were reserved for
future grant.
Subsequent to June 30, 1996, the Company granted options to purchase an
aggregate of 167,300 shares of Common Stock.
NOTE 6--INCOME TAXES:
No provision for income taxes was recorded for the year ended June 30, 1994
as the Company incurred net operating losses during the period. The provision
for income taxes for the years ended June 30, 1995 and 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------
1995 1996
---- ------
<S> <C> <C>
Current:
Federal....................................................... $ 22 $1,940
State......................................................... 36 757
---- ------
58 2,697
---- ------
Deferred:
Federal....................................................... -- (757)
State......................................................... -- (100)
---- ------
-- (857)
---- ------
$ 58 $1,840
==== ======
</TABLE>
F-12
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes differs from the amount determined
by applying the U.S. statutory income tax rate to income (loss) before income
taxes as summarized below (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate.......... $ (474) $ 283 $ 1,604
State income taxes, net of federal benefit......... (86) 49 370
Net operating loss carryforwards for which no
benefit was recognized............................ 555 -- --
Net operating loss utilized (subject to alternative
minimum tax limitation)........................... -- (279) --
Release of valuation allowance..................... -- -- (309)
Nondeductible expenses............................. 5 5 98
Other.............................................. -- -- 77
------ ----- -------
$ -- $ 58 $ 1,840
====== ===== =======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting and
income tax purposes. The Company provides a valuation allowance for deferred
tax assets when it is more likely than not, based on available evidence, that
some portion or all of the deferred tax assets will not be realized. Based on
a reevaluation of the realizability of future tax benefits based on income
earned in fiscal 1996, creating available tax carrybacks, the Company reversed
the previously established valuation allowance during fiscal 1996. Significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------
1995 1996
----- ----
<S> <C> <C>
Depreciation.................................................... $ 177 $355
State income taxes.............................................. 3 177
Allowance for doubtful accounts and other reserves.............. 129 325
----- ----
309 857
Valuation allowance............................................. (309) --
----- ----
$ -- $857
===== ====
</TABLE>
NOTE 7--COMMITMENTS:
The Company leases office space for its corporate headquarters and various
field offices.
Future annual minimum lease payments under all noncancellable operating
leases as of June 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $ 788
1998................................................................ 774
1999................................................................ 693
2000................................................................ 630
2001................................................................ 515
Thereafter.......................................................... 29
------
$3,429
======
</TABLE>
Total rent expense for the years ended June 30, 1994, 1995 and 1996 was
approximately $314,000, $374,000 and $545,000, respectively.
F-13
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--LINES OF CREDIT AND NOTES PAYABLE:
The Company has a $6.0 million revolving line of credit with a bank which
expires in June 1997. Borrowings under the revolving line of credit are
limited to 80% of eligible domestic accounts receivable, and bear interest at
the bank's prime rate plus 1.00%, 9.25 at June 30, 1996. Borrowings under the
revolving line of credit at June 30, 1996 totaled $1.0 million. The Company
also has a $3.0 million term facility with the same bank which expires in June
1997. Borrowings under the term facility bear interest at the bank's prime
rate plus 1.25%, 9.50 at June 30, 1996 and are payable in 36 monthly
installments. There were no borrowings under the term facility at June 30,
1996.
Long term debt of $1,064,000 and $715,000 at June 30, 1995 and 1996,
respectively, relates to two notes payable of $600,000 each, dated April 18,
1994 and April 5, 1995, respectively. These notes bear interest at the bank's
prime rate plus 1.25% and are payable in 36 equal monthly installments.
Scheduled principal payments for fiscal 1997, 1998 and 1999 are $399,000,
$266,000 and $50,000, respectively.
These financing arrangements are secured by substantially all of the
Company's assets and require the Company to comply with certain financial
covenants. At June 30, 1996, the Company was in compliance with these
financial covenants. In conjunction with these financing arrangements, the
Company issued the bank a warrant on July 1, 1994 to purchase up to 63,291
shares of Series C Preferred Stock at $0.79 per share. The warrant expires on
July 1, 1999 and will convert into Common Stock warrants upon consummation of
an initial public offering prior to July 1, 1999. No value was assigned to
this warrant as its fair market value at the time of issuance was not
material.
NOTE 9--SUBSEQUENT EVENTS:
CERTAIN EQUITY TRANSACTIONS
In July 1996, the Company's Board of Directors, subject to shareholder
approval, approved an increase in the number of common shares authorized to
75,000,000 subject to completion of the proposed Offering. In addition,
subject to shareholder approval and effective upon the closing of the proposed
Offering, the Company will be authorized to issue 5,000,000 shares of
undesignated preferred stock.
EMPLOYEE STOCK PURCHASE PLAN
Effective July 18, 1996, the Company's Board of Directors adopted, the
Employee Stock Purchase Plan (the "Purchase Plan"), subject to shareholder
approval, which will become effective upon the effective date of the proposed
Offering. The Purchase Plan provides for the issuance of a maximum of
1,200,000 shares of Common Stock. Eligible employees can have up to 15% of
their earnings withheld to be used to purchase shares of the Common Stock on
specified dates determined by the Board of Directors. The price of Common
Stock purchased under the Purchase Plan will be equal to 85% of the lower of
the fair market value of the Common Stock on the commencement date of each
offering period or the specified purchase date.
1996 STOCK OPTION PLAN
Effective July 18, 1996, the Company's Board of Directors approved the 1996
Stock Option Plan (the "1996 Plan") as a successor to the "1992 Plan", subject
to shareholder approval. The 1996 Plan will become effective upon the
effective date of the proposed Offering and provides for the granting to
employees (including officers and employee directors) of incentive stock
options and for the granting to employees, directors (including non-employee
directors) and consultants of nonstatutory stock options and stock purchase
rights. In conjunction therewith, the Company's Board of Directors authorized
an additional 5,500,000 shares for issuance under the
F-14
<PAGE>
INTERNATIONAL NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996 Plan. The 1996 Plan may be administered by the Board of Directors or a
committee designated by the Board (the "Administrator"). The exercise price of
all incentive and nonstatutory stock options granted under the 1996 Plan shall
be determined by the Administrator. With respect to any participant who owns
stock possessing more than ten percent of the voting power of all classes of
the Company's outstanding capital stock (a "10% Shareholder"), the exercise
price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date. The exercise price of incentive stock
options for all other employees shall be no less than 100% of the fair market
value per share on the date of the grant. The maximum term of an option
granted under the 1996 Plan may not exceed ten years from the date of grant
(five years in the case of an incentive stock option granted to a 10%
Shareholder). In the case of stock purchase rights, unless the Administrator
determines otherwise, the Company shall have a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment
with the Company for any reason (including death or disability). Such
repurchase option lapses at a rate determined by the Administrator. The
purchase price for shares repurchased by the Company shall be the original
price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company.
F-15
<PAGE>
[LOGO]
<PAGE>
SCH. II
INTERNATIONAL NETWORK SERVICES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER END
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 1994
Allowance for doubtful
accounts................ $ 21 $222 -- (82) $161
Year Ended June 30, 1995
Allowance for doubtful
accounts................ $161 262 -- (202) $221
Year Ended June 30, 1996
Allowance for doubtful
accounts................ $221 610 -- (277) $554
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
SEC registration fee............................................. 6,897
NASD filing fee.................................................. 2,500
Nasdaq National Market listing fee............................... 50,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 250,000
Accounting fees and expenses..................................... 125,000
Directors' and officers' liability insurance..................... 250,000
Blue Sky qualification fees and expenses......................... 10,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous fees............................................... 5,603
--------
Total.......................................................... $860,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IV of the Registrant's Amended and Restated Articles of
Incorporation (Exhibit 3.2 hereto) and Article IX of the Registrant's Amended
and Restated Bylaws (Exhibit 3.4 hereto) provide for mandatory indemnification
of its directors and officers, and permissible indemnification of employees
and other agents, to the maximum extent permitted by the California
Corporation Code. In addition, the Registrant has entered into Indemnification
Agreements (Exhibit 10.1 hereto) with its officers and directors. Reference is
also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1
hereto, which provides for the indemnification of officers and directors of
the Registrant against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1992, the Registrant has issued and sold unregistered securities
in the amounts, at the times and for the aggregate amounts of consideration
listed below:
(1) From April 1992 through June 1996, the Registrant has granted stock
options to purchase 9,715,725 shares of the Company's Common Stock at a
weighted average exercise price of $1.52 per share to employees,
consultants and directors pursuant to its Amended and Restated 1992
Flexible Stock Incentive Plan. Of these options, 2,817,500 have been
canceled without being exercised, 4,728,765 have been exercised and
2,169,460 remain outstanding.
(2) In May 1992, the Registrant issued 6,650,000 shares of Common Stock
to an investor at $0.01 per share for a total purchase price of $66,500.
(3) In June 1993, the Company issued an aggregate of 2,848,000 shares of
Series A Preferred Stock to an investor in exchange for cancellation of
certain indebtedness by the Company to the investor in the amount of
$1,716,000.
(4) In March 1994, the Company issued convertible promissory notes to
seven investors in exchange for loans to the Company in the aggregate
amount of $1,000,000. Such notes converted into 1,291,798 shares of Series
C Preferred Stock in July 1994.
(5) In July 1994, the Company issued warrants to seven investors to
purchase an aggregate of 253,163 shares of the Company's Common Stock at an
exercise price of $0.10 per share in exchange for aggregate
II-1
<PAGE>
consideration of $2,000. In August 1995, two investors exercised warrants
and purchased a total of 16,110 shares of Common Stock. The remaining
warrants expire upon the closing of this offering.
(6) In June 1993, the Company issued an aggregate of 6,848,922 shares of
Series B Preferred Stock to nine investors at $0.336 per share for an
aggregate purchase price of $2,299,998.
(7) In July 1994, the Company issued an aggregate of 5,722,178 shares of
Series C Preferred Stock to 11 investors at $0.79 per share for an
aggregate purchase price of $4,520,520 which consisted of $3,500,000 in
cash and $1,020,521 worth of converted notes.
(8) In July 1994, the Company issued a warrant to Cisco Systems, Inc. to
purchase an aggregate of 1,315,789 shares of Series C Preferred Stock at an
exercise price of $1.14 per share. The warrant was exercised in June 1995.
(9) In July 1994, the Company issued a warrant to Imperial Bank to
purchase an aggregate of 63,291 shares of Series C Preferred Stock at a
purchase price of $0.79 per share.
The issuances of securities described in paragraph (1) were deemed exempt
from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act. The issuances of the securities
described in paragraphs (2) through (8) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act
as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation, as amended.
3.2 Amended and Restated Articles of Incorporation to be filed promptly
after the closing of the offering.
3.3 Bylaws, as amended.
3.4 Amended and Restated Bylaws to take effect upon the closing of the
offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* Specimen Common Stock Certificate.
4.3 Investors' Rights Agreement between the Registrant and the parties
named therein dated June 11, 1993, as amended.
4.4 Warrant for Series C Preferred Stock issued to Imperial Bank.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati.
10.1 Form of Indemnification Agreement entered into between the Registrant
and each of the executive officers and directors and certain key
employees.
10.2 Amended and Restated 1992 Flexible Stock Incentive Plan, as amended,
and forms of agreements thereto.
10.3 1996 Stock Plan and form of agreement thereto.
10.4 1996 Employee Stock Purchase Plan.
10.5 Lease Agreement between the Registrant and Aetna Life Insurance
Company dated May 8, 1996.
10.6 Credit Agreement between the Registrant and Imperial Bank dated June
27, 1996.
11.1 Statement regarding computation of earnings per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts...................... S-1
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California Corporation Law, the Registrant's
Amended and Restated Articles of Incorporation, the Registrant's Amended and
Restated Bylaws, the Registrant's indemnification agreements or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 31st day of July 1996.
INTERNATIONAL NETWORK SERVICES
/s/ Donald K. McKinney
By: _________________________________
Donald K. McKinney
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Donald K. McKinney and Kevin J. Laughlin, and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement filed
herewith and any or all amendments to said Registration Statement (including
post-effective amendments and registration statements filed pursuant to Rule
462 and otherwise), and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
or any regulatory authority granting unto said attorneys-in-fact and agents
the full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURES TITLE DATE
/s/ Donald K. McKinney Chairman of the Board and July 31, 1996
_______________________________ Chief Executive Officer
Donald K. McKinney (Principal Executive
Officer)
/s/ Kevin J. Laughlin Vice President, Finance, July 31, 1996
_______________________________ Chief Financial Officer and
Kevin J. Laughlin Secretary (Principal
Financial and Accounting
Officer)
/s/ John L. Drew President and Director July 31, 1996
_______________________________
John L. Drew
/s/ Vernon R. Anderson Director July 31, 1996
_______________________________
Vernon R. Anderson
/s/ David Carlick Director July 31, 1996
_______________________________
David Carlick
/s/ Lawrence G. Finch Director July 31, 1996
_______________________________
Lawrence G. Finch
/s/ Douglas Leone Director July 31, 1996
_______________________________
Douglas Leone
/s/ Donald A. LeBeau Director July 31, 1996
_______________________________
Donald A. LeBeau
II-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERNATIONAL NETWORK SERVICES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation, as amended.
3.2 Amended and Restated Articles of Incorporation to be filed
promptly after the closing of the offering.
3.3 Bylaws, as amended.
3.4 Amended and Restated Bylaws to take effect upon the closing of
the offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* Specimen Common Stock Certificate.
4.3 Investors' Rights Agreement between the Registrant and the
parties named therein dated June 11, 1993, as amended.
4.4 Warrant for Series C Preferred Stock issued to Imperial Bank.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati.
10.1 Form of Indemnification Agreement entered into between the
Registrant and each of the executive officers and directors
and certain key employees.
10.2 Amended and Restated 1992 Flexible Stock Incentive Plan, as
amended, and forms of agreements thereto.
10.3 1996 Stock Plan and form of agreement thereto.
10.4 1996 Employee Stock Purchase Plan.
10.5 Lease Agreement between the Registrant and Aetna Life Insurance
Company dated May 8, 1996.
10.6 Credit Agreement between the Registrant and Imperial Bank dated
June 27, 1996.
11.1 Statement regarding computation of earnings per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
Shares
--------------
INTERNATIONAL NETWORK SERVICES
COMMON STOCK (NO PAR VALUE)
UNDERWRITING AGREEMENT
, 1996
- --------------------
<PAGE>
, 1996
--------------------
Morgan Stanley & Co. Incorporated
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
International Network Services, a California corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters"), an aggregate of ____________ shares of the Common
Stock, no par value, of the Company (the "Firm Shares"). The Company also
proposes to issue and sell to the several Underwriters not more than an
additional ______________ shares of its Common Stock no par value, (the
"Additional Shares"), if and to the extent that you, as Managers of the
offering, shall have determined to exercise, on behalf of the Underwriters, the
right to purchase such shares of common stock granted to the Underwriters in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares." The shares of Common Stock, no par
value, of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
<PAGE>
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph 1(b)
do not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company.
(d) The Company has no subsidiaries and no equity interest in any
corporation, partnership, joint venture, firm or other business.
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and non-
assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or any agreement or other instrument binding upon the
<PAGE>
Company that is material to the Company or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company, and no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company from that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company is a party or to which any of the properties of
the Company is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(n) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
is in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company.
(o) The Company is not aware of any costs and liabilities (including,
without limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any permit,
license
<PAGE>
or approval, any related constraints on operating activities and any potential
liabilities to third parties)that would, singly or in the aggregate, have a
material adverse effect on the Company.
(p) Except as described in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the Company
or to require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company has not
incurred any material liability or obligation, direct or contingent, nor entered
into any material transaction not in the ordinary course of business; (2) the
Company has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its capital
stock; and (3) there has not been any material change in the capital stock,
short-term debt or long-term debt of the Company, except in each case as
described in or contemplated by the Prospectus.
(s) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by it
which is material to the business of the Company, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the Company are
held by it under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company, in each case except as
described in or contemplated by the Prospectus.
(t) The Company owns or possesses, or can acquire on reasonable terms,
all material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names currently employed by it in connection with the business now
operated by it, and the Company has not received any notice of infringement of
or conflict with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company.
<PAGE>
(u) No material labor dispute with the employees of the Company or, to
the knowledge of the Company, is imminent.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the business in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company, except as described in
or contemplated by the Prospectus.
(w) The Company possesses all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct its business, and the Company has not received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company, except as described in or
contemplated by the Prospectus.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are executed in
accordance with management's general or specific authorizations; (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
-------------------------------
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company at $____________ a share (the "Purchase Price") the number of Firm
Shares set forth in Schedule I hereto opposite the name of such Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to ______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be
<PAGE>
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section
4 hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (whether such shares or any securities are owned by the Company
on the date of this Agreement or are hereafter acquired) or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder, (B) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof and
which is described in the Registration Statement or the Prospectus or (C) the
issuance by the Company of shares of Common Stock under the employee benefit
plans described in the Prospectus.
3. Terms of Public Offering. The Company is advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$______________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
$______________ a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may reallow, a concession, not in excess
of $______________ a share, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to
--------------------
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on ______________, 1996, or at
such other time on the same or such other date, not later than ______________,
1996, as shall be
<PAGE>
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 A.M., New York City time, on the date specified in the notice described in
Section 2 or on such other time on the same or such other date, in any event not
later than ______________, 1996 as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "Option Closing
Date."
Certificates for the Firm Shares and any Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and any Additional Shares shall be delivered to you
on the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligation of the
-------------------------------------------
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than ____________ (New York time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company, from that
set forth in the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is material
and adverse and that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in clause (a) above and to the effect that the
representations and warranties of the Company contained in this Agreement are
true and correct as of the Closing Date and that the Company has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
<PAGE>
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich and Rosati, Professional Corporation, outside
counsel for the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of California, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business as a foreign corporation under the corporation laws of, and is in good
standing in each jurisdiction in the United States in which the conduct of its
business or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained under the caption
"Description of Capital Stock" in the Prospectus;
(iii) the shares of Common Stock outstanding prior to the issuance
of the Shares have been duly authorized and are validly issued and non-
assessable and, to such counsel's knowledge, fully paid;
(iv) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive right or, to such counsel's knowledge, similar
rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or by-laws of the Company or, to such counsel's knowledge, any agreement or
other instrument binding upon the Company that is filed as an exhibit to the
Registration Statement, or, to such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction over the
Company, and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be required
by the securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares;
(vii) the statements (A) in the Prospectus under the captions
"______________," "______________," Description of Capital Stock" and, with
respect to the
<PAGE>
description of this Agreement, "Underwriters" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to therein;
(viii) to such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company is a party
or to which any of the properties of the Company is subject that are required to
be described in the Registration Statement or the Prospectus and are not so
described or of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not described or
filed as required;
(ix) The Company is not an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
In addition, such counsel shall state that it believes (A) that the
Registration Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein as to which
such counsel need not express any belief) comply as to form in all material
respects with the requirements of the Securities Act and the rules and
regulations of the Commission thereunder, (B) nothing has come to such counsel's
attention which causes them to believe that (except for financial statements and
schedules and other financial and statistical data as to which such counsel need
not express any belief) the Registration Statement as of its effective date
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need not express any
belief) the Prospectus on the effective date contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware and Freidenrich, A Professional Corporation, counsel
for the Underwriters, dated the Closing Date, covering the matters referred to
in subparagraphs (iv), (v), (vii) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and (xii) of
paragraph (c) above.
With respect to subparagraph (xi) of paragraph (c) above, Wilson
Sonsini Goodrich and Rosati, Professional Corporation and Gray Cary Ware and
Freidenrich, A Professional Corporation, may state that their opinion and belief
are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and review
and discussion of the contents thereof, but are without independent check or
verification, except as specified.
<PAGE>
The opinions of Wilson Sonsini Goodrich and Rosati, Professional
Corporation, and Gray Cary Ware & Freidenrich, A Professional Corporation,
described in paragraphs (c) and (d) above shall be rendered to the Underwriters
at the request of the Company, and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from Price
Waterhouse, LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus; provided
--------
that the letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares of
Common Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
------------------------
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 A.M. local time on the business day next succeeding the date of this
Agreement and during the period mentioned in paragraph (c) below, as many copies
of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
<PAGE>
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the Prospectus
is required by law to be delivered in connection with sales by an Underwriter or
dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to comply
with applicable law, forthwith to prepare, file with the Commission and furnish,
at its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been sold by
you on behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending September 30, 1997 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel
and the Company's accountants in connection with the registration and delivery
of the Shares under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration Statement, any
preliminary prospectus, the Prospectus and amendments and supplements to any of
the foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment Memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 6(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
Memorandum, (iv) all filing fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of the
offering of the Shares by the National Association of Securities Dealers, Inc.,
(v) all fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the
<PAGE>
Common Stock and all costs and expenses incident to listing the Shares on the
Nasdaq National Market, (vi) the cost of printing certificates representing the
Shares, (vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, and (ix) all
other costs and expenses incident to the performance of the obligations of the
Company hereunder for which provision is not otherwise made in this Section. It
is understood, however, that except as provided in this Section, Section 7
entitled "Indemnity and Contribution", and the last paragraph of Section 9
below, the Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, stock transfer taxes payable on resale of
any of the Shares by them and any advertising expenses connected with any offers
they may make.
(f) The Company has an agreement with each officer, director and
stockholder of the Company, pursuant to which each such person agreed not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock of
the Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly ("Lockup Agreements"). The Company will not
release any officer, director or stockholder from their obligations under the
Lockup Agreement except with the prior written consent of Morgan Stanley & Co.
Incorporated.
7. Indemnity and Contribution.
--------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue
<PAGE>
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the directors of the Company, the officers of the
Company who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a) or (b) of this Section 7, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such Proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for (i) all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act and (ii) the Company, its
directors, its officers who sign the Registration Statement and each person, if
any, who controls the Company within the meaning of either such Section, and
that all such fees and expenses shall be reimbursed as they are incurred. In
the case of any such separate firm for the Underwriters and such control persons
of the Underwriters, such firm
<PAGE>
shall be designated in writing by Morgan Stanley & Co. Incorporated. In the
case of any such separate firm for the Company, and such directors, officers and
control persons of the Company, such firm shall be designated in writing by the
Company. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in paragraph (a) or
(b) of this Section 7 is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party or parties on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by the Company and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate Public Offering
Price of the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties'
<PAGE>
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
---
rata allocation (even if the Underwriters were treated as one entity for such
- ----
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) of this Section 7. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, or the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
8. Termination. This Agreement shall be subject to termination by notice
-----------
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through
<PAGE>
(iv), such event, singly or together with any other such event, makes it, in
your judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall become
--------------------------------------
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
--------
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any non-
defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
refuses to purchase Additional Shares and the aggregate number of Additional
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Additional Shares to be purchased, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket
<PAGE>
expenses (including the fees and disbursements of their counsel) reasonably
incurred by such Underwriters in connection with this Agreement or the offering
contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of New York.
<PAGE>
12. Headings. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
International Network Services
By:
------------------------------------
Donald K. McKinney,
Chief Executive Officer
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company LLC
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By: Morgan Stanley & Co. Incorporated
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE>
SCHEDULE I
Number of Firm Shares To
Be
Underwriter Purchased
- ------------------------ ---------------------------
Morgan Stanley & Co. Incorporated
Alex. Brown & Sons Incorporated
Robertson, Stephens & Company LLC
[NAMES OF OTHER UNDERWRITERS]
Total
===========================
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION OF
INTERNATIONAL NETWORK SERVICES
Donald K. McKinney and Kevin J. Laughlin hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. The Articles of Incorporation of this corporation are hereby amended
and restated to read as follows:
"I.
The name of the Corporation is International Network Services.
II.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a professional permitted to be incorporated by the California
Corporations Code.
III.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is forty-seven million
(47,000,000) shares, thirty million (30,000,000) shares of which shall be Common
Stock (the "Common Stock") and seventeen million (17,000,000) shares of which
shall be Preferred Stock.
B. Two million eight hundred forty-eight thousand (2,848,000) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"), six million eight hundred forty-eight
thousand nine hundred twenty-two (6,848,922) of the authorized shares of
Preferred Stock are hereby designated "Series B Preferred Stock" (the "Series B
Preferred"), and six million four hundred sixty-eight thousand three hundred
forty-six (6,468,346) shares of the authorized Preferred Stock are hereby
designated "Series C Preferred Stock" (the "Series C Preferred"). The Series A
Preferred, the Series B Preferred and the Series C Preferred are hereinafter
collectively referred to as the "Series Preferred."
<PAGE>
C. The rights, preferences, privileges, restrictions and other matters
relating to the Series Preferred are as follows:
1. Dividend Rights.
---------------
(a) Holders of Series Preferred, in preference to the holders of
any other stock of the Company ("Junior Stock"), shall be entitled to receive,
when and as declared by the Board of Directors, but only out of funds that are
legally available therefor, cash dividends at the rate of eight percent (8%) of
the "Original Issue Price" of each such series of Preferred Stock per annum on
each outstanding share of Series Preferred. The Original Issue Price of the
Series A Preferred shall be equal to $0.602738, the Original Issue Price of the
Series B Preferred shall be equal to $0.335819, and the Original Issue Price of
the Series C Preferred shall be equal to $0.79. Such dividends shall not be
cumulative.
(b) So long as any shares of Series Preferred shall be
outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any Junior Stock, nor
shall any shares of any Junior Stock of the Company be purchased, redeemed, or
otherwise acquired for value by the Company (except for acquisitions of common
stock by the Company pursuant to agreements which permit the Company to
repurchase such shares upon termination of employment or in exercise of the
Company's right of first refusal upon a proposed transfer) until all dividends
on the Series Preferred shall have been paid or declared and set apart. In the
event dividends are paid on any share of Common Stock, an additional dividend
shall be paid with respect to all outstanding shares of Series Preferred in an
amount equal per share of Series Preferred (on an as-if-converted to Common
Stock basis) to the amount paid or set aside for each share of Common Stock. The
provisions of this Section 1(b) shall not, however, apply to (i) a dividend
payable in Common Stock, (ii) the acquisition of shares of any Junior Stock in
exchange for shares of any other Junior Stock, or (iii) any repurchase of any
outstanding securities of the Company that is unanimously approved by the
Company's Board of Directors. The holders of the Series Preferred expressly
waive their rights, if any, as described in California Corporations Code
Sections 503 and 506 as they relate to repurchase of shares upon termination of
employment.
2. Voting Rights.
-------------
(a) Except as otherwise provided herein or as required by law,
the Series Preferred shall be voted equally with the shares of the Common Stock
of the Company and not as a separate class, at any annual or special meeting of
shareholders of the Company, and may act by written consent in the same manner
as the Common Stock, in either
-2-
<PAGE>
case upon the following basis: each holder of shares of Series Preferred shall
be entitled to such number of votes as shall be equal to the whole number of
shares of Common Stock into which such holder's aggregate number of shares of
Series Preferred are convertible (pursuant to Section 5 hereof) immediately
after the close of business on the record date fixed for such meeting or the
effective date of such written consent.
(b) The Company's Board of Directors shall consist of six
members, elected as follows: (i) so long as at least four million (4,000,000)
shares of Series B Preferred are outstanding, holders of the Series B Preferred,
voting as a separate class, shall be entitled to elect two (2) members of the
Board of Directors at or pursuant to each meeting or consent of the Company's
shareholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; (ii) holders of the Common Stock, voting as a separate class,
shall be entitled to elect one (1) member of the Board of Directors at or
pursuant to each meeting or consent of the Company's shareholders for the
election of directors, and to remove from office such director and to fill any
vacancy caused by the resignation, death or removal of such director; (iii) so
long as at least one million five hundred thousand (1,500,000) shares of Series
A Preferred are outstanding, holders of the Series A Preferred, voting as a
separate class, shall be entitled to elect one (1) member of the Board of
Directors at or pursuant to each meeting or consent of the Company's
shareholders for the election of directors, and to remove from office such
director and to fill any vacancy caused by the resignation, death or removal of
such director; and (iv) the remaining directors authorized for election at such
election of directors shall be elected by the holders of the Common Stock and
the Series Preferred voting together in accordance with Section 2(a) hereof.
(c) In addition to any other vote or consent required herein or
by law, so long as at least three million four hundred twenty-four thousand four
hundred sixty-one (3,424,461) shares of Series B Preferred remain outstanding,
the vote or written consent of the holders of at least two-thirds (2/3) of the
outstanding Series B Preferred shall be necessary for effecting or validating
the following actions:
(i) Any increase or decrease, whether by reclassification
or otherwise, in the authorized shares of Series A Preferred or Series B
Preferred;
(ii) Any redemption of, or payment of dividends with respect
to, Junior Stock, other than a repurchase of Junior Stock pursuant to the
exercise of any contractual or other legal rights of
-3-
<PAGE>
first refusal or repurchase, or any repurchase of any outstanding securities of
the Company that is approved by the Company's Board of Directors; or
(iii) Any action to change the authorized number of directors
of the Company's Board of Directors.
(d) In addition to any other vote or consent required herein or
by law, so long as at least two million five hundred thirty-one thousand six
hundred forty-five (2,531,645) shares of Series C Preferred remain outstanding,
the vote or written consent of the holders of at least a majority of the
outstanding Series C Preferred shall be necessary for effecting or validating
the following actions:
(i) Any increase or decrease, whether by reclassification
or otherwise, in the authorized shares of Series C Preferred; or
(ii) Any redemption of, or payment of dividends with respect
to, Junior Stock, other than a repurchase of Junior Stock pursuant to the
exercise of any contractual or other legal rights of first refusal or
repurchase, or any repurchase of any outstanding securities of the Company that
is approved by the Company's Board of Directors.
(e) In addition to any other vote or consent required herein or
by law, so long as at least three million four hundred twenty-four thousand four
hundred sixty-one (3,424,461) shares of Series B Preferred and two million five
hundred thirty-one thousand six hundred forty-five (2,531,645) shares of Series
C Preferred remain outstanding, the vote or written consent of the holders of at
least a majority of the outstanding Series B Preferred and Series C Preferred
voting together as a single class, shall be necessary for effecting or
validating the following actions:
(i) Any amendment, alteration, or repeal of any provision
of the Articles of Incorporation or the Bylaws of the Company (including any
filing of a Certificate of Determination), that adversely affects the rights,
preferences or privileges of the Series B Preferred or Series C Preferred;
(ii) Any creation, whether by reclassification or otherwise,
of any new class or series of shares having rights, preferences or privileges
senior to or on parity with the Series B Preferred or Series C Preferred; or
(iii) Any agreement to sell, lease or otherwise dispose of
all or substantially all of the assets, property or busi-
-4-
<PAGE>
ness of the Company, or to merge or consolidate the Company with any person, or
permit any other person to merge into it, or any other reorganization except for
mergers, consolidations or reorganizations in which the Company is the surviving
corporation and, after giving effect to the merger, consolidation, or
reorganization, the holders of the Company's outstanding capital stock
immediately preceding such event own more than fifty percent (50%) of the
outstanding capital stock of the surviving corporation.
3. Liquidation Rights.
------------------
(a) Upon any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, before any distribution or payment
shall be made to the holders of any Junior Stock, the holders of Series
Preferred shall be entitled to be paid out of the assets of the Company an
amount per share of Series Preferred equal to the sum of (i) the Original Issue
Price, and (ii) all declared but unpaid dividends on such shares to the date of
such payment.
(b) After the payment of the full liquidation preference of the
Series Preferred as set forth in Section 3(a) above, the remaining assets of the
Company legally available for distri bution, if any, shall be distributed
ratably to the holders of the Common Stock and Series Preferred on an as-if-
converted basis until such time as the holders of the Series A Preferred, Series
B Preferred and Series C Preferred have received a total liquidation amount of
$1.007457 per share, $1.007457 per share and $1.14 per share, respectively (as
adjusted for stock splits, recapitalization and the like). The remaining assets
of the Company legally available for distribution, if any, shall be distributed
ratably to the holders of Common Stock.
(c) The following events shall be considered a liquidation under
Section 3(a):
(i) (A) any consolidation or merger of the Company with or
into any other corporation or other entity or person, or any other corporate
reorganization, in which the Company shall not be the continuing or surviving
entity of such consolidation, merger or reorganization and the holders of the
Company's outstanding capital stock immediately preceding such event own less
than fifty percent (50%) of the outstanding capital stock of the surviving
corporation; or (B) any transaction or series of related transactions by the
Company in which in excess of fifty percent (50%) of the Company's voting power
is transferred; or
-5-
<PAGE>
(ii) a sale, lease or other disposition of all or
substantially all of the assets of the Company.
(d) If, upon any liquidation, distribution, or winding up, the
assets of the Company shall be insufficient to make payment in full to all
holders of Series Preferred, then such assets shall be distributed among the
holders of Series Preferred at the time outstanding, ratably in proportion to
the full amounts to which they would otherwise be respectively entitled pursuant
to Section 3(a) above.
4. Redemption.
----------
(a) The Company shall be obligated to redeem the Series
Preferred as follows:
(1) At any time after May 19, 1998, the holders of at least
two-thirds of (2/3) of the then outstanding shares of Series B Preferred and
Series C Preferred, voting together as a single class, may require the Company
to redeem all of the outstanding Series Preferred for cash in three equal annual
installments, at a per share purchase price equal to the Original Issue Price
plus ten percent (10%) per year compounded annually through the redemption date
(the "Redemption Price"), by giving notice (the "Exercise Notice") to the
Company. Such Exercise Notice shall specify the initial redemption date, which
date shall be at least 60 days from the effective date of the Exercise Notice.
(2) The Company shall redeem the shares of Series Preferred
to be redeemed hereunder in three installments of equal amount, with the first
installment on the initial redemption date specified in the Exercise Notice, the
second installment on the first anniversary of such date and the third
installment on the second anniversary of such date. Each such installment date
shall be a "Redemption Date" as described herein.
(3) At least thirty (30) but no more than sixty (60) days
prior to each Redemption Date, the Company shall send a notice (a "Redemption
Notice") to all holders of Series Preferred setting forth (a) the Redemption
Price for the shares to be redeemed; and (b) the place at which such holders may
obtain payment of the Redemption Price upon surrender of their share
certificates. If the Company does not have sufficient funds legally available to
redeem all shares to be redeemed at the Redemption Date, then it shall redeem
such shares pro rata (based on the portion of the aggregate Redemption Price
payable to them) to the extent possible and shall redeem the remaining shares to
be redeemed as soon as sufficient funds are legally available.
-6-
<PAGE>
(b) On or prior to each Redemption Date, the Company shall
deposit the Redemption Price of all shares to be redeemed with a bank or trust
company having aggregate capital and surplus in excess of $10,000,000, as a
trust fund, with irrevocable instructions and authority to the bank or trust
company to pay, on and after such Redemption Date, the Redemption Price of the
shares to their respective holders upon the surrender of their share
certificates. The balance of any funds deposited by the Company pursuant to this
Section 4(b) remaining unclaimed at the expiration of one year following such
Redemption Date shall be returned to the Company promptly upon its written
request.
(c) On or after such Redemption Date, each holder of shares of
Series Preferred shall surrender such holder's certificates representing such
shares to the Company and thereupon the Redemption Price of such shares shall be
payable to the order of the person whose name appears on such certificate or
certificates as the owner thereof. From and after such Redemption Date, unless
there shall have been a default in payment of the Redemption Price or the
Company is unable to pay the Redemption Price due to not having sufficient
legally available funds, all dividends on the shares of Series Preferred shall
cease to accrue and all rights of the holders of such shares as holders of
Series Preferred (except the right to receive the Redemption Price without
interest upon surrender of their certificates), shall cease and terminate with
respect to such shares, provided that in the event that shares of Series
Preferred are not redeemed due to a default in payment by the Company or because
the Company does not have sufficient legally available funds, such shares of
Series Preferred shall remain outstanding and shall be entitled to all of the
rights and preferences provided herein.
5. Conversion Rights. The holders of the Series Preferred shall
-----------------
have the following rights to convert the Series Preferred into shares of Common
Stock:
(a) Optional Conversion. Subject to and in compliance with the
-------------------
provisions of this Section 5, any shares of Series Preferred may, at the option
of the holder, be converted at any time into fully-paid and nonassessable shares
of Common Stock. The number of shares of Common Stock to which a holder of
Series Preferred shall be entitled upon conversion shall be the product
obtained by multiplying the applicable "Conversion Rate" for such series of
Preferred Stock then in effect (determined as provided in Section 5(b)) by the
number of shares of Series Preferred being converted.
(b) Conversion Rate. The conversion rate in effect at any time
---------------
for conversion of the Series A Preferred (the "Series A
-7-
<PAGE>
Conversion Rate") shall be the quotient obtained by dividing $0.17885 by the
"Series A Conversion Price," calculated as provided in Section 5(c). The
conversion rate in effect at any time for conversion of the Series B Preferred
(the "Series B Conversion Rate") shall be the quotient obtained by dividing the
Original Issue Price of the Series B Preferred by the "Series B Conversion
Price," calculated as provided in Section 5(c). The conversion rate in effect
at any time for conversion of the Series C Preferred (the "Series C Conversion
Rate") shall be the quotient obtained by dividing the Original Issue Price of
the Series C Preferred by the "Series C Conversion Price," calculated as
provided in Section 5(c).
(c) Conversion Price. The conversion price for the Series A
----------------
Preferred shall initially be $0.17885 (the "Series A Conversion Price"). Such
initial Series A Conversion Price shall be adjusted from time to time in
accordance with this Section 5. All references to the Series A Conversion Price
herein shall mean the Series A Conversion Price as so adjusted. The conversion
price for Series B Preferred shall initially be the Original Issue Price of the
Series B Preferred (the "Series B Conversion Price"). Such initial Series B
Conversion Price shall be adjusted from time to time in accordance with this
Section 5. All references to the Series B Conversion Price herein shall mean
the Series B Conversion Price as so adjusted. The conversion price for Series C
Preferred shall initially be the Original Issue Price of the Series C Preferred
(the "Series C Conversion Price"). Such initial Series C Conversion Price shall
be adjusted from time to time in accordance with this Section 5. All references
to the Series C Conversion Price herein shall mean the Series C Conversion Price
as so adjusted.
(d) Mechanics of Conversion. Each holder of Series Preferred who
-----------------------
desires to convert the same into shares of Common Stock pursuant to this Section
5 shall surrender the certificate or certif icates therefor, duly endorsed, at
the office of the Company or any transfer agent for the Series Preferred, and
shall give written notice to the Company at such office that such holder elects
to convert the same. Such notice shall state the number of shares of Series
Preferred being converted and the name or names in which said holder wishes the
certificate or certificates for shares of Common Stock to be issued (except that
no such notice of intent to convert shall be necessary in the event of an
automatic conversion pursuant to Section 5(m) below). Thereupon, the Company
shall promptly issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder is
entitled. Any declared and unpaid dividends on the Series Preferred being
converted shall remain payable to the holders converting such shares on the
specified payment date therefor. Except as provided in Section 5(m) below, such
conversion shall be deemed to have been made
-8-
<PAGE>
at the close of business on the date of such surrender of the certificates
representing the shares of Series Preferred to be converted, and the person
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of Common
Stock on such date.
(e) Adjustment for Stock Splits and Combinations. If the Company
--------------------------------------------
shall at any time or from time to time after the date that the first share of a
series of Preferred Stock is issued (for each such series, the "Original Issue
Date") effect a subdivision of the outstanding Common Stock, the Conversion
Price for such series in effect immediately before that subdivision shall be
proportionately decreased. Conversely, if the Company shall at any time or from
time to time after the Original Issue Date of a series of Preferred Stock
combine the outstanding shares of Common Stock into a smaller number of shares,
the Conversion Price for such series in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 5(e) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Common Stock Dividends and Distributions. If
-------------------------------------------------------
the Company at any time or from time to time after the Original Issue Date of a
series of Preferred Stock makes, or fixes a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, in each such event the Conversion
Price for such series that is then in effect shall be decreased as of the time
of such issuance or, in the event such record date is fixed, as of the close of
business on such record date, by multiplying the Conversion Price then in effect
by a fraction (1) the numerator of which is the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date, and (2) the denominator of which is
the total number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on such record date
plus the number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this Section 5(f) to reflect the actual payment of such
dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. If the
-------------------------------------------------
Company at any time or from time to time after the Original Issue Date of a
series of Preferred Stock makes, or fixes a record
-9-
<PAGE>
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the Company other than
shares of Common Stock, in each such event provision shall be made so that the
holders of such series of Preferred Stock shall receive upon conversion thereof,
in addition to the number of shares of Common Stock receivable thereupon, the
amount of other securities of the Company which they would have received had
their Series Preferred been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the conversion date, retained such securities receivable by them
as aforesaid during such period, subject to all other adjustments called for
during such period under this Section 5 with respect to the rights of the
holders of the Series Preferred or with respect to such other securities by
their terms.
(h) Adjustment for Reclassification, Exchange and Substitution.
----------------------------------------------------------
If at any time or from time to time after the Original Issue Date of a series of
Preferred Stock, the Common Stock issuable upon the conversion of such series of
Preferred Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section 5 or in Section 3(c)), in any such event each holder
of such series of Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the maximum number of shares of Common Stock into which such shares
of Series Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
(i) Reorganizations, Mergers, Consolidations or Sales of Assets.
-----------------------------------------------------------
If at any time or from time to time after the Original Issue Date of a series of
Preferred Stock, there is a capital reorganization of the Common Stock (other
than a recapitalization, subdivision, combination, reclassification, exchange
or substitution of shares provided for elsewhere in this Section 5 or in Section
3(c)), as a part of such capital reorganization, provision shall be made so that
the holders of such series of Preferred Stock shall thereafter be entitled to
receive upon conversion of such series of Preferred Stock the number of shares
of stock or other securities or property of the Company to which a holder of the
number of shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, subject to adjustment in respect of
such stock or securities by the terms thereof. In any such case, appropriate
-10-
<PAGE>
adjustment shall be made in the application of the provisions of this Section 5
with respect to the rights of the holders of Series Preferred after the capital
reorganization to the end that the provisions of this Section 5 (including
adjustment of the Conversion Price then in effect and the number of shares
issuable upon conversion of the Series Preferred) shall be applicable after that
event and be as nearly equivalent as practicable.
(j) Sale of Shares Below Conversion Price.
-------------------------------------
(1) If at any time or from time to time after the Original
Issue Date of a series of Preferred Stock, the Company issues or sells, or is
deemed by the express provisions of this subsection (j) to have issued or sold,
Additional Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock as provided in Section 5(f)
above, and other than a subdivision or combination of shares of Common Stock as
provided in Section 5(e) above, for an Effective Price (as defined in
subsection (j)(4) below) less than the then effective Conversion Price of such
series, then and in each case the then existing Conversion Price shall be
reduced, as of the opening of business on the date of such issue or sale, to a
price determined by multiplying the Conversion Price by a fraction (i) the
numerator of which shall be (A) the number of shares of Common Stock deemed
outstanding (as defined in the following sentence) immediately prior to such
issue or sale, plus (B) the number of shares of Common Stock which the aggregate
consideration received (as defined in subsection (j)(2)) by the Company for the
total number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock deemed outstanding (as defined below) immediately prior
to such issue or sale plus the total Additional Shares of Common Stock so
issued. For the purposes of the preceding sentence, all outstanding shares of
Common Stock and all shares of Common Stock issuable upon conversion of Series
Preferred that are outstanding as of the close of business on the day next
preceding the date of issue or sale of Additional Shares of Common Stock shall
be deemed outstanding.
(2) For the purpose of making any adjustment required under this
Section 5(j), the consideration received by the Company for any issue or sale of
securities shall (A) to the extent it consists of cash, be computed at the net
amount of cash received by the Company after deduction of any underwriting or
similar commissions, compensation or concessions paid or allowed by the
Company in connection with such issue or sale but without deduction of any
expenses payable by the Company, (B) to the extent it consists of property other
than cash, be computed at the fair value of that property as determined in good
faith by the Board of Directors, and (C) if Additional Shares of
-11-
<PAGE>
Common Stock, Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such Additional Shares
of Common Stock, Convertible Securities or rights or options.
(3) For the purpose of the adjustment required under this
Section 5(j), if the Company issues or sells any rights or options for the
purchase of, or stock or other securities convertible into, Additional Shares of
Common Stock (such convertible stock or securities being herein referred to as
"Convertible Securities") and if the Effective Price of such Additional Shares
of Common Stock is less than the applicable Conversion Price, in each case the
Company shall be deemed to have issued at the time of the issuance of such
rights or options or Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise or conversion thereof and to have
received as consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the Company for the
issuance of such rights or options or Convertible Securities, plus, in the case
of such rights or options, the minimum amounts of consideration, if any, payable
to the Company upon the exercise of such rights or options, plus, in the case of
Convertible Securities, the minimum amounts of consideration, if any, payable to
the Company (other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities) upon the conversion thereof; provided that if in
the case of Convertible Securities the minimum amounts of such consideration
cannot be ascertained, but are a function of antidilution or similar protective
clauses, the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Company upon
the exercise or conversion of such rights, options or Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated using
the increased minimum amount of consideration payable to the Company upon the
exercise or conversion of such rights, options or Convertible Securities. No
further adjustment of the Conversion Price, as adjusted upon the issuance of
such rights, options or Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on
-12-
<PAGE>
the exercise of any such rights or options or the conversion of any such
Convertible Securities. If any such rights or options or the conversion
privilege represented by any such Convertible Securities shall expire without
having been exercised, the Conversion Price as adjusted upon the issuance of
such rights, options or Convertible Securities shall be readjusted to the
Conversion Price which would have been in effect had an adjustment been made on
the basis that the only Additional Shares of Common Stock so issued were the
Additional Shares of Common Stock, if any, actually issued or sold on the
exercise of such rights or options or rights of conversion of such Convertible
Securities, and such Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such exercise,
plus the consideration, if any, actually received by the Company for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities
actually converted, plus the consideration, if any, actually received by the
Company (other than by cancellation of liabilities or obligations evidenced by
such Convertible Securities) on the conversion of such Convertible Securities,
provided that such readjustment shall not apply to shares that have previously
been converted.
(4) "Additional Shares of Common Stock" for each series of
Preferred Stock shall mean all shares of Common Stock issued by the Company,
whether or not subsequently reacquired or retired by the Company, other than (1)
shares of Common Stock issued upon conversion of the Series Preferred; (2) up
to 3,643,104 shares of Common Stock, and/or options, warrants or other Common
Stock purchase rights, issued after the Original Issue Date to employees,
officers or directors of, or consultants or advisors to the Company or any
subsidiary pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board, net of repurchases and option
expirations (provided that shares issued pursuant to the exercise of options or
warrants issued after the Original Issue Date shall not be included in such
number if such shares were included at the time the option or warrant was
issued); (3) shares of Common Stock or Convertible Securities issued in
connection with equipment lease or commercial credit agreements with financial
institutions and (4) shares of Common Stock issued or issuable upon exercise of
the Warrants to purchase Common Stock issued pursuant to the Note and Warrant
Purchase Agreement dated March 15, 1994. The "Effective Price" of Additional
Shares of Common Stock shall mean the quotient determined by dividing the total
number of Additional Shares of Common Stock issued or sold, or deemed to have
been issued or sold by the Company under this Section 5(j) into the aggregate
consideration received, or deemed to have been received by the Company for such
issue under this Section 5(j), for such Additional Shares of Common Stock.
-13-
<PAGE>
(k) Accountants' Certificate of Adjustment. In each case of an
--------------------------------------
adjustment or adjustment of the Conversion Price for the number of shares of
Common Stock or other securities issuable upon conversion of the Series
Preferred, if the Series Preferred is then convertible pursuant to this Section
5, the Company, at its expense, shall compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to each registered holder of Series Preferred at the
holder's address as shown in the Company's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (1) the
consideration received or deemed to be received by the Company for any
Additional Shares of Common Stock issued or sold or deemed to have been issued
or sold, (2) the Conversion Price at the time in effect, (3) the number of
Additional Shares of Common Stock and (4) the type and amount, if any, of other
property which at the time would be received upon conversion of the Series
Preferred.
(l) Notices of Record Date. Upon (i) any taking by the Company
----------------------
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation, or
any transfer of all or substantially all the assets of the Company to any other
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Company, the Company shall mail to each holder of Series Preferred at
least twenty (20) days prior to the record date specified therein a notice
specifying (1) the date on which any such record is to be taken for the purpose
of such dividend or distribution and a description of such dividend or
distribution, (2) the date on which any such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (3) the date, if any, that is to be fixed as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up.
(m) Automatic Conversion.
--------------------
(1) Each share of a series of Preferred Stock shall
automatically be converted into shares of Common Stock, based on the then-
effective Conversion Price for such series, at any time upon the affirmative
vote of the holders of a majority of the out-
-14-
<PAGE>
standing shares of Series B Preferred and Series C Preferred, voting together as
a single class, or immediately upon the closing of a firmly underwritten public
offering pursuant to an effective registra tion statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Company in which (i) the per share price is at least $1.65 (as
adjusted for stock splits, recapitalizations and the like), and (ii) the gross
cash proceeds to the Company (before underwriting discounts, commissions and
fees) are at least $7,500,000. Upon such automatic conversion, any declared and
unpaid dividends shall remain payable on the specified payment date.
(2) Upon the occurrence of the event specified in paragraph
(1) above, the outstanding shares of each such series of Preferred Stock shall
be converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
such shares of Series Preferred are either delivered to the Company or its
transfer agent as provided below, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of the Series Preferred, the holders of
Series Preferred shall surrender the certificates representing such shares at
the office of the Company or any transfer agent for the Series Preferred.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series Preferred surrendered were convertible on the date on
which such automatic conversion occurred. All declared and unpaid dividends on
the shares of Series Preferred being converted, to and including the date of
such conversion, shall remain payable on the specified payment date.
(n) Fractional Shares. No fractional shares of Common Stock
-----------------
shall be issued upon conversion of Series Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series Preferred by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Corporation shall, in
lieu of issuing any fractional share, pay cash equal to the product of such
fraction
-15-
<PAGE>
multiplied by the Common Stock's fair market value (as determined by the Board)
on the date of conversion.
(o) Reservation of Stock Issuable Upon Conversion. The Company
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series Preferred, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series Preferred, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
(p) Notices. Any notice required by the provisions of this
-------
Section 5 shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by confirmed telex
or facsimile, (iii) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (iv) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Company.
(q) Payment of Taxes. The Company will pay all taxes (other than
----------------
taxes based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series Preferred, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series Preferred
so converted were registered.
(r) No Dilution or Impairment. The Company shall not amend its
-------------------------
Articles of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series Preferred
against dilution or other impairment.
-16-
<PAGE>
6. No Reissuance of Series Preferred. No share or shares of
---------------------------------
Series Preferred acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued.
7. Residual Rights. All rights accruing to the outstanding
---------------
shares of the Company not otherwise expressly provided for in the Restated
Articles of Incorporation or any subsequent Restated Articles of Incorporation
shall be vested in the Common Stock.
IV.
A. The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B. The Corporation is authorized to indemnify the directors and officers
of the Corporation to the fullest extent permissible under California law.
C. Any repeal or modification of this Article shall only be prospective
and shall not effect the rights under this Article in effect at the time of the
alleged occurrence of any action or omission to act giving rise to liability."
3. The foregoing amendment and restatement of the articles of
incorporation has been duly approved by the Board of Directors of this
Corporation.
4. The foregoing amendment and restatement of the articles of
incorporation has been duly approved by the required vote of share holders in
accordance with Section 902 of the California Corporations Code. The
Corporation has two classes of stock outstanding and such classes of stock are
entitled to vote with respect to the amendment herein set forth. The total
number of outstanding shares of Common Stock of the Corporation is 7,072,800.
The total number of out standing shares of Series A Preferred of the
Corporation is 2,848,000.
-17-
<PAGE>
The total number of outstanding shares of Series B Preferred of the Corporation
is 6,848,922. The number of shares voting in favor of the amendment equaled or
exceeded the vote required, such required vote being a majority of the
outstanding shares of Common Stock, a majority of the outstanding Series
Preferred voting together as a single class, and two-thirds of the outstanding
shares of Series B Preferred voting as a separate class.
(The balance of this page is intentionally left blank).
-18-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at Mountain View, California on June 27, 1994.
/s/ Donald K. McKinney
-------------------------------
Donald K. McKinney, President
/s/ Kevin J. Laughlin
-------------------------------
Kevin J. Laughlin, Secretary
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<PAGE>
Ex 3.1
CERTIFICATE OF AMENDMENT OF
RESTATED ARTICLES OF INCORPORATION OF
INTERNATIONAL NETWORK SERVICES
Donald K. McKinney and Kevin J. Laughlin hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. That Section III B. of the Restated Articles of Incorporation of this
corporation is hereby amended to read as follows:
"B. Two million eight hundred forty-eight thousand (2,848,000) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"), six million eight hundred forty-eight
thousand nine hundred twenty-two (6,848,922) of the authorized shares of
Preferred Stock are hereby designated "Series B Preferred Stock" (the "Series B
Preferred"), and seven million one hundred one thousand two hundred fifty-eight
(7,101,258) shares of the authorized Preferred Stock are hereby designated
"Series C Preferred Stock" (the "Series C Preferred"). The Series A Preferred,
the Series B Preferred and the Series C Preferred are hereinafter collectively
referred to as the "Series Preferred."
3. That Section III C.2.(d) of the Restated Articles of Incorporation of
this corporation is hereby amended to read as follows:
"(d) In addition to any other vote or consent required herein or
by law, so long as at least two million eight hundred sixty-one thousand eighty-
nine (2,861,089) shares of Series C Preferred remain outstanding, the vote or
written consent of the holders of at least a majority of the outstanding Series
C Preferred shall be necessary for effecting or validating the following
actions:
(i) Any increase or decrease, whether by reclassification
or otherwise, in the authorized shares of Series C Preferred; or
(ii) Any redemption of, or payment of dividends with
respect to, Junior Stock, other than a repurchase of Junior Stock pursuant to
the exercise of any contractual or other legal rights of first refusal or
repurchase, or any repurchase of any outstanding securities of the Company that
is approved by the Company's Board of Directors."
<PAGE>
4. That Section III C.2.(e) of the Restated Articles of Incorporation of
this corporation is hereby amended to read as follows:
"(e) In addition to any other vote or consent required herein or
by law, so long as at least three million four hundred twenty-four thousand four
hundred sixty-one (3,424,461) shares of Series B Preferred and two million eight
hundred sixty-one thousand eighty-nine (2,861,089) shares of Series C Preferred
remain outstanding, the vote or written consent of the holders of at least a
majority of the outstanding Series B Preferred and Series C Preferred voting
together as a single class, shall be necessary for effecting or validating the
following actions:
(i) Any amendment, alteration, or repeal of any provision
of the Articles of Incorporation or the Bylaws of the Company (including any
filing of a Certificate of Determination), that adversely affects the rights,
preferences or privileges of the Series B Preferred or Series C Preferred;
(ii) Any creation, whether by reclassification or otherwise,
of any new class or series of shares having rights, prefer ences or privileges
senior to or on parity with the Series B Preferred or Series C Preferred; or
(iii) Any agreement to sell, lease or otherwise dispose of
all or substantially all of the assets, property or busi ness of the Company, or
to merge or consolidate the Company with any person, or permit any other person
to merge into it, or any other reorganization except for mergers, consolidations
or reorganizations in which the Company is the surviving corporation and, after
giving effect to the merger, consolidation, or reorganization, the holders of
the Company's outstanding capital stock immediately preceding such event own
more than fifty percent (50%) of the outstanding capital stock of the surviving
corporation."
5. The foregoing amendment of the restated articles of incorporation has
been duly approved by the Board of Directors of this Corporation.
6. The foregoing amendment of the restated articles of incorporation has
been duly approved by the required vote of share holders in accordance with
Sections 902 and 903 of the California Corporations Code. The Corporation has
two classes of stock outstanding and such classes of stock are entitled to vote
with respect to the amendment herein set forth. The total number of outstanding
shares of Common Stock of the Corporation is 7,922,800. The total number of
outstanding shares of Series A Preferred of the
-2-
<PAGE>
Corporation is 2,848,000. The total number of outstanding shares of Series B
Preferred of the Corporation is 6,848,922. The total number of outstanding
shares of Series C Preferred of the Corporation is 3,823,443. The number of
shares voting in favor of the amendment equaled or exceeded the vote required,
such required vote being a majority of the outstanding shares of Common Stock
and outstanding Series Preferred voting together as a single class, a majority
of the outstanding shares of Series C Preferred voting together as a separate
class, and a majority of the outstanding shares of Series B Preferred and Series
C Preferred voting together as a separate class.
(The balance of this page is intentionally left blank).
-3-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at Mountain View, California on July 22, 1994.
/s/ Donald K. McKinney
------------------------------
Donald K. McKinney, President
/s/ Kevin J. Laughlin
----------------------
Kevin J. Laughlin, Secretary
-4-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
INTERNATIONAL NETWORK SERVICES
Donald K. McKinney and Kevin J. Laughlin certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. Article III C.5.(j)(4) of the Restated Articles of Incorporation of
this corporation is hereby amended to read as follows:
"(4) "Additional Shares of Common Stock" for each series of Preferred
Stock shall mean all shares of Common Stock issued by the Company, whether or
not subsequently reacquired or retired by the Company, other than (1) shares of
Common Stock issued upon conversion of the Series Preferred; (2) up to 4,643,104
shares of Common Stock, and/or options, warrants or other Common Stock purchase
rights, issued after the Original Issue Date to employees, officers or directors
of, or consultants or advisors to the Company or any subsidiary pursuant to
stock purchase or stock option plans or other arrangements that are approved by
the Board, net of repurchases and option expirations (provided that shares
issued pursuant to the exercise of options or warrants issued after the Original
Issue Date shall not be included in such number if such shares were included at
the time the option or warrant was issued); (3) shares of Common Stock or
Convertible Securities issued in connection with equipment lease or commercial
credit agreements with financial institutions and (4) shares of Common Stock
issued or issuable upon exercise of the Warrants to purchase Common Stock issued
pursuant to the Note and Warrant Purchase Agreement dated March 15, 1994. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Company under this
Section 5(j) into the aggregate consideration received, or deemed to have been
received by the Company for such issue under this Section 5(j), for such
Additional Shares of Common Stock."
<PAGE>
3. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the Board of Directors of this Corporation.
4. The foregoing amendment to the Restated Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Sections 902 and 903 of the California Corporations Code and Section III C.2.(e)
of the Restated Articles of Incorporation. The Corporation has two classes of
stock outstanding and such classes of stock are entitled to vote with respect to
the amendment herein set forth. The total number of outstanding shares of
Common Stock of the Corporation is 7,944,100. The total number of outstanding
shares of Series A Preferred of the Corporation is 2,848,000. The total number
of outstanding shares of Series B Preferred of the Corporation is 6,848,922.
The total number of outstanding shares of Series C Preferred of the Corporation
is 5,722,178. The number of shares voting in favor of the amendment equaled or
exceeded the vote required, such required vote being a majority of the
outstanding shares of Common Stock and Series Preferred voting together as a
single class, a majority of the outstanding Series Preferred voting together as
a single class and a majority of the outstanding shares of Series B and Series C
Preferred voting together as a single class.
(The balance of this page is intentionally left blank).
-2-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing Certificate are true and correct of our own knowledge.
Executed at Mountain View, California, this 8th day of December, 1994.
/s/ Donald K. McKinney
-------------------------------------
Donald K. McKinney, President
/s/ Kevin J. Laughlin
-------------------------------------
Kevin J. Laughlin, Secretary
-3-
<PAGE>
EX 3.1
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
INTERNATIONAL NETWORK SERVICES
Donald K. McKinney and Kevin J. Laughlin certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. Article III C.5.(j)(4) of the Restated Articles of Incorporation of
this corporation is hereby amended to read as follows:
"(4) "Additional Shares of Common Stock" for each series of Preferred
Stock shall mean all shares of Common Stock issued by the Company, whether or
not subsequently reacquired or retired by the Company, other than (1) shares of
Common Stock issued upon conversion of the Series Preferred; (2) up to 7,043,104
shares of Common Stock, and/or options, warrants or other Common Stock purchase
rights, issued after the Original Issue Date to employees, officers or directors
of, or consultants or advisors to the Company or any subsidiary pursuant to
stock purchase or stock option plans or other arrangements that are approved by
the Board, net of repurchases and option expirations (provided that shares
issued pursuant to the exercise of options or warrants issued after the Original
Issue Date shall not be included in such number if such shares were included at
the time the option or warrant was issued); (3) shares of Common Stock or
Convertible Securities issued in connection with equipment lease or commercial
credit agreements with financial institutions and (4) shares of Common Stock
issued or issuable upon exercise of the Warrants to purchase Common Stock issued
pursuant to the Note and Warrant Purchase Agreement dated March 15, 1994. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Company under this
Section 5(j) into the aggregate consideration received, or deemed to have been
received by the Company for such issue under this Section 5(j), for such
Additional Shares of Common Stock."
3. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the Board of Directors of this Corporation.
<PAGE>
4. The foregoing amendment to the Restated Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Sections 902 and 903 of the California Corporations Code and Section III C.2.(e)
of the Restated Articles of Incorporation. The Corporation has two classes of
stock outstanding and such classes of stock are entitled to vote with respect to
the amendment herein set forth. The total number of outstanding shares of
Common Stock of the Corporation is 8,523,005. The total number of outstanding
shares of Series A Preferred of the Corporation is 2,848,000. The total number
of outstanding shares of Series B Preferred of the Corporation is 6,848,922.
The total number of outstanding shares of Series C Preferred of the Corporation
is 7,037,967. The number of shares voting in favor of the amendment equaled or
exceeded the vote required, such required vote being a majority of the
outstanding shares of Common Stock and Series Preferred voting together as a
single class, a majority of the outstanding Series Preferred voting together as
a single class and a majority of the outstanding shares of Series B and Series C
Preferred voting together as a single class.
(The balance of this page is intentionally left blank).
-2-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing Certificate are true and correct of our own knowledge.
Executed at Mountain View, California, this 20th day of September, 1995.
/s/ Donald K. McKinney
------------------------------------
Donald K. McKinney, President
/s/ Kevin J. Laughlin
------------------------------------
Kevin J. Laughlin, Secretary
-3-
<PAGE>
EX 3.1
CERTIFICATE OF AMENDMENT OF RESTATED
ARTICLES OF INCORPORATION OF
INTERNATIONAL NETWORK SERVICES
John Drew and Kevin J. Laughlin hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. Article III A. of the Restated Articles of Incorporation, as amended,
of this Corporation is hereby amended to read as follows:
A. This Corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is sixty two
million (62,000,000) shares, forty five million (45,000,000) shares of which
shall be Common Stock (the "Common Stock") and seventeen million (17,000,000)
shares of which shall be Preferred Stock.
3. Article III C.2.(b) of the Restated Articles of Incorporation, as
amended, of this Corporation is hereby amended to read as follows:
"(b) The Company's Board of Directors shall consist of seven members,
elected as follows: (i) so long as at least four million (4,000,000) shares of
Series B Preferred are outstanding, holders of the Series B Preferred, voting as
a separate class, shall be entitled to elect two (2) members of the Board of
Directors at or pursuant to each meeting or consent of the Company's
shareholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; (ii) holders of the Common Stock, voting as a separate class,
shall be entitled to elect one (1) member of the Board of Directors at or
pursuant to each meeting or consent of the Company's shareholders for the
election of directors, and to remove from office such director and to fill any
vacancy caused by the resignation, death or removal of such director; (iii) so
long as at least one million five hundred thousand (1,500,000) shares of Series
A Preferred are outstanding, holders of the Series A Preferred, voting as a
separate class, shall be entitled to elect one (1) member of the Board of
Directors at or pursuant to each meeting or consent of the Company's
shareholders for the election of directors, and to remove from office such
director and to fill any vacancy caused by the resignation, death or removal of
such director; and (iv) the remaining directors authorized for election at such
election of directors shall be elected by the holders of the Common Stock and
the Series Preferred voting together in accordance with Section 2(a) hereof."
4. Article III C.5.(j)(4) of the Restated Articles of Incorporation, as
amended, of this Corporation is hereby amended to read as follows:
<PAGE>
"(4) "Additional Shares of Common Stock" for each series of Preferred
Stock shall mean all shares of Common Stock issued by the Company, whether or
not subsequently reacquired or retired by the Company, other than (1) shares of
Common Stock issued upon conversion of the Series Preferred; (2) up to 8,000,000
shares of Common Stock, and/or options, warrants or other Common Stock purchase
rights, issued after the Original Issue Date to employees, officers or directors
of, or consultants or advisors to the Company or any subsidiary pursuant to
stock purchase or stock option plans or other arrangements that are approved by
the Board, net of repurchases and option expirations (provided that shares
issued pursuant to the exercise of options or warrants issued after the Original
Issue Date shall not be included in such number if such shares were included at
the time the option or warrant was issued); (3) shares of Common Stock or
Convertible Securities issued in connection with equipment lease or commercial
credit agreements with financial institutions and (4) shares of Common Stock
issued or issuable upon exercise of the Warrants to purchase Common Stock issued
pursuant to the Note and Warrant Purchase Agreement dated March 15, 1994. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
shall mean the quotient determined by dividing the total number of Additional
Shares of Common Stock issued or sold, or deemed to have been issued or sold by
the Company under this Section 5(j) into the aggregate consideration received,
or deemed to have been received by the Company for such issue under this Section
5(j), for such Additional Shares of Common Stock."
5. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the Board of Directors of this Corporation.
6. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The Corporation has two
classes of stock outstanding and such classes of stock are entitled to vote with
respect to the amendment herein set forth. The total number of outstanding
shares of Common Stock of the Corporation is 11,260,635. The total number of
outstanding shares of Series A Preferred Stock of the Corporation is 2,848,000.
The total number of outstanding shares of Series B Preferred Stock of the
Corporation is 6,848,922. The total number of outstanding shares of Series C
Preferred Stock of the Corporation is 7,037,967. The number of shares voting in
favor of the amendment equaled or exceeded the vote required, such required vote
being a majority of the outstanding shares of Common Stock voting as a separate
class, a majority of the outstanding shares of Common Stock and Preferred Stock
voting together as a single class, a majority of the outstanding shares of
Preferred Stock voting together as a single class, a majority of the outstanding
shares of Series B and Series C Preferred Stock voting together as a single
class, and two-thirds of the outstanding shares of Series B Preferred Stock
voting as a separate class.
-2-
<PAGE>
We further declare under penalty of perjury that the matters set forth in
the foregoing certificate are true and correct of our own knowledge.
Executed at Mountain View, California on July 16, 1996.
/s/ John L. Drew
---------------------------------
John L. Drew, President
/s/ Kevin J. Laughlin
---------------------------------
Kevin J. Laughlin, Secretary
-3-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
INTERNATIONAL NETWORK SERVICES
John L. Drew and Kevin J. Laughlin hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of International Network Services, a California corporation (the
"Corporation" or the "Company").
2. The Articles of Incorporation of this Corporation are hereby amended
and restated to read as follows:
"I.
The name of the Corporation is International Network Services.
II.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is eighty million
(80,000,000) shares, seventy-five million (75,000,000) shares of which shall be
Common Stock (the "Common Stock") and five million (5,000,000) shares of which
shall be Preferred Stock.
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is authorized to determine the designation of
any series, to establish the number of shares of any series of the undesignated
Preferred Stock, and to fix the powers, preferences and rights of the shares of
each such series and the qualifications, limitations or restrictions thereof,
and, within the limits and restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the number of shares constituting
any series of the undesignated Preferred Stock, to increase or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
<PAGE>
IV.
A. The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B. The Corporation is authorized, to the fullest extent permissible under
California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by bylaw, agreement or otherwise, for
breach of duty to the Corporation and its shareholders in excess of that
expressly permitted by Section 317 and to advance defense expenses to its agents
in connection with such' matters as they are incurred. If, after the effective
date of this Article, California law is amended in a manner which permits a
corporation to limit the monetary or other liability of its agents or to
authorize indemnification of, or advancement of such defense expenses to, its
agents or other persons, in any such case to a greater extent than is permitted
on such effective date, the references in this Article to "California law" shall
to that extent be deemed to refer to California law as so amended.
C. Any repeal or modification of this Article shall only be prospective
and shall not effect the rights under this Article in effect at the time of the
alleged occurrence of any action or omission to act giving rise to liability.
V.
A. No Cumulative Voting. There shall be no right with respect to shares
--------------------
of the Corporation to cumulate votes in the election of a director in the event
that this corporation becomes a "listed corporation" within the meaning of
Section 301.5 of the California Corporations Code ("Section 301.5"). Section
301.5 defines a "listed corporation" as either of the following: (i) a
corporation with outstanding shares listed on the New York Stock Exchange or the
American Stock Exchange and (ii) a corporation with outstanding securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the corporation has at least 800 holders of its equity
securities as of the record date of the corporation's most recent annual meeting
of shareholders. For purposes of determining the number of holders of a
corporation's equity securities under Section 301.5, there shall be included, in
addition to the number of record holders reflected on the corporation's stock
records, the number of holders of the equity securities held in the name of any
nominee holder which furnishes the corporation with a certification as required
by Section 301.5, provided the corporation retains the certification with the
record of shareholders and makes the certification available for inspection and
copying as specified in Section 301.5.
B. No Written Consent. Any action required or permitted to be taken by
------------------
the shareholders of the Corporation must be effected at a duly called annual or
special meeting of shareholders of the Corporation and may not be effected by
any consent in writing by the shareholders."
-2-
<PAGE>
3. The foregoing amendment and restatement of the articles of
incorporation has been duly approved by the Board of Directors of this
Corporation.
4. The foregoing amendment and restatement of the articles of
incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the California Corporations Code. The
Corporation has two classes of stock outstanding and such classes of stock are
entitled to vote with respect to the amendment herein set forth. The total
number of outstanding shares of Common Stock of the Corporation is 28,117,974.
The total number of outstanding shares of Series A Preferred of the Corporation
is 2,848,000. The total number of outstanding shares of Series B Preferred of
the Corporation is 6,848,922. The total number of outstanding shares of Series
C Preferred Stock is 7,037,967. The number of shares voting in favor of the
amendment equaled or exceeded the vote required, such required vote being a
majority of the outstanding shares of Common Stock and Series Preferred voting
together as a single class, a majority of the outstanding Series Preferred
voting together as a single class, a majority of the outstanding shares of
Series B and Series C Preferred voting together as a single class, and two-
thirds of the outstanding shares of Series B Preferred voting as a separate
class.
-3-
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Executed at Sunnyvale, California on August __, 1996.
_____________________________________
John L. Drew, President
_____________________________________
Kevin J. Laughlin, Secretary
-4-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
a California corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - Offices.......................................................... 1
Section 1.1 Principal Executive Office............................... 1
Section 1.2 Other Offices............................................ 1
ARTICLE II - Meetings of Shareholders........................................ 1
Section 2.1 Place of Meetings........................................ 1
Section 2.2 Annual Meeting........................................... 1
Section 2.3 Notice of Annual Meeting................................. 2
Section 2.4 Special Meetings......................................... 3
Section 2.5 Notice of Special Meetings............................... 3
Section 2.6 Quorum................................................... 3
Section 2.7 Adjourned Meeting and Notice............................. 3
Section 2.8 Record Date.............................................. 4
Section 2.9 Voting................................................... 4
Section 2.10 Proxies.................................................. 5
Section 2.11 Validation of Defectively Called or Noticed Meetings..... 6
Section 2.12 Action Without Meeting................................... 6
Section 2.13 Inspectors of Election................................... 7
ARTICLE III - Board of Directors............................................. 8
Section 3.1 Powers; Approval of Loans to Officers.................... 8
Section 3.2 Election and Term of Office.............................. 8
Section 3.3 Vacancies................................................ 8
Section 3.4 Time and Place of Meetings............................... 9
Section 3.5 Notice of Special Meetings............................... 10
Section 3.6 Action at a Meeting: Quorum and Required Vote............ 10
Section 3.7 Action Without a Meeting................................. 10
Section 3.8 Adjourned Meeting and Notice............................. 11
Section 3.9 Fees and Compensation.................................... 11
Section 3.10 Appointment of Executive and Other Committees............ 11
ARTICLE IV - Officers........................................................ 12
Section 4.1 Officers................................................. 12
Section 4.2 The Chairman of the Board................................ 13
Section 4.3 The President............................................ 13
Section 4.4 Vice-Presidents.......................................... 13
Section 4.5 The Secretary............................................ 13
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.6 The Treasurer........................................... 14
Section 4.7 The Controller.......................................... 14
ARTICLE V - Execution of Corporate Instruments, Ratification, and Voting
of Stocks Owned by the Corporation............................. 15
Section 5.1 Execution of Corporate Instruments...................... 15
Section 5.2 Ratification by Shareholders............................ 15
Section 5.3 Voting of Stocks Owned by the Corporation............... 15
ARTICLE VI - Annual and Other Reports....................................... 16
Section 6.1 Reports to Shareholders................................. 16
Section 6.2 Report of Shareholder Vote.............................. 17
Section 6.3 Reports to the Secretary of State....................... 17
ARTICLE VII - Shares of Stock............................................... 17
ARTICLE VIII - Inspection of Corporate Records.............................. 18
Section 8.1 General Records......................................... 18
Section 8.2 Inspection of Bylaws.................................... 19
ARTICLE IX - Indemnification of Officers, Directors, Employees and Agents... 19
Section 9.1 Right to Indemnification................................ 19
Section 9.2 Authority to Advance Expenses........................... 20
Section 9.3 Right of Claimant to Bring Suit......................... 20
Section 9.4 Provisions Nonexclusive................................. 21
Section 9.5 Authority to Insure..................................... 21
Section 9.6 Survival of Rights...................................... 21
Section 9.7 Settlement of Claims.................................... 21
Section 9.8 Effect of Amendment..................................... 21
Section 9.9 Subrogation............................................. 22
Section 9.10 No Duplication of Payments.............................. 22
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE X - Amendments....................................................... 22
Section 10.1 Power of Shareholders.................................... 22
Section 10.2 Power of Directors....................................... 22
ARTICLE XI - Definitions..................................................... 22
ARTICLE XII - Corporate Seal................................................. 23
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
A CALIFORNIA CORPORATION
ARTICLE I
Offices
Section 1.1 Principal Executive Office.
--------------------------
The principal executive office of the corporation is hereby fixed and
located at: 407 Hale Street, Palo Alto, California 94301. The Board of
directors is hereby granted full power and authority to change said principal
executive office from one location to another. Any such change shall be noted
on these Bylaws by the Secretary, opposite this Section, or this Section may be
amended to state the new location.
Section 1.2 Other Offices.
-------------
Other business offices may at any time be established at any place or
places specified by the Board of Directors.
ARTICLE II
Meetings of Shareholders
Section 2.1 Place of Meetings.
-----------------
All meetings of shareholders shall be held at the principal executive
office of the corporation, or at any other place, within or without the State of
California, specified by the Board of Directors.
Section 2.2 Annual Meeting.
--------------
The annual meeting of the shareholders, after the year 1991, shall be held
at the time and date in each year fixed by the Board of Directors. At the
annual meeting directors shall be elected, reports of the affairs of the
corporation shall be considered, and any other business may be transacted that
is within the power of the shareholders.
<PAGE>
Section 2.3 Notice of Annual Meeting.
------------------------
Written notice of each annual meeting shall be given to each shareholder
entitled to vote, either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by 500 or more persons
(determined in accordance with Section 605 Of the General Corporation Law) on
the record date for the meeting, by third-class mail, or by other means of
written communication, charges prepaid, addressed to such shareholder at the
shareholder's address appearing on the books of the corporation or given by such
shareholder to the corporation for the purpose of notice. If any notice or
report addressed to the shareholder at the address of such shareholder appearing
on the books of the corporation is returned to the corporation by the United
States Postal Service marked to indicate that the United States Postal Service
is unable to deliver the notice or report to the shareholder at such address,
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice or report to
all other shareholders. If a shareholder gives no address, notice shall be
deemed to have been given to such shareholder if addressed to the shareholder at
the place where the principal executive office of the corporation is situated,
or if published at least once in some newspaper of general circulation in the
county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled thereto not
less than ten (10) days (or, if sent by third-class mail, thirty (30) days) nor
more than sixty (60) days before each annual meeting. Any such notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by other means of written communication. An affidavit of
mailing of any such notice in accordance with the foregoing provisions, executed
by the Secretary, Assistant Secretary or any transfer agent of the corporation
shall be prima facie evidence of the giving of the notice.
----- -----
Such notice shall specify:
(a) the place, the date, and the hour of such meeting;
(b) those matters that the Board of Directors, at the time of the
mailing of the notice, intends to present for action by the shareholders
(but, subject to the provisions of subsection (d) below, any proper matter
may be presented at the meeting for such action);
(c) if directors are to be elected, the names of nominees intended at
the time of the notice to be presented by the Board of Directors for
election;
(d) the general nature of a proposal, if any, to take action with
respect to approval of (i) a contract or other transaction with an
interested director, (ii) amendment of the Articles of Incorporation, (iii)
a reorganization of the corporation as defined in Section 181 of the
General Corporation Law, (iv) voluntary dissolution of the corporation, or
(v) a distribution in
-2-
<PAGE>
dissolution other than in accordance with the rights of outstanding
preferred shares, if any; and
(e) such other matters, if any, as may be expressly required by
statute.
Section 2.4 Special Meetings.
----------------
Special meetings of the shareholders for any purpose or purposes whatsoever
may be called at any time by the Chairman of the Board (if there be such an
officer appointed), by the President, by the Board of Directors, or by one or
more shareholders entitled to cast not less than ten percent (10%) of the votes
at the meeting.
Section 2.5 Notice of Special Meetings.
--------------------------
Upon request in writing that a special meeting of shareholders be called
for any proper purpose, directed to the Chairman of the Board (if there be such
an officer appointed), President, Vice President or Secretary by any person
(other than the Board of Directors) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to the
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. Except in special
cases where other express provision is made by statute, notice of any special
meeting of shareholders shall be given in the same manner as for annual meetings
of shareholders. In addition to the matters required by Section 2.3(a). and, if
applicable, Section 2.3(c) of these Bylaws, notice of any special meeting shall
specify the general nature of the business to be transacted, and no other
business may be transacted at such meeting.
Section 2.6 Quorum.
------
The presence in person or by proxy of persons entitled to vote a majority
of the voting shares at any meeting shall constitute a quorum for the
transaction of business. If a quorum is present, the affirmative vote of a
majority of the shares represented and voting at the meeting (which shares
voting affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
voting by classes is required by the General Corporation Law or the Articles of
Incorporation. Any meeting of shareholders, whether or not a quorum is present,
may be adjourned from time to time by the vote of the holders of a majority of
the shares present in person or represented by proxy thereat and entitled to
vote, but in the absence of a quorum no other business may be transacted at such
meeting, except that the shareholders present or represented by proxy at a duly
called or held meeting, at which a quorum is present, may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 2.7 Adjourned Meeting and Notice.
----------------------------
-3-
<PAGE>
When any shareholders' meeting, either annual or special, is adjourned for
more than forty-five (45) days, or if after adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of an original meeting. Except as provided above, it shall not
be necessary to give any notice of the time and place of the adjourned meeting
or of the business to be transacted thereat, other than by announcement of the
time and place thereof at the meeting at which such adjournment is taken.
Section 2.8 Record Date.
-----------
(a) The Board of Directors may fix a time in the future as a record date
for the determination of the shareholders entitled to notice of and to vote at
any meeting of shareholders or entitled to give consent to corporate action in
writing without a meeting, to receive any report, to receive any dividend or
other distribution, or allotment of any rights, or to exercise rights in respect
of any other lawful action. The record date so fixed shall be not more than
sixty (60) days nor less than ten (10) days prior to the date of such meeting,
nor more than sixty (60) days prior to any other action. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date for the adjourned meeting, but the Board of
Directors shall fix a new record date if the meeting is adjourned for more than
forty-five (45) days from the date set for the original meeting. When a record
date is so fixed, only shareholders of record at the close of business on that
date are entitled to notice of and to vote at any such meeting, to give consent
without a meeting, to receive any report, to receive the dividend, distribution,
or allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorporation
or these Bylaws.
(b) If no record date is fixed:
(1) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day preceding the day on
which the meeting is held.
(2) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given.
(3) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
Section 2.9 Voting.
------
(a) Except as provided below with respect to cumulative voting and except
as may be otherwise provided in the Articles of Incorporation, each outstanding
share, regardless of class, shall
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be entitled to one vote on each matter submitted to a vote of shareholders. Any
holders of shares entitled to vote on any matter may vote part of the shares in
favor of the proposal and refrain from voting the remaining shares or vote them
against the proposal, other than elections to office, but, if the shareholder
fails to specify the number of shares such shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is with
respect to all shares such shareholder is entitled to vote.
(b) Subject to the provisions of Sections 702 through 704 of the General
Corporation Law (relating to voting of shares held by a fiduciary, receiver,
pledgee, or minor, in the name of a corporation, or in joint ownership), persons
in whose names shares entitled to vote stand on the stock records of the
corporation at the close of business on the record date shall be entitled to
vote at the meeting of shareholders. Such vote may be viva voce or by ballot;
---- ----
provided, however, that all elections for directors must be by ballot upon
demand made by a shareholder at any election and before the voting begins.
Shares of this corporation owned by a corporation more than twenty-five percent
(25%) of the voting power of which is owned directly by this corporation, or
indirectly through one or more majority-owned subsidiaries of this corporation,
shall not be entitled to vote on any matter.
(c) Subject to the requirements of the next sentence, every shareholder
entitled to vote at any election for directors shall have the right to cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by that number of votes to which
such shareholder's shares are normally entitled, or to distribute votes on the
same principle among as many candidates as such shareholder thinks fit. No
shareholder shall be entitled to cumulate votes unless such candidate's name or
candidates, names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting, prior to the voting, of the
shareholder's intention to cumulate such shareholder's votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination. The candidates receiving the highest number of
affirmative votes of shares entitled to be voted for them, up to the number of
directors to be elected by such shares, shall be elected. Votes against a
director and votes withheld shall have no legal effect.
Section 2.10 Proxies.
-------
(a) Every person entitled to vote shares (including voting by written
consent) may authorize another person or other persons to act by proxy with
respect to such shares. "Proxy" means a written authorization signed by a
shareholder or the shareholder's attorney-in-fact giving another person or
persons power to vote with respect to the shares of such shareholder. "Signed"
for the purpose of this Section means the placing of the shareholder's name on
the proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the shareholder or the shareholder's attorney-in-fact. Any proxy
duly executed is not revoked and continues in full force and effect until (i) a
written instrument revoking it is filed with the Secretary of the corporation
prior to the vote pursuant thereto, (ii) a subsequent proxy executed by the
person executing the prior proxy is presented to the meeting, (iii) the person
executing the proxy attends the meeting and votes in person, or (iv) written
notice of the death or incapacity of the maker of such proxy is received by the
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corporation before the vote pursuant thereto is counted; provided that no such
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution, unless otherwise provided in the proxy. Notwithstanding the
foregoing sentence, a proxy that states that it is irrevocable, is irrevocable
for the period specified therein to the extent permitted by Section 705(e) and
(f) of the General Corporation Law. The dates contained on the forms of proxy
presumptively determine the order of execution, regardless of the postmark dates
on the envelopes in which they are mailed.
(b) As long as no outstanding class of securities of the corporation is
registered under Section 12 of the Securities Exchange Act of 1934, or is not
exempted from such registration by Section 12(g)(2) of such Act, any form of
proxy or written consent distributed to ten (10) or more shareholders of the
corporation when outstanding shares of the corporation are held of record by 100
or more persons shall afford an opportunity on the proxy or form of written
consent to specify a choice between approval and disapproval of each matter or
group of related matters-intended to be acted upon at the meeting for which the
proxy is solicited or by such written consent, other than elections to office,
and shall provide, subject to reasonable specified conditions,, that where the
person solicited specifies a choice with respect to any such matter the shares
will be voted in accordance therewith. In any election of directors, any form
of proxy in which the directors to be voted upon are named therein as candidates
and which is marked by a shareholder "withhold" or otherwise marked in a manner
indicating that the authority to vote for the election of directors is withheld
shall not be voted for the election of a director.
Section 2.11 Validation of Defectively Called or Noticed Meetings.
----------------------------------------------------
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Attendance of a person at
a meeting shall constitute a waiver of notice of and presence at such meeting,
except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by these Bylaws or by the
General Corporation Law to be included in the notice if such objection is
expressly made at the meeting. Neither the business to be transacted at nor the
purpose of any regular or special meeting of shareholders need be specified in
any written waiver of notice, consent to the holding of the meeting or approval
of the minutes thereof, unless otherwise provided in the Articles of
Incorporation or these Bylaws, or unless the meeting involves one or more
matters specified in Section 2.3(d) of these Bylaws.
Section 2.12 Action Without Meeting.
----------------------
(a) Directors may be elected without a meeting by a consent in writing,
setting forth the action so taken, signed by all of the persons who would be
entitled to vote for the election of
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directors, provided that, without notice except as hereinafter set forth, a
director may be elected at any time to fill a vacancy not filled by the
directors (other than a vacancy created by removal of a director) by the written
consent of persons holding a majority of the outstanding shares entitled to vote
for the election of directors.
Any other action that may be taken at a meeting of the shareholders, may be
taken without a meeting, and without prior notice except as hereinafter set
forth, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
(b) Unless the consents of all shareholders entitled to vote have been
solicited in writing:
(1) notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director, (ii) indemnification of an
agent of the corporation, (iii) a reorganization of the corporation as
defined in Section 181 of the General Corporation Law, or (iv) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, if any, without a meeting by less than
unanimous written consent, shall be given at least ten (10) days before the
consummation of the action authorized by such approval; and
(2) prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not
consented in writing. Such notices shall be given in the manner provided
in Section 2.3 of these Bylaws.
(c) Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
Section 2.13 Inspectors of Election.
----------------------
(a) In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed, or if any persons so
appointed fail to appear or refuse to act, the chairman of any such meeting may,
and on the request of any shareholder or the holder of such shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
or refuse) at the meeting. The number of inspectors shall be either one or
three. If inspectors are appointed at a meeting on the request of one or more
shareholders or holders of proxies, the majority of shares represented in person
or by proxy shall determine whether one inspector or three inspectors are to be
appointed.
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(b) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies;
receive votes, ballots or consents; hear and determine all challenges and
questions in any way arising in connection with the right to vote; count and
tabulate all votes or consents; determine when the polls shall close; determine
the result; and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
(c) The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision., act or certificate of
all. Any report or certificate made by the inspectors of election is prima
-----
facie evidence of the facts stated therein.
- -----
ARTICLE III
Board of Directors
Section 3.1 Powers; Approval of Loans to Officers.
-------------------------------------
(a) Subject to the provisions of the General Corporation Law and any
limitations in the Articles of Incorporation relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
Section 3.2 Election and Term of Office.
---------------------------
The directors shall be elected at each annual meeting of shareholders, but,
if any such-annual meeting is not held or the directors are not elected thereat,
the directors may be elected at any special meeting of shareholders held for
that purpose. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 3.3 Vacancies.
---------
A vacancy in the Board of Directors shall be deemed to exist in case of the
death, resignation or removal of any director, if a director has been declared
of unsound mind by order of court or convicted of a felony, if the authorized
number of directors is increased, if the incorporator or incorporators have
failed to appoint the authorized number of directors in any resolution for
appointment of directors upon the initial organization of the corporation, or if
the shareholders fail, at
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any annual or special meeting of shareholders at which any director or directors
are elected, to elect the full authorized number of directors to be voted for at
that meeting.
Vacancies in the Board of Directors, except for a vacancy created by the
removal of a director, may be filled by a majority of the directors present at a
meeting at which a quorum is present, or if the number of directors then in
office is less than a quorum, (a) by the unanimous written consent of the
directors then in office, (b) by the vote of a majority of the directors then in
office at a meeting held pursuant to notice or waivers of notice in compliance
with these Bylaws, or (c) by a sole remaining director. Each director so
elected shall hold office until his or her successor is elected at an annual or
a special meeting of the shareholders. A vacancy in the Board of Directors
created by the removal of a director may be filled only by the vote of a
majority of the shares entitled to vote represented at a duly held meeting at
which a quorum is present, or by the written consent of all of the holders of
the outstanding shares.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent other than to fill a vacancy created by removal shall require the
consent of holders of a majority of the outstanding shares entitled to vote.
Any such election by written consent to fill a vacancy created by removal shall
require the unanimous written consent of all shares entitled to vote for the
election of directors.
Any director may resign effective upon giving written notice to the
Chairman of the Board (if there be such an officer appointed), the President,
the Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effectove at a future time, a successor may be elected to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term of office.
Section 3.4 Time and Place of Meetings.
--------------------------
The Board of Directors shall hold a regular meeting immediately after the
meeting of shareholders at which it is elected and at the place where such
meeting is held, or at such other place as shall be fixed by the Board of
Directors, for the purpose of organization, election of officers of the
corporation and the transaction of other business. Notice of such meeting is
hereby dispensed with. Other regular meetings of the Board of Directors shall be
held without notice at such times and places as are fixed by the Board of
Directors. Special meetings of the Board of Directors may be held at any time
whenever - called by the Chairman of the Board (if there be such an officer
appointed), the President, any Vice-President, the Secretary or any two
directors.
Except as hereinabove provided in this Section 3.5, all meetings of the
Board of Directors may be held at any place within or without the State of
California that has been designated by resolution of the Board of Directors as
the place for the holding of regular meetings, or by written consent of all
directors. In the absence of such designation, meetings of the Board of
Directors shall
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be held at the principal executive office of the corporation. Special meetings
of the Board of Directors may be held either at a place so designated or at the
principal executive office of the corporation.
Section 3.5 Notice of Special Meetings.
--------------------------
Notice of the time and place of special meetings shall be delivered
personally to each director or communicated to each director by telephone,
telegraph or mail, charges prepaid, addressed to the director at the director's
address as it is shown upon the records of the corporation or, if it is not so
shown on such records or is not readily ascertainable, at the place at which the
meetings of the directors are regularly held. In case such notice is mailed, it
shall be deposited in the United States mail at least four (4) days prior to the
time of the holding of the meeting. In case such notice is delivered personally
or by telephone or telegraph, as above provided, it shall be so delivered at
least forty-eight (48) hours prior to the time of the holding of the meeting.
Such mailing, telegraphing, or delivery, personally or by telephone, as above
provided, shall be due, legal and personal notice to such director.
Notice of a meeting need not be given to any director who, signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement,.the lack of notice to such
director. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meetings.
Section 3.6 Action at a Meeting: Quorum and Required Vote.
---------------------------------------------
Presence of a majority of the authorized number of directors at a meeting
of the Board of Directors constitutes a quorum for the transaction of business,
except as hereinafter provided. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Participation in a meeting as permitted in the preceding
sentence constitutes presence in person at such meeting. Every act or decision
done or made by a majority of the directors present at a meeting duly held at
which a quorum is present is the act of the Board of Directors, unless a greater
number, or the same number after disqualifying one or more directors from
voting, is required by law, by the Articles of Incorporation, or by these
Bylaws. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
Section 3.7 Action Without a Meeting.
------------------------
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board of Directors shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors. Such action by written consent shall have the same force
and effect as a unanimous vote of such directors.
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Section 3.8 Adjourned Meeting and Notice.
----------------------------
A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place. If the meeting is adjourned
for more than twenty-four (24) hours, notice of any adjournment to another time
or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
Section 3.9 Fees and Compensation.
---------------------
Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.
Section 3.10 Appointment of Executive and Other Committees.
---------------------------------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board of
Directors. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. The appointment of members or alternate members of a
committee requires the vote of a majority of the authorized number of directors.
Any such committee, to the extent provided in the resolution of the Board of
Directors or in these Bylaws, shall have all the authority of the Board of
Directors, except with respect to:
(a) The approval of any action for which the General Corporation Law also
requires shareholders' approval or approval-of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or in any
committee.
(c) The fixing of compensation of the directors for serving on the Board
of Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new Bylaws.
(e) The amendment or repeal of any resolution of the Board of Directors
that by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except at a
rate, in a periodic amount or within a price range determined by the Board of
Directors.
(g) The appointment of other committees of the Board of Directors or the
members thereof.
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The provisions of Sections 3.5 through 3.9 of these Bylaws apply also to
committees of the Board of Directors and action by such committees, mutatis
-------
mutandis (with the necessary changes having been made in the language thereof).
- --------
ARTICLE IV
Officers
Section 4.1 Officers.
--------
The officers of the corporation shall consist of the President, the
Secretary and the Treasurer, and each of them shall be appointed by the Board of
Directors. The corporation may also have a Chairman of the Board, one or more
Vice-Presidents, a Controller, one or more Assistant Secretaries and Assistant
Treasurers, and such other officers as may be appointed by the Board Of
Directors, or with authorization from the Board of Directors by the President.
The order of the seniority of the Vice Presidents shall be in the order of their
nomination, unless otherwise determined by the Board of Directors. Any two or
more of such offices may be held by the same person. The Board of Directors
shall designate one officer as the chief financial officer of the corporation.
In the absence of such designation, the Treasurer shall be the chief financial
officer. The Board of Directors may appoint, and may empower the President to
appoint, such other Officers as the business of the corporation may require,
each 'of whom shall have such authority and perform such duties as are provided
in these Bylaws or as the Board of Directors may from time to time determine.
All officers of the corporation shall hold office from the date appointed
to the date of the next succeeding regular meeting of the Board of Directors
following the meeting of shareholders at which the Board of Directors is
elected, and until their successors are elected; provided that all officers, as
well as any other employee or agent of the corporation, may be removed at any
time at the pleasure of the Board of Directors, or, except in the case of an
officer chosen by the Board of Directors, by any officer upon whom such power of
removal may be conferred by the Board of Directors, and upon the removal,
resignation, death or incapacity of any officer, the Board of Directors or the
President, in cases where he or she has been vested by the Board of Directors
with power to appoint, may declare such office vacant and fill such vacancy.
Nothing in these Bylaws shall be construed as creating any kind of contractual
right to employment with the corporation.
Any officer may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the corporation, without
prejudice, however, to the rights, if any, of the corporation under any contract
to which such officer is a party. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
The salary and other compensation of the officers shall be fixed from time
to time by resolution of or in the manner determined by the Board of Directors.
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Section 4.2 The Chairman of the Board.
-------------------------
The Chairman of the Board (if there be such an officer appointed) shall,
when present, preside at all meetings of the Board of Directors and shall
perform all the duties commonly incident to that office. The Chairman of the
Board shall have authority to execute in the name of the corporation bonds,
contracts, deeds, leases and other written instruments to be executed by the
corporation (except where by law the signature of the President is required),
and shall perform such other duties as the Board of Directors may from time to
time determine.
Section 4.3 The President.
-------------
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman . of the Board, the President shall be the chief
executive officer of the corporation and shall perform all the duties commonly
incident to that office. The President shall have authority to execute in the
name of the corporation bonds, contracts, deeds, leases and other written
instruments to be executed by the corporation. The President shall preside at
all meetings of the shareholders and, in the absence of the Chairman of the
Board or if there is none, at all meetings of the Board of Directors, and shall
perform such other duties as the Board of Directors may from time to time
determine.
Section 4.4 Vice-Presidents.
---------------
The Vice-Presidents (if there be such officers appointed), in the order of
their seniority (unless otherwise established by the Board of Directors), may
assume and perform the duties of the President in the absence or disability of
the President or whenever the offices of the Chairman of the Board and President
are vacant. The Vice-Presidents shall have such titles, perform such other
duties, and have such other powers as the Board of Directors, the President or
these Bylaws may designate from time to time.
Section 4.5 The Secretary.
-------------
The Secretary shall record or cause to be recorded, and shall keep or cause
to be kept, at the principal executive office and such other place as the Board
of Directors may order, a book of minutes of actions taken at all meetings of
directors and committees thereof and of shareholders, with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings
thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent, a share register or
a duplicate share register in a form capable of being converted into written
form, showing the names of the shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
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The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board of Directors and committees thereof
required by these Bylaws or by law to be given, and shall have such other powers
and perform such other duties as may be prescribed by the Board of Directors or
by these Bylaws.
The President may direct any Assistant Secretary to assume and perform the
duties of the Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform such other duties and have such other powers
as the Board of Directors or the President may designate from time to time.
Section 4.6 The Treasurer.
-------------
The Treasurer shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
corporation. The books of account shall at all reasonable times be open to
inspection by any director.
The Treasurer shall deposit all moneys and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the Board of Directors. The Treasurer shall disburse the funds of the
corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of the
Treasurer's transactions as Treasurer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these Bylaws.
The President may direct any Assistant Treasurer to assume and perform the
duties of the Treasurer in the absence or disability of the Treasurer, and each
Assistant Treasurer shall perform such other duties and have such other powers
as the Board of Directors or the President may designate from time to time.
Section 4.7 The Controller.
--------------
The Controller (if there be such an officer appointed) shall be responsible
for the establishment and maintenance of accounting and other systems required
to control and account for the assets of the corporation and provide safeguards
therefor, and to collect information required for management purposes, and shall
perform such other duties and have such other powers as the Board of Directors
or the President may designate from time to time. The President may direct any
Assistant Controller to assume and perform the duties of the Controller, in the
absence or disability of the Controller, and each Assistant Controller shall
perform such other duties and have such other powers as the Board of Directors,
the Chairman of the Board (if there be such an officer appointed) or the
President may designate from time to time.
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ARTICLE V
Execution of Corporate Instruments, Ratification,
and Voting of Stocks Owned by the Corporation
Section 5.1 Execution of Corporate Instruments.
----------------------------------
In its discretion, the Board of Directors may determine the method and
designate the signatory officer or officers or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law,-and such execution
or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the corporation, or in special accounts of the corporation, shall be
signed by such person or persons as the Board of Directors shall authorize to do
so.
The Board of Directors shall designate an officer who personally, or
through his representative, shall vote shares of other corporations standing in
the name of this corporation. The authority to vote shares shall include the
authority to execute a proxy in the name of the corporation for purposes of
voting the shares.
Section 5.2 Ratification by Shareholders.
----------------------------
In its discretion, the Board of Directors may submit any contract or act
for approval or ratification of the shareholders at any annual meeting of
shareholders, or at any special meeting of shareholders called for that purpose;
and any contract or act that shall be approved or ratified by the holders of a
majority of the voting power of the corporation shall be as valid and binding
upon the corporation and upon the shareholders thereof as though approved or
ratified by each and every shareholder of the corporation, unless a greater vote
is required by law for such purpose.
Section 5.3 Voting of Stocks Owned by the Corporation.
-----------------------------------------
All stock of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized to do so by
resolution of the Board of Directors, or in the absence of such authorization,
by the Chairman of the Board (if there be such an officer appointed), the
President or any Vice-President, or by any other person authorized to do so by
the Chairman of the Board, the President or any Vice President.
-15-
<PAGE>
ARTICLE VI
Annual and Other Reports
Section 6.1 Reports to Shareholders.
-----------------------
The Board of Directors of the corporation shall cause an annual report to
be sent to the shareholders not later than 120 days after the close of the
fiscal year, and at least fifteen (15) days (or, if sent by third-class mail,
thirty-five (35) days) prior to the annual meeting of shareholders to be held
during the next fiscal year. This report shall contain a balance sheet as of the
end of that fiscal year and an income statement and statement of changes in
financial position for that fiscal year, accompanied by any report thereon of
independent accountants or, if there is no such report, the certificate of an
authorized officer of the corporation that the statements were prepared without
audit from the books and records of the corporation. This report shall also
contain such other matters as required by Section 1501(b) of the General
Corporation Law, unless the corporation is subject to the reporting requirements
of Section 13 of the Securities Exchange Act of 1934, and is not exempted
therefrom under Section 12(g)(2) thereof. As long as the corporation has less
than 100 holders of record of its shares (determined as provided in Section 605
of the General Corporation Law), the foregoing requirement of an annual report
is hereby waived.
If no annual report for the last fiscal year has been sent to shareholders,
the corporation shall, upon the written request of any shareholder made more
than 120 days after the close of such fiscal year, deliver or mail to the person
making the request within thirty (30) days thereafter the financial statements
for such year as required by Section 1501(a) of the General Corporation Law. A
shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of such period and, in addition, if no annual report
for the last fiscal year has been sent to shareholders, the annual report for
the last fiscal year, unless such report has been waived under these Bylaws. The
statements shall be delivered or mailed to the person making the request within
thirty (30) days thereafter. A copy of any such statements shall be kept on file
in the principal executive office of the corporation for twelve (12) months, and
they shall be exhibited at all reasonable times to any shareholder demanding an
examination of the statements, or a copy shall be mailed to the shareholder.
The quarterly income statements and balance sheets referred to in this
Section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
-16-
<PAGE>
Section 6.2 Report of Shareholder Vote.
--------------------------
For a period of sixty (60) days following the conclusion of an annual,
regular, or special meeting of shareholders, the corporation shall, upon written
request from a shareholder, forthwith inform the shareholder of the result of
any particular vote of shareholders taken at the meeting, including the number
of shares voting for, the number of shares voting against, and the number of
shares abstaining or withheld from voting. If the matter voted on was the
election of directors, the corporation shall report the number of shares (or
votes if voted cumulatively) cast for each nominee for director. If more than
one class or series of shares voted, the report shall state the appropriate
numbers by class and series of shares.
Section 6.3 Reports to the Secretary of State.
---------------------------------
(a) Every year, during the calendar month in which the original
articles of incorporation were filed with the California Secretary of State, or
during the preceding five calendar months, the corporation shall file a
statement with the Secretary of State on the prescribed form, setting forth the
authorized number of directors; the names and complete business and residence
addresses of all incumbent directors; the names and complete business or
resident addresses of the chief executive officer, the secretary, and the chief
financial officer; the street address of the corporation's principal executive
office or principal business office in this state; a statement of the general
type of business constituting the principal business activity of the
corporation; and a designation of the agent of the corporation for the purpose
of service of process, all in compliance with Section 1502 of the Corporations
Code of California.
(b) Notwithstanding the provisions of paragraph (a) of this section,
if there has been no change in the information contained in the corporation's
last annual statement on file in the Secretary of State's office, the
corporation may, in lieu of filing the annual statement described in paragraph
(a) of this section, advise the Secretary of State, on the appropriate form,
that no changes in the required information have occurred during the applicable
period.
ARTICLE VII
Shares of Stock
Every holder of shares in the corporation shall be entitled to have a
certificate signed in the name of the corporation by the Chairman or Vice
Chairman of the Board (if there be such officers appointed) or the President or
a Vice-President and by the chief financial officer or any Assistant Treasurer
or the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the shareholder. Any of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if such person were an officer, transfer agent or registrar at the
date of issue.
-17-
<PAGE>
Any such certificate shall also contain such legends or other statements as
may be required by Sections 417 and 418 of the General Corporation Law, the
Corporate Securities Law of 1968, federal or other state securities laws, and
any agreement between the corporation and the issuee of the certificate.
Certificates for shares may be issued prior to full payment, under such
restrictions and for such purposes as the Board of Directors or these Bylaws may
provide; provided, however, that the certificate issued to represent any such
partly paid shares shall state on the face thereof the total amount of the
consideration to be paid therefor, the amount remaining unpaid and the terms of
payment.
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and cancelled at the same time; provided,
however, that a new certificate will be issued without the surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction, or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirement imposed by the corporation. In the event of the
issuance of a new certificate ' the rights and liabilities of the corporation,
and of the holders of the old and new certificates, shall be governed by the
provisions of Sections 8104 and 8405 of the California Commercial Code.
ARTICLE VIII
Inspection of Corporate Records
Section 8.1 General Records.
---------------
The accounting books and records and the minutes of proceedings of the
shareholders, the Board of Directors and committees thereof of the corporation
and any subsidiary of the corporation shall be open to inspection upon the
written demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts. Minutes of
proceedings of the shareholders, Board, and committees thereof shall be kept in
written form. Other books and records shall be kept either in written form or in
any other form capable of being converted into written form.
A shareholder or shareholders holding at least five percent (5%) in the
aggregate of the outstanding voting shares of the corporation or who hold at
least one percent (1%) of such voting
-18-
<PAGE>
shares and have filed a Schedule 14B with the United States Securities and
Exchange Commission relating to the election of directors of the corporation
shall have (in person, or by agent or attorney) the right to inspect and copy
the record of shareholders, names and addresses and shareholdings during usual
business hours upon five (5) business days, prior written demand upon the
corporation or to obtain from the transfer agent for the corporation, upon
written demand and upon the tender of its usual charges for such list, a list of
the shareholders' names and addresses, who are entitled to vote for the election
of directors, and their shareholdings as of the most recent record date for
which it has been compiled or as of a date specified b the shareholder
subsequent to the date of demand. The list shall be made available on or before
the later of five (5) business days after the demand is received or the date
specified therein as the date as of which the list is to be compiled.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and its subsidiaries. Such inspection
by a director may be made in person or by agent or attorney, and the right of
inspection includes the right to copy and make extracts.
Section 8.2 Inspection of Bylaws.
--------------------
The corporation shall keep at its principal executive office in California,
or if its principal executive office is not in California, then at its principal
business office in California (or shall otherwise provide upon written request
of any shareholder if it has no such office in California) the original or a
copy of these Bylaws as amended to date, which shall be open to inspection by
the shareholders at all reasonable times during office hours.
ARTICLE IX
Indemnification of Officers, Directors, Employees
and Agents
Section 9.1 Right to Indemnification.
------------------------
Each person who was or is a party or is threatened to be made a party to or
is involved (as a party, witness, or otherwise), in any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (hereafter a "Proceeding"), by reason of the fact that he, or a
person of whom he is the legal representative, is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, or other enterprise, or
was a director, officer, employee, or agent of a foreign or domestic corporation
that was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation, including service with respect
to employee benefit plans, whether the basis of the Proceeding is alleged action
in an official capacity as a director, officer, employee, or agent or in any
other capacity while serving as a director, officer, employee, or agent
(hereafter an "Agent"), shall be indemnified and held harmless by the
corporation to the fullest extent
-19-
<PAGE>
authorized by statutory and decisional law, as the same exists or may hereafter
be interpreted or amended (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the corporation to provide broader indemnification rights than were permitted
prior thereto) against all expenses, liability, and loss (including attorneys,
fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be
paid in settlement, any interest, assessments, or other charges imposed thereon,
and any federal, state, local, or foreign taxes imposed thereon, and any
federal, state, local, or foreign taxes imposed on any Agent as a result of the
actual or deemed receipt of any payments under this Article) reasonably incurred
or suffered by such person in connection with investigating, defending, being a
witness in, or participating in (including on appeal), or preparing for any of
the foregoing in, any Proceeding (hereafter "Expenses"); provided, however, that
-------- -------
except as to actions to enforce indemnification rights pursuant to Section 9.3
of these Bylaws, the corporation shall indemnify any Agent seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
such person only if the Proceeding (or part thereof) was authorized by the Board
of Directors of the corporation. The right to indemnification conferred in this
Article shall be a contract right. It is the corporation's intention that these
bylaws provide indemnification in excess of that expressly permitted by Section
317 of the California General Corporation Law, as authorized by the
corporation's Articles of Incorporation.
Section 9.2 Authority to Advance Expenses.
-----------------------------
Expenses incurred by an officer or director (acting in his capacity as
such) in defending a Proceeding shall be paid by the corporation in advance of
the final disposition of such Proceeding, provided, however, that if required by
--------
the California General Corporation Law, as amended, such Expenses shall be
advanced only upon delivery to the corporation of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article or otherwise. Expenses incurred by other Agents of
the corporation (or by the directors or officers not acting in their capacity as
such, including service with respect to employee benefit plans) may be advanced
upon the receipt of a similar undertaking, if required by law, and upon such
other terms and conditions as the Board of Directors deems appropriate. Any
obligation to reimburse the corporation for Expense advances shall be unsecured
and no interest shall be charged thereon.
Section 9.3 Right of Claimant to Bring Suit.
-------------------------------
If a claim under Section 9.1 or 9.2 of these Bylaws is not paid in full by
the corporation within thirty (30) days after a written claim has been received
by the corporation, the claimant may at any time thereafter bring suit against
the corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
(including attorneys, fees) of prosecuting such claim. it shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the corporation) that the claimant has
not met the standards of conduct that make it permissible under the California
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. The burden of proving such a defense shall be on the corporation
Neither the failure of the corporation (including
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<PAGE>
its Board of Directors, independent legal counsel., or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper under the circumstances because he has
met the applicable standard of conduct set forth in the California General
Corporation Law, nor an actual determination by the corporation (including its
Board of Directors, independent legal counsel, or its stockholders) that the
claimant had not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that claimant has not met the applicable
standard of conduct.
Section 9.4 Provisions Nonexclusive.
-----------------------
The rights conferred on any person by this Article shall not be exclusive
of any other rights that such person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Articles, agreement, or vote of
the stockholders or disinterested directors is inconsistent with these bylaws,
the provision, agreement, or vote shall take precedence.
Section 9.5 Authority to Insure.
-------------------
The corporation may purchase and maintain insurance to protect itself and
any Agent against any Expense asserted against or incurred by such person,
whether or not the corporation would have the power to indemnify the Agent
against such Expense under applicable law or the provisions of this Article,
provided that, in cases where the corporation owns all or a portion of the
shares of the company issuing the insurance policy, the company and/or the
policy must meet one of the two sets of conditions set forth in Section 317 of
the California General Corporation Law, as amended.
Section 9.6 Survival of Rights.
------------------
The rights provided by this Article shall continue as to a person who has
ceased to be an Agent and shall inure to the benefit of the heirs, executors,
and administrators of such person.
Section 9.7 Settlement of Claims.
--------------------
The corporation shall not be liable to indemnify any Agent under this
Article (a) for any amounts paid in settlement of any action or claim effected
without the corporation's written consent, which consent shall not be
unreasonably withheld; or (b) for any judicial award, if the corporation was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.
Section 9.8 Effect of Amendment.
-------------------
Any amendment, repeal, or modification of this Article shall not adversely
affect any right or protection of any Agent existing at the time of such
amendment, repeal, or modification.
-21-
<PAGE>
Section 9.9 Subrogation.
-----------
In the event of payment under this Article, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the corporation effectively to bring suit to enforce such
rights.
Section 9.10 No Duplication of Payments.
--------------------------
The corporation shall not be liable under this Article to make any payment
in connection with any claim made against the Agent to the extent the Agent has
otherwise actually received payment (under any insurance policy, agreement,
vote, or otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE X
Amendments
Section 10.1 Power of Shareholders.
---------------------
New bylaws may be adopted or these Bylaws may be amended or repealed by the
affirmative vote of a majority of the outstanding shares entitled to vote, or by
the written assent of shareholders entitled to vote such shares, except as
otherwise provided by law or by the Articles of Incorporation.
Section 10.2 Power of Directors.
------------------
Subject to the right of shareholders as provided in Section 10.1 of this
Article X to adopt, amend or repeal these Bylaws, these Bylaws (other than a
bylaw or amendment thereof changing the authorized number of directors, or
providing for the approval by the Board, acting alone, of a loan or guarantee to
any officer or an employee benefit plan providing for the same) may be adopted,
amended or repealed by the Board of Directors.
ARTICLE XI
Definitions
Unless the context otherwise requires, the general provisions, rules of
construction and definitions contained in the General Corporation Law as amended
from time to t' shall govern the construction of these Bylaws. Without limiting
the generality of the foregoing, the masculine gender includes the feminine and
neuter, the singular number includes the plural and the plural number includes
the singular, and the term "person" includes a corporation as well as a natural
person.
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<PAGE>
ARTICLE XII
Corporate Seal
The corporate seal shall consist of a circular die bearing the name of the
corporation, the state in which it was incorporated and the date of its
incorporation. If and when authorized by the Board of Directors, a duplicate of
the corporate seal may be kept and used by such officer or person as the Board
of Directors may designate.
-23-
<PAGE>
EX 3.3
AMENDMENT TO THE BYLAWS OF
INTERNATIONAL NETWORK SERVICES
RESOLVED: That Article III, Section 3.2 of the Company's Bylaws shall be
- --------
amended to read in full as follows:
"Section 3.2 Number and Qualification of Directors.
----------- -------------------------------------
The authorized number of directors shall not be less than five (5) nor
more than nine (9) until changed by an amendment of the Articles of
Incorporation or these Bylaws amending this Section 3.2 duly adopted by a
vote or written consent of holders of a majority of the outstanding shares;
provided that if the authorized number of directors is five (5) or more,
any proposal to reduce the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its adoption at a
meeting, or the shares not consenting in the case of action by written
consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of
the outstanding shares entitled to vote. The exact number of directors
shall be fixed from time to time, within the limits specified in the
Articles of Incorporation or in this Section 3.2, by a bylaw or amendment
thereof duly adopted by the vote of a majority of the shares entitled to
vote represented at a duly held meeting at which a quorum is present, or by
the written consent of the holders of a majority of the outstanding shares
entitled to vote, or by the Board of Directors.
Subject to the foregoing provisions for changing the number of
directors, the number of directors of the Corporation has been fixed at
seven (7)."
RESOLVED FURTHER: That Article X, Section 10.2 of the Company's Bylaws shall be
- ----------------
amended to read in full as follows:
"Section 10.2 Power of Directors.
------------ ------------------
Subject to the right of shareholders as provided in Section 10.1 of
this Article X to adopt, amend or repeal these Bylaws, these Bylaws (other
than a bylaw or amendment (i) changing the authorized number of directors
(except to fix the authorized number of directors pursuant to a bylaw
providing for a variable number of directors); or (ii) providing for the
approval by the Board, acting alone, of a loan or guarantee to any officer
or an employee benefit plan providing for the same) may be adopted, amended
or repealed by the Board of Directors."
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
a California corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - Offices......................................................................................... 1
Section 1.1 Principal Executive Office.............................................................. 1
Section 1.2 Other Offices........................................................................... 1
ARTICLE II - Meetings of Shareholders....................................................................... 1
Section 2.1 Place of Meetings....................................................................... 1
Section 2.2 Annual Meeting.......................................................................... 1
Section 2.3 Notice of Annual Meeting................................................................ 2
Section 2.4 Special Meetings........................................................................ 3
Section 2.5 Notice of Special Meetings.............................................................. 3
Section 2.6 Advance Notice of Shareholder Nominees and Shareholder Business......................... 3
Section 2.7 Quorum.................................................................................. 4
Section 2.8 Adjourned Meeting and Notice............................................................ 5
Section 2.9 Record Date............................................................................. 5
Section 2.10 Voting.................................................................................. 6
Section 2.11 Proxies................................................................................. 7
Section 2.12 Validation of Defectively Called or Noticed Meetings.................................... 7
Section 2.13 Action Without Meeting.................................................................. 8
Section 2.14 Inspectors of Election.................................................................. 9
ARTICLE III - Board of Directors............................................................................ 9
Section 3.1 Powers; Approval of Loans to Officers................................................... 9
Section 3.2 Number and Qualification of Directors................................................... 10
Section 3.3 Election and Term of Office............................................................. 10
Section 3.4 Vacancies............................................................................... 10
Section 3.5 Time and Place of Meetings; Meetings by Telephone....................................... 11
Section 3.6 Notice of Special Meetings.............................................................. 12
Section 3.7 Waiver of Notice........................................................................ 12
Section 3.8 Action at a Meeting: Quorum and Required Vote........................................... 12
Section 3.9 Action Without a Meeting................................................................ 13
Section 3.10 Adjourned Meeting and Notice............................................................ 13
Section 3.11 Fees and Compensation................................................................... 13
Section 3.12 Appointment of Executive and Other Committees........................................... 13
ARTICLE IV - Officers....................................................................................... 14
Section 4.1 Officers................................................................................ 14
Section 4.2 The Chairman of the Board............................................................... 15
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.3 The Chief Executive Officer............................................................. 15
Section 4.4 The President........................................................................... 15
Section 4.5 Vice Presidents......................................................................... 15
Section 4.6 The Secretary........................................................................... 16
Section 4.7 The Chief Financial Officer............................................................. 16
Section 4.8 The Controller.......................................................................... 16
ARTICLE V - Execution of Corporate Instruments, Ratification, Voting of Stocks Owned by the
Corporation and Record Date for Purposes Other than Notice and Voting.......................... 17
Section 5.1 Execution of Corporate Instruments...................................................... 17
Section 5.2 Ratification by Shareholders............................................................ 17
Section 5.3 Voting of Stocks Owned by the Corporation............................................... 17
Section 5.4 Record Date for Purposes Other than Notice and Voting................................... 18
ARTICLE VI - Annual and Other Reports....................................................................... 18
Section 6.1 Reports to Shareholders................................................................. 18
ARTICLE VII - Shares of Stock............................................................................... 19
ARTICLE VIII - Inspection of Corporate Records.............................................................. 20
Section 8.1 General Records......................................................................... 20
Section 8.2 Inspection of Bylaws.................................................................... 21
ARTICLE IX - Indemnification of Officers, Directors, Employees and Agents................................... 21
Section 9.1 Indemnification of Directors and Officers............................................... 21
Section 9.2 Indemnification of Others............................................................... 21
Section 9.3 Payment of Expenses in Advance.......................................................... 22
Section 9.4 Indemnity Not Exclusive................................................................. 22
Section 9.5 Insurance Indemnification............................................................... 22
Section 9.6 Conflicts............................................................................... 22
Section 9.7 Indemnity Agreements.................................................................... 23
Section 9.8 Amendment, Repeal or Modification....................................................... 23
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE X - Amendments..................................................................................... 23
Section 10.1 Power of Shareholders.................................................................. 23
Section 10.2 Power of Directors..................................................................... 23
ARTICLE XI - Definitions................................................................................... 23
</TABLE>
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
A CALIFORNIA CORPORATION
ARTICLE I
Offices
Section 1.1 Principal Executive Office.
--------------------------
The Board of Directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
Section 1.2 Other Offices.
-------------
Other business offices may at any time be established at any place or
places specified by the Board of Directors.
ARTICLE II
Meetings of Shareholders
Section 2.1 Place of Meetings.
-----------------
All meetings of shareholders shall be held at the principal executive
office of the corporation, or at any other place, within or without the State of
California, specified by the Board of Directors.
Section 2.2 Annual Meeting.
--------------
The annual meeting of the shareholders shall be held at the time and date
in each year fixed by the Board of Directors. At the annual meeting directors
shall be elected, reports of the affairs of the corporation shall be considered,
and any other business may be transacted that is within the power of the
shareholders.
<PAGE>
Section 2.3 Notice of Annual Meeting.
------------------------
Written notice of each annual meeting shall be given to each shareholder
entitled to vote, either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by 500 or more persons
(determined in accordance with Section 605 of the General Corporation Law) on
the record date for the meeting, by third-class mail, or by other means of
written communication, charges prepaid, addressed to such shareholder at the
shareholder's address appearing on the books of the corporation or given by such
shareholder to the corporation for the purpose of notice. If any notice or
report addressed to the shareholder at the address of such shareholder appearing
on the books of the corporation is returned to the corporation by the United
States Postal Service marked to indicate that the United States Postal Service
is unable to deliver the notice or report to the shareholder at such address,
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice or report to
all other shareholders. If a shareholder gives no address, notice shall be
deemed to have been given to such shareholder if addressed to the shareholder at
the place where the principal executive office of the corporation is situated,
or if published at least once in some newspaper of general circulation in the
county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled thereto not
less than ten (10) days (or, if sent by third-class mail, thirty (30) days) nor
more than sixty (60) days before each annual meeting. Any such notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by other means of written communication. An affidavit of
mailing of any such notice in accordance with the foregoing provisions, executed
by the Secretary, Assistant Secretary or any transfer agent of the corporation
shall be prima facie evidence of the giving of the notice.
----- -----
Such notice shall specify:
(a) the place, the date, and the hour of such meeting;
(b) those matters that the Board of Directors, at the time of the
mailing of the notice, intends to present for action by the shareholders
(but, subject to the provisions of subsection (d) below, any proper matter
may be presented at the meeting for such action);
(c) if directors are to be elected, the names of nominees intended at
the time of the notice to be presented by the Board of Directors for
election;
(d) the general nature of a proposal, if any, to take action with
respect to approval of (i) a contract or other transaction with an
interested director, (ii) amendment of the Articles of Incorporation, (iii)
a reorganization of the corporation as defined in Section 181 of the
General Corporation Law, (iv) voluntary dissolution of the corporation, or
(v) a distribution in
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<PAGE>
dissolution other than in accordance with the rights of outstanding
preferred shares, if any; and
(e) such other matters, if any, as may be expressly required by
statute.
Section 2.4 Special Meetings.
----------------
Special meetings of the shareholders for any purpose or purposes whatsoever
may be called at any time by the Chairman of the Board (if there be such an
officer appointed), by the President, by the Board of Directors, or by one or
more shareholders entitled to cast not less than ten percent (10%) of the votes
at the meeting.
Section 2.5 Notice of Special Meetings.
--------------------------
Upon request in writing that a special meeting of shareholders be called
for any proper purpose, directed to the Chairman of the Board (if there be such
an officer appointed), President, Vice President or Secretary by any person
(other than the Board of Directors) entitled to call a special meeting of
shareholders, the officer forthwith shall cause notice to be given to the
shareholders entitled to vote that a meeting will be held at a time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. Except in special
cases where other express provision is made by statute, notice of any special
meeting of shareholders shall be given in the same manner as for annual meetings
of shareholders. In addition to the matters required by Section 2.3(a). and, if
applicable, Section 2.3(c) of these Bylaws, notice of any special meeting shall
specify the general nature of the business to be transacted, and no other
business may be transacted at such meeting.
Section 2.6 Advance Notice of Shareholder Nominees and Shareholder Business.
---------------------------------------------------------------
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (b) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder. For such nominations or
other business to be considered properly brought before the meeting by a
shareholder, such shareholder must have given timely notice and in proper form
of his or her intent to bring such nomination or such business before such
meeting. To be timely, such shareholder's notice must be delivered to or mailed
and received by the secretary of the corporation not less than ninety (90) days
prior to the meeting; provided, however, that in the event that less than one
hundred (100) days notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the tenth day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. To be in proper form, a shareholder's notice to the
secretary shall set forth:
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(a) the name and address of the shareholder who intends to make the
nominations or propose the business and, as the case may be, the name
and address of the person or persons to be nominated or the nature of
the business to be proposed;
(b) a representation that the shareholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or to introduce
the business specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder;
(d) such other information regarding each nominee or each matter of
business to be proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to
be proposed by the Board of Directors; and
(e) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
Section 2.7 Quorum.
------
The presence in person or by proxy of persons entitled to vote a majority
of the voting shares at any meeting shall constitute a quorum for the
transaction of business. If a quorum is present, the affirmative vote of a
majority of the shares represented and voting at the meeting (which shares
voting affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
voting by classes is required by the General Corporation Law or the Articles of
Incorporation. Any meeting of shareholders, whether or not a quorum is present,
may be adjourned from time to time by the vote of the holders of a majority of
the shares present in person or represented by proxy thereat and entitled to
vote, but in the absence of a quorum no other business may be transacted at such
meeting, except that the shareholders present or represented by proxy at a duly
called or held meeting, at which a quorum is present, may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
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<PAGE>
Section 2.8 Adjourned Meeting and Notice.
----------------------------
When any shareholders' meeting, either annual or special, is adjourned for
more than forty-five (45) days, or if after adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of an original meeting. Except as provided above, it shall not
be necessary to give any notice of the time and place of the adjourned meeting
or of the business to be transacted thereat, other than by announcement of the
time and place thereof at the meeting at which such adjournment is taken.
Section 2.9 Record Date.
-----------
(a) The Board of Directors may fix a time in the future as a record date
for the determination of the shareholders entitled to notice of and to vote at
any meeting of shareholders or entitled to give consent to corporate action in
writing without a meeting, to receive any report, to receive any dividend or
other distribution, or allotment of any rights, or to exercise rights in respect
of any other lawful action. The record date so fixed shall be not more than
sixty (60) days nor less than ten (10) days prior to the date of such meeting,
nor more than sixty (60) days prior to any other action. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date for the adjourned meeting, but the Board of
Directors shall fix a new record date if the meeting is adjourned for more than
forty-five (45) days from the date set for the original meeting. When a record
date is so fixed, only shareholders of record at the close of business on that
date are entitled to notice of and to vote at any such meeting, to give consent
without a meeting, to receive any report, to receive the dividend, distribution,
or allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorporation
or these Bylaws.
(b) If no record date is fixed:
(1) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the business day preceding the day on
which the meeting is held.
(2) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given.
(3) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
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<PAGE>
Section 2.10 Voting.
------
(a) Except as provided below and except as otherwise provided in the
Articles of Incorporation, each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote of shareholders. Any
holders of shares entitled to vote on any matter may vote part of the shares in
favor of the proposal and refrain from voting the remaining shares or vote them
against the proposal, other than elections to office, but, if the shareholder
fails to specify the number of shares such shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is with
respect to all shares such shareholder is entitled to vote.
(b) Subject to the provisions of Sections 702 through 704 of the General
Corporation Law (relating to voting of shares held by a fiduciary, receiver,
pledgee, or minor, in the name of a corporation, or in joint ownership), persons
in whose names shares entitled to vote stand on the stock records of the
corporation at the close of business on the record date shall be entitled to
vote at the meeting of shareholders. Such vote may be viva voce or by ballot;
---- ----
provided, however, that all elections for directors must be by ballot upon
demand made by a shareholder at any election and before the voting begins.
Shares of this corporation owned by a corporation more than twenty-five percent
(25%) of the voting power of which is owned directly by this corporation, or
indirectly through one or more majority-owned subsidiaries of this corporation,
shall not be entitled to vote on any matter.
(c) Subject to the requirements of the next sentence, every shareholder
entitled to vote at any election for directors shall have the right to cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by that number of votes to which
such shareholder's shares are normally entitled, or to distribute votes on the
same principle among as many candidates as such shareholder thinks fit. No
shareholder shall be entitled to cumulate votes unless such candidate's name or
candidates, names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting, prior to the voting, of the
shareholder's intention to cumulate such shareholder's votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination. The candidates receiving the highest number of
affirmative votes of shares entitled to be voted for them, up to the number of
directors to be elected by such shares, shall be elected. Votes against a
director and votes withheld shall have no legal effect.
The foregoing right to cumulate votes shall be subject to Article
Fifth of the Articles of Incorporation which provides that the right to cumulate
votes shall be extinguished upon such time that the corporation becomes a
"listed corporation" within the meaning of Section 301.5 of the General
Corporation Law ("Section 301.5"). Section 301.5 defines a "listed corporation"
as either of the following: (i) a corporation with outstanding shares listed on
the New York Stock Exchange or the American Stock Exchange and (ii) a
corporation with outstanding securities designated for trading as a national
market security on the National Association of Securities Dealers Automatic
Quotation System (or any successor national market system) if the corporation
has at least 800 holders of its equity securities as of the record date of the
corporation's most recent annual meeting of shareholders. For purposes of
determining the number of holders of a corporation's equity securities
-6-
<PAGE>
under Section 301.5, there shall be included in addition to the number of record
holders reflected on the corporation's stock records, the number of holders of
the equity securities held in the name of any nominee holder which furnishes the
corporation with a certification as required by Section 301.5, provided the
corporation retains the certification with the record of shareholders and makes
the certification available for inspection and copying as specified in Section
301.5.
Section 2.11 Proxies.
-------
Every person entitled to vote shares (including voting by written consent)
may authorize another person or other persons to act by proxy with respect to
such shares. "Proxy" means a written authorization signed by a shareholder or
the shareholder's attorney-in-fact giving another person or persons power to
vote with respect to the shares of such shareholder. "Signed" for the purpose
of this Section means the placing of the shareholder's name on the proxy
(whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the shareholder or the shareholder's attorney-in-fact. Any proxy
duly executed is not revoked and continues in full force and effect until (i) a
written instrument revoking it is filed with the Secretary of the corporation
prior to the vote pursuant thereto, (ii) a subsequent proxy executed by the
person executing the prior proxy is presented to the meeting, (iii) the person
executing the proxy attends the meeting and votes in person, or (iv) written
notice of the death or incapacity of the maker of such proxy is received by the
corporation before the vote pursuant thereto is counted; provided that no such
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution, unless otherwise provided in the proxy. Notwithstanding the
foregoing sentence, a proxy that states that it is irrevocable, is irrevocable
for the period specified therein to the extent permitted by Section 705(e) and
(f) of the General Corporation Law. The dates contained on the forms of proxy
presumptively determine the order of execution, regardless of the postmark dates
on the envelopes in which they are mailed.
Section 2.12 Validation of Defectively Called or Noticed Meetings.
----------------------------------------------------
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Attendance of a person at
a meeting shall constitute a waiver of notice of and presence at such meeting,
except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by these Bylaws or by the
General Corporation Law to be included in the notice if such objection is
expressly made at the meeting. Neither the business to be transacted at nor the
purpose of any regular or special meeting of shareholders need be specified in
any written waiver of notice, consent to the holding of the meeting or approval
of the minutes thereof, unless otherwise provided in the Articles of
Incorporation or these Bylaws, or unless the meeting involves one or more
matters specified in Section 2.3(d) of these Bylaws.
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<PAGE>
Section 2.13 Action Without Meeting.
----------------------
(a) Unless otherwise provided in the Articles of Incorporation, directors
may be elected without a meeting by a consent in writing, setting forth the
action so taken, signed by all of the persons who would be entitled to vote for
the election of directors, provided that, without notice except as hereinafter
set forth, a director may be elected at any time to fill a vacancy not filled by
the directors (other than a vacancy created by removal of a director) by the of
persons holding a majority of the outstanding shares entitled to vote for the
election of directors.
Unless otherwise provided in the Articles of Incorporation, any other
action that may be taken at a meeting of the shareholders, may be taken without
a meeting, and without prior notice except as hereinafter set forth, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
(b) Unless the consents of all shareholders entitled to vote have been
solicited in writing:
(1) notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director, (ii) indemnification of an
agent of the corporation, (iii) a reorganization of the corporation as
defined in Section 181 of the General Corporation Law, or (iv) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, if any, without a meeting by less than
unanimous written consent, shall be given at least ten (10) days before the
consummation of the action authorized by such approval; and
(2) prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not
consented in writing. Such notices shall be given in the manner provided
in Section 2.3 of these Bylaws.
(c) Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
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<PAGE>
Section 2.14 Inspectors of Election.
----------------------
(a) In advance of any meeting of shareholders, the Board of Directors may
appoint inspectors of election to act at the meeting and any adjournment
thereof. If inspectors of election are not so appointed, or if any persons so
appointed fail to appear or refuse to act, the chairman of any such meeting may,
and on the request of any shareholder or the holder of such shareholder's proxy
shall, appoint inspectors of election (or persons to replace those who so fail
or refuse) at the meeting. The number of inspectors shall be either one or
three. If inspectors are appointed at a meeting on the request of one or more
shareholders or holders of proxies, the majority of shares represented in person
or by proxy shall determine whether one inspector or three inspectors are to be
appointed.
(b) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies;
receive votes, ballots or consents; hear and determine all challenges and
questions in any way arising in connection with the right to vote; count and
tabulate all votes or consents; determine when the polls shall close; determine
the result; and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
(c) The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision., act or certificate of
all. Any report or certificate made by the inspectors of election is prima
-----
facie evidence of the facts stated therein.
- -----
ARTICLE III
Board of Directors
Section 3.1 Powers; Approval of Loans to Officers.
-------------------------------------
(a) Subject to the provisions of the General Corporation Law and any
limitations in the Articles of Incorporation relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
(b) The corporation may, upon the approval of the Board of Directors
alone, make loans of money or property to, or guarantee the obligations of, any
officer of the corporation or its parent or subsidiary, whether or not a
director, or adopt an employee benefit plan or plans authorizing such loans or
guaranties provided that (i) the Board of Directors determines that such a loan
or guaranty or
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<PAGE>
plan may reasonably be expected to benefit the corporation, (ii) the corporation
has outstanding shares held of record by 100 or more persons (determined as
provided in Section 605 of the General Corporation Law) on the date of approval
by the board of directors, and (iii) the approval of the Board of Directors is
by a vote sufficient without counting the vote of any interested director or
directors.
Section 3.2 Number and Qualification of Directors.
-------------------------------------
The authorized number of directors shall not be less than five (5) nor more
than nine (9) until changed by an amendment of the Articles of Incorporation or
these Bylaws amending this Section 3.2 duly adopted by a vote or written consent
of holders of a majority of the outstanding shares; provided that if the
authorized number of directors is five (5) or more, any proposal to reduce the
minimum number of directors to a number less than five (5) cannot be adopted if
the votes cast against its adoption at a meeting, or the shares not consenting
in the case of action by written consent, are equal to more than sixteen and
two-thirds percent (16-2/3%) of the outstanding shares entitled to vote. The
exact number of directors shall be fixed from time to time, within the limits
specified in the Articles of Incorporation or in this Section 3.2, by a bylaw or
amendment thereof duly adopted by the vote of a majority of the shares entitled
to vote represented at a duly held meeting at which a quorum is present, or by
the written consent of the holders of a majority of the outstanding shares
entitled to vote, or by the Board of Directors.
Subject to the foregoing provisions for changing the number of directors,
the number of directors of the Corporation has been fixed at seven (7).
Section 3.3 Election and Term of Office.
---------------------------
The directors shall be elected at each annual meeting of shareholders, but,
if any such annual meeting is not held or the directors are not elected thereat,
the directors may be elected at any special meeting of shareholders held for
that purpose. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 3.4 Vacancies.
---------
A vacancy in the Board of Directors shall be deemed to exist in case of the
death, resignation or removal of any director, if a director has been declared
of unsound mind by order of court or convicted of a felony, if the authorized
number of directors is increased, if the incorporator or incorporators have
failed to appoint the authorized number of directors in any resolution for
appointment of directors upon the initial organization of the corporation, or if
the shareholders fail, at any annual or special meeting of shareholders at which
any director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting.
Vacancies in the Board of Directors, except for a vacancy created by the
removal of a director, may be filled by a majority of the directors present at a
meeting at which a quorum is
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<PAGE>
present, or if the number of directors then in office is less than a quorum, (a)
by the unanimous written consent of the directors then in office, (b) by the
vote of a majority of the directors then in office at a meeting held pursuant to
notice or waivers of notice in compliance with these Bylaws, or (c) by a sole
remaining director. Each director so elected shall hold office until his or her
successor is elected at an annual or a special meeting of the shareholders. A
vacancy in the Board of Directors created by the removal of a director may be
filled only by the vote of a majority of the shares entitled to vote represented
at a duly held meeting at which a quorum is present, or by the written consent
of all of the holders of the outstanding shares.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent other than to fill a vacancy created by removal shall require the
consent of holders of a majority of the outstanding shares entitled to vote.
Any such election by written consent to fill a vacancy created by removal shall
require the unanimous written consent of all shares entitled to vote for the
election of directors.
Any director may resign effective upon giving written notice to the
Chairman of the Board (if there be such an officer appointed), the President,
the Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of the director's term of office.
Section 3.5 Time and Place of Meetings; Meetings by Telephone.
-------------------------------------------------
The Board of Directors shall hold a regular meeting immediately after the
meeting of shareholders at which it is elected and at the place where such
meeting is held, or at such other place as shall be fixed by the Board of
Directors, for the purpose of organization, election of officers of the
corporation and the transaction of other business. Notice of such meeting is
hereby dispensed with. Other regular meetings of the Board of Directors may be
held without notice at such times and places as are fixed by the Board of
Directors. Special meetings of the Board of Directors may be held at any time
whenever called by the Chairman of the Board (if there be such an officer
appointed), the President, any Vice-President, the Secretary or any two
directors.
Except as hereinabove provided in this Section 3.5, all meetings of the
Board of Directors may be held at any place within or without the State of
California that has been designated by resolution of the Board of Directors as
the place for the holding of regular meetings, or by written consent of all
directors. In the absence of such designation, meetings of the Board of
Directors shall be held at the principal executive office of the corporation.
Special meetings of the Board of Directors may be held either at a place so
designated or at the principal executive office of the corporation.
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Members of the Board of Directors may participate in a meeting through use
of conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another. Participation in a
meeting as permitted in the preceding sentence constitutes presence in person at
such meeting.
Section 3.6 Notice of Special Meetings.
--------------------------
Notice of the time and place of special meetings shall be delivered to each
director personally or by telephone (including a voice messaging system or other
system or technology designed to record and communicate messages), telegram,
facsimile, electronic mail or other electronic means. Alternatively, notice may
be sent by first-class mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone (including a voice messaging system or
other system or technology designed to record and communicate messages),
telegram, facsimile, electronic mail or other electronic means, it shall be
delivered at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
Section 3.7 Waiver of Notice.
----------------
Notice of a meeting need not be given to any director who, signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement,.the lack of notice to such
director. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meetings. A waiver need
not specify the purpose of the meeting.
Section 3.8 Action at a Meeting: Quorum and Required Vote.
---------------------------------------------
Presence of a majority of the authorized number of directors at a meeting
of the Board of Directors constitutes a quorum for the transaction of business,
except as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present is the act of the Board of Directors, unless a greater number, or the
same number after disqualifying one or more directors from voting, is required
by law, by the Articles of Incorporation, or by these Bylaws. A meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for such meeting.
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<PAGE>
Section 3.9 Action Without a Meeting.
------------------------
Any action required or permitted to be taken by the Board of Directors may
be taken without a meeting, if all members of the Board of Directors shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors. Such action by written consent shall have the same force
and effect as a unanimous vote of such directors.
Section 3.10 Adjourned Meeting and Notice.
----------------------------
A majority of the directors present, whether or not a quorum is present,
may adjourn any meeting to another time and place. If the meeting is adjourned
for more than twenty-four (24) hours, notice of any adjournment to another time
or place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of the adjournment.
Section 3.11 Fees and Compensation.
---------------------
Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.
Section 3.12 Appointment of Executive and Other Committees.
---------------------------------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the Board of
Directors. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. The appointment of members or alternate members of a
committee requires the vote of a majority of the authorized number of directors.
Any such committee, to the extent provided in the resolution of the Board of
Directors or in these Bylaws, shall have all the authority of the Board of
Directors, except with respect to:
(a) The approval of any action for which the General Corporation Law also
requires shareholders' approval or approval-of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or in any
committee.
(c) The fixing of compensation of the directors for serving on the Board
of Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new Bylaws.
(e) The amendment or repeal of any resolution of the Board of Directors
that by its express terms is not so amendable or repealable.
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<PAGE>
(f) A distribution to the shareholders of the corporation, except at a
rate, in a periodic amount or within a price range determined by the Board of
Directors.
(g) The appointment of other committees of the Board of Directors or the
members thereof.
The provisions of Sections 3.5 through 3.10 of these Bylaws apply also to
committees of the Board of Directors and action by such committees, mutatis
-------
mutandis (with the necessary changes having been made in the language thereof).
- --------
ARTICLE IV
Officers
Section 4.1 Officers.
--------
The officers of the corporation shall consist of the Chief Executive
Officer, the President, the Secretary and the Chief Financial Officer, and each
of them shall be appointed by the Board of Directors. The corporation may also
have a Chairman of the Board, one or more Vice-Presidents, a Controller, one or
more Assistant Secretaries, and such other officers as may be appointed by the
Board of Directors, or with authorization from the Board of Directors by the
President. The order of the seniority of the Vice Presidents shall be in the
order of their nomination, unless otherwise determined by the Board of
Directors. Any two or more of such offices may be held by the same person. The
Board of Directors may appoint, and may empower the President to appoint, such
other Officers as the business of the corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
All officers of the corporation shall hold office from the date appointed
to the date of the next succeeding regular meeting of the Board of Directors
following the meeting of shareholders at which the Board of Directors is
elected, and until their successors are elected; provided that, subject to the
rights, if any, of an officer under any contract of employment, all officers, as
well as any other employee or agent of the corporation, may be removed at any
time at the pleasure of the Board of Directors, or, except in the case of an
officer chosen by the Board of Directors, by any officer upon whom such power of
removal may be conferred by the Board of Directors, and upon the removal,
resignation, death or incapacity of any officer, the Board of Directors or the
President, in cases where he or she has been vested by the Board of Directors
with power to appoint, may declare such office vacant and fill such vacancy.
Nothing in these Bylaws shall be construed as creating any kind of contractual
right to employment with the corporation.
Any officer may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the corporation, without
prejudice, however, to the rights, if any, of the corporation under any contract
to which such officer is a party. Any such resignation shall take effect
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at the date of the receipt of such notice or at any later time specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
The salary and other compensation of the officers shall be fixed from time
to time by resolution of or in the manner determined by the Board of Directors.
Section 4.2 The Chairman of the Board.
-------------------------
The Chairman of the Board (if there be such an officer appointed) shall,
when present, preside at all meetings of the Board of Directors and shall
perform all the duties commonly incident to that office. The Chairman of the
Board shall have authority to execute in the name of the corporation bonds,
contracts, deeds, leases and other written instruments to be executed by the
corporation (except where by law the signature of the President is required),
and shall perform such other duties as the Board of Directors may from time to
time determine.
Section 4.3 The Chief Executive Officer.
---------------------------
Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an officer, the Chief
Executive Officer of the corporation shall, subject to the control of the Board
of Directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
shareholders and, in the absence or nonexistence of a Chairman of the Board, at
all meetings of the Board of Directors. He shall have the general powers and
duties of management usually vested in the Chief Executive Officer of a
corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
Section 4.4 The President.
-------------
The President of the corporation shall exercise and perform such powers and
duties as may from time to time be assigned to him by the Board of Directors or
as may be prescribed by these Bylaws. The President shall have authority to
execute in the name of the corporation bonds, contracts, deeds, leases and other
written instruments to be executed by the corporation. In the absence of the
Chief Executive Officer, he shall preside at all meetings of the shareholders
and, in the absence or nonexistence of a Chairman of the Board or the Chief
Executive Officer, at all meetings of the Board of Directors and shall perform
such other duties as the Board of Directors may from time to time determine..
Section 4.5 Vice Presidents.
---------------
The Vice-Presidents (if there be such officers appointed), in the order of
their seniority (unless otherwise established by the Board of Directors), may
assume and perform the duties of the President in the absence or disability of
the President or whenever the office of the President is vacant. The Vice-
Presidents shall have such titles, perform such other duties, and have such
other powers as the Board of Directors, the President or these Bylaws may
designate from time to time.
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Section 4.6 The Secretary.
-------------
The Secretary shall record or cause to be recorded, and shall keep or cause
to be kept, at the principal executive office and such other place as the Board
of Directors may order, a book of minutes of actions taken at all meetings of
directors and committees thereof and of shareholders, with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings
thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent, a share register or
a duplicate share register in a form capable of being converted into written
form, showing the names of the shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board of Directors and committees thereof
required by these Bylaws or by law to be given, and shall have such other powers
and perform such other duties as may be prescribed by the Board of Directors or
by these Bylaws.
The President may direct any Assistant Secretary to assume and perform the
duties of the Secretary in the absence or disability of the Secretary, and each
Assistant Secretary shall perform such other duties and have such other powers
as the Board of Directors or the President may designate from time to time.
Section 4.7 The Chief Financial Officer.
---------------------------
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct accounts of the properties and business
transactions of the corporation. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. The Chief Financial Officer shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the Chief Executive Officer, President and directors,
whenever they request it, an account of all of the Chief Financial Officer's
transactions as Chief Financial Officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these Bylaws.
Section 4.8 The Controller.
--------------
The Controller (if there be such an officer appointed) shall be responsible
for the establishment and maintenance of accounting and other systems required
to control and account for the assets of the corporation and provide safeguards
therefor, and to collect information required for management
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purposes, and shall perform such other duties and have such other powers as the
Board of Directors or the President may designate from time to time. The
President may direct any Assistant Controller to assume and perform the duties
of the Controller, in the absence or disability of the Controller, and each
Assistant Controller shall perform such other duties and have such other powers
as the Board of Directors, the Chairman of the Board (if there be such an
officer appointed) or the President may designate from time to time.
ARTICLE V
Execution of Corporate Instruments, Ratification, Voting of Stocks Owned by the
Corporation and Record Date for Purposes Other than Notice and Voting
Section 5.1 Execution of Corporate Instruments.
----------------------------------
In its discretion, the Board of Directors may determine the method and
designate the signatory officer or officers or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law,-and such execution
or signature shall be binding upon the corporation. Unless so authorized or
ratified by the Board of Directors or within the agency power of an officer,
agent or employee , no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the corporation, or in special accounts of the corporation, shall be
signed by such person or persons as the Board of Directors shall authorize to do
so.
Section 5.2 Ratification by Shareholders.
----------------------------
In its discretion, the Board of Directors may submit any contract or act
for approval or ratification of the shareholders at any annual meeting of
shareholders, or at any special meeting of shareholders called for that purpose;
and any contract or act that shall be approved or ratified by the holders of a
majority of the voting power of the corporation shall be as valid and binding
upon the corporation and upon the shareholders thereof as though approved or
ratified by each and every shareholder of the corporation, unless a greater vote
is required by law for such purpose.
Section 5.3 Voting of Stocks Owned by the Corporation.
-----------------------------------------
All stock of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized to do so by
resolution of the Board of Directors, or in the absence of such authorization,
by the Chairman of the Board (if there be such an officer appointed), the Chief
Executive Officer, the President or any Vice-President, or by any other person
authorized to do so by the Chairman of the Board, the President or any Vice
President.
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Section 5.4 Record Date for Purposes Other than Notice and Voting.
------------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
ARTICLE VI
Annual and Other Reports
Section 6.1 Reports to Shareholders.
-----------------------
The Board of Directors of the corporation shall cause an annual report to
be sent to the shareholders not later than 120 days after the close of the
fiscal year, and at least fifteen (15) days (or, if sent by third-class mail,
thirty-five (35) days) prior to the annual meeting of shareholders to be held
during the next fiscal year. This report shall contain a balance sheet as of
the end of that fiscal year and an income statement and statement of changes in
financial position for that fiscal year, accompanied by any report thereon of
independent accountants or, if there is no such report, the certificate of an
authorized officer of the corporation that the statements were prepared without
audit from the books and records of the corporation. This report shall also
contain such other matters as required by Section 1501(b) of the General
Corporation Law, unless the corporation is subject to the reporting requirements
of Section 13 of the Securities Exchange Act of 1934, and is not exempted
therefrom under Section 12(g)(2) thereof. As long as the corporation has less
than 100 holders of record of its shares (determined as provided in Section 605
of the General Corporation Law), the foregoing requirement of an annual report
is hereby waived.
If no annual report for the last fiscal year has been sent to shareholders,
the corporation shall, upon the written request of any shareholder made more
than 120 days after the close of such fiscal year, deliver or mail to the person
making the request within thirty (30) days thereafter the financial statements
for such year as required by Section 1501(a) of the General Corporation Law. A
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shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of the corporation may make a written request to
the corporation for an income statement of the corporation for the three-month,
six-month or nine-month period of the current fiscal year ended more than thirty
(30) days prior to the date of the request and a balance sheet of the
corporation as of the end of such period and, in addition, if no annual report
for the last fiscal year has been sent to shareholders, the annual report for
the last fiscal year, unless such report has been waived under these Bylaws.
The statements shall be delivered or mailed to the person making the request
within thirty (30) days thereafter. A copy of any such statements shall be kept
on file in the principal executive office of the corporation for twelve (12)
months, and they shall be exhibited at all reasonable times to any shareholder
demanding an examination of the statements, or a copy shall be mailed to the
shareholder.
The quarterly income statements and balance sheets referred to in this
Section shall be accompanied by the report thereon, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
ARTICLE VII
Shares of Stock
Every holder of shares in the corporation shall be entitled to have a
certificate signed in the name of the corporation by the Chairman of the Board
(if there be such officer appointed) or the President or a Vice-President and by
the Chief Financial Officer or the Secretary or any Assistant Secretary,
certifying the number of shares and the class or series of shares owned by the
shareholder. Any of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.
Any such certificate shall also contain such legends or other statements as
may be required by Sections 417 and 418 of the General Corporation Law, the
Corporate Securities Law of 1968, federal or other state securities laws, and
any agreement between the corporation and the issuee of the certificate.
Certificates for shares may be issued prior to full payment, under such
restrictions and for such purposes as the Board of Directors or these Bylaws may
provide; provided, however, that the certificate issued to represent any such
partly paid shares shall state on the face thereof the total amount of the
consideration to be paid therefor, the amount remaining unpaid and the terms of
payment.
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<PAGE>
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and cancelled at the same time; provided,
however, that a new certificate will be issued without the surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction, or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirement imposed by the corporation. In the event of the
issuance of a new certificate, the rights and liabilities of the corporation,
and of the holders of the old and new certificates, shall be governed by the
provisions of Sections 8104 and 8405 of the California Commercial Code.
ARTICLE VIII
Inspection of Corporate Records
Section 8.1 General Records.
---------------
The accounting books and records and the minutes of proceedings of the
shareholders, the Board of Directors and committees thereof of the corporation
and any subsidiary of the corporation shall be open to inspection upon the
written demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts. Minutes
of proceedings of the shareholders, Board, and committees thereof shall be kept
in written form. Other books and records shall be kept either in written form
or in any other form capable of being converted into written form.
A shareholder or shareholders holding at least five percent (5%) in the
aggregate of the outstanding voting shares of the corporation or who hold at
least one percent (1%) of such voting shares and have filed a Schedule 14B with
the United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have (in person, or by agent or attorney) the
right to inspect and copy the record of shareholders, names and addresses and
shareholdings during usual business hours upon five (5) business days, prior
written demand upon the corporation or to obtain from the transfer agent for the
corporation, upon written demand and upon the tender of its usual charges for
such list, a list of the shareholders' names and addresses, who are entitled to
vote for the election of directors, and their shareholdings as of the most
recent record date for which it has been compiled or as of a date specified b
the shareholder subsequent to the date of demand. The list shall be made
available on or before the later of five (5) business days after the demand is
received or the date specified therein as the date as of which the list is to be
compiled.
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Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and its subsidiaries. Such
inspection by a director may be made in person or by agent or attorney, and the
right of inspection includes the right to copy and make extracts.
Section 8.2 Inspection of Bylaws.
--------------------
The corporation shall keep at its principal executive office in California,
or if its principal executive office is not in California, then at its principal
business office in California (or shall otherwise provide upon written request
of any shareholder if it has no such office in California) the original or a
copy of these Bylaws as amended to date, which shall be open to inspection by
the shareholders at all reasonable times during office hours.
ARTICLE IX
Indemnification of Officers, Directors, Employees
and Agents
Section 9.1 Indemnification of Directors and Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law, indemnify each of its directors and officers
against expenses (as defined in Section 317(a) of the General Corporation Law),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was a director or
officer of the corporation. For purposes of this Article IX, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
Section 9.2 Indemnification of Others.
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an employee or
agent of the corporation. For purposes of this Article IX, an "employee" or
"agent" of the corporation includes any person (other than a director or
officer) (i) who is or was an employee or agent of the corporation, (ii) who is
or was serving at the request of the corporation as an employee or agent of
another corporation, part-
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nership, joint venture, trust or other enterprise, or (iii) who was an employee
or agent of a corporation which was a predecessor corporation of the corporation
or of another enterprise at the request of such predecessor corporation.
Section 9.3 Payment of Expenses in Advance.
------------------------------
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 9.1 or for which
indemnification is permitted pursuant to Section 9.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an under
taking by or on behalf of the indemnified party to repay such amount if it shall
ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article IX.
Section 9.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
Section 9.5 Insurance Indemnification.
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article IX.
Section 9.6 Conflicts.
---------
No indemnification or advance shall be made under this Article IX, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(1) That it would be inconsistent with a provision of the
Articles of Incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
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Section 9.7 Indemnity Agreements.
--------------------
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the corporation, or any other person who
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including employee benefit plans, or any person who was a
director, officer employee or agent of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation, providing for indemnification rights equivalent to or,
if the Board of Directors so determines and to the extent permitted by
applicable law, greater than, those provided for in this Article IX.
Section 9.8 Amendment, Repeal or Modification.
---------------------------------
Any amendment, repeal or modification of any provision of this Article IX
shall not adversely affect any right or protection of a director or agent of the
corporation existing at the time of such amendment, repeal or modification.
ARTICLE X
Amendments
Section 10.1 Power of Shareholders.
---------------------
New bylaws may be adopted or these Bylaws may be amended or repealed by the
affirmative vote of a majority of the outstanding shares entitled to vote,
except as otherwise provided by law or by the Articles of Incorporation.
Section 10.2 Power of Directors.
------------------
Subject to the right of shareholders as provided in Section 10.1 of this
Article X to adopt, amend or repeal these Bylaws, these Bylaws (other than a
bylaw or amendment changing the authorized number of directors (except to fix
the authorized number of directors pursuant to a bylaw providing for a variable
number of directors) may be adopted, amended or repealed by the Board of
Directors.
ARTICLE XI
Definitions
Unless the context otherwise requires, the general provisions, rules of
construction and definitions contained in the General Corporation Law as amended
from time to time shall govern the construction of these Bylaws. Without
limiting the generality of the foregoing, the masculine gender
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includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the term "person" includes a
corporation as well as a natural person.
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EXHIBIT 4.3
INVESTORS' RIGHTS AGREEMENT
This Investors' Rights Agreement (the "Agreement") is entered into as of
the 11th day of June, 1993, by and among International Network Services, a
California corporation (the "Company"), Donald K. McKinney and Rebecca McDaniel
McKinney, Trustees of the McKinney Family Trust, UAD June 2, 1986 (collectively,
"McKinney"), as purchaser of the Company's Series A Preferred Stock ("Series A
Stock"), and the purchasers of the Company's series B Preferred Stock ("Series B
Stock") set forth on Exhibit A of that certain Series B preferred Stock Purchase
Agreement of even date herewith (the "Purchase Agreement"). The purchasers of
the Series B Stock shall be referred to hereinafter as the "Purchasers" and each
individually as a "Purchaser." The Series A Stock and the Series B Stock, taken
together, shall be referred to as the "Preferred Stock."
RECITALS
--------
WHEREAS; As a condition to purchasing shares of Preferred Stock, the
Purchasers and McKinney have requested that the Company extend to them
registration rights, information rights and a right of first refusal as set
forth below.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement and in the
Purchase Agreement, the parties mutually agree as follows:
I. GENERAL
-------
1.1 Definitions. As used in this Agreement the following terms shall have
-----------
the following respective meanings:
"Holder" means any person owning of record Registrable Securities or any
assignee of record of such Registrable Securities in accordance with Section
2.10 hereof.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
"Registrable Securities" means (i) Common Stock acquired from the Company
and held by McKinney, (ii) Common Stock of the Company issued or issuable upon
conversion of the Shares; and (iii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, such above-described securities.
Notwithstanding the foregoing, Registrable Securities shall not include any
securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the transferor's
rights under Article II of this Agreement are not assigned.
"Registrable Securities then outstanding" shall be the number of shares
determined by calculating the total number of shares of the Company's Common
Stock that are Registrable Securities and either
<PAGE>
(1) are then issued and outstanding or (2) are issuable pursuant to then
exercisable or convertible securities.
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale.
"Shares" shall mean all outstanding shares of the Company's Preferred
Stock, measured as of the completion of the transactions contemplated by this
Agreement.
"Form S-3" means such form under the Securities Act as in effect on the
date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"SEC" or "Commission" means the Securities and Exchange Commission.
II. REGISTRATION, RESTRICTIONS ON TRANSFER
--------------------------------------
2.1 Restrictions on Transfer.
------------------------
(a) Each Holder agrees not to make any disposition of all or any
portion of the Shares (or the Common Stock issuable upon the conversion thereof)
unless and until the transferee has agreed in writing for the benefit of the
Company to be bound by this Section 2.1, provided and to the extent such
Sections are then applicable and:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(ii) (A) Such Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (B) if reasonably
requested by the Company, such Holder shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such shares under the Securities
Act. It is agreed that the Company will
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<PAGE>
not require Opinions of counsel for transactions made pursuant to Rule 144
except in unusual circumstances.
(iii) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a Holder which is (A) a partnership to its partners in
accordance with partnership interests, or (B) to the Holder's family member or
trust for the benefit of an individual Holder, provided the transferee will be
subject to the terms of this Section 2.1 to the same extent as if he were an
original Holder hereunder.
(b) Each certificate representing Shares shall (unless otherwise
permitted by the provisions of the Agreement) be stamped or otherwise imprinted
with a legend substantially similar to the following (in addition to any legend
required under applicable state securities laws or as provided elsewhere in the
Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL
OR BASED ON OTHER WRITTEN EVIDENCE IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any holder thereof if the holder shall have
obtained an opinion of counsel (which counsel may be counsel to the Company)
reasonably acceptable to the Company to the effect that the securities proposed
to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable state
securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 Demand Registration.
-------------------
2.2.1 Subject to the conditions of this Section 2.2, if the Company
shall receive at any time after June __, 1995 a written request from the Holders
of more than fifty percent (50%) of the Registrable Securities then outstanding
(the "Initiating Holders") that the Company file a registration statement under
the Securities Act covering the registration of Registrable Securities having an
aggregate offering price to the public, in excess of $7,500,000, then the
Company shall, within thirty (30) days of the receipt thereof, give written
notice of such request to all Holders, and subject to the limitations of Section
2.2.2, effect, as soon as practicable, the registration under the Securities Act
of all Registrable Securities that the Holders request to be registered.
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2.2.2 If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 2.2
and the Company shall include such information in the written notice referred to
in Section 2.2.1. In such event, the right of any Holder to include his
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders (which underwriter or
underwriters shall be reasonably acceptable to the Company). Notwithstanding
any other provision of this Section 2.2, if the underwriter advises the Company
in writing that marketing factors require, a limitation of the number of
securities to be underwritten (including Registrable Securities) then the
Company shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares that may be
included in the underwriting shall be allocated to the Holders of such
Registrable Securities on a pro rata basis based on the number of Registrable
Securities held by all such Holders (including the Initiating Holders). Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from the registration.
2.2.3 The Company shall not be obligated to effect more than two (2)
registrations pursuant to this Section 2.2.
2.2.4 The Company shall not be required to effect a registration
pursuant to this Section 2.2 during the period starting with the date of filing
of, and ending on the date one hundred eighty (180) days following the effective
date of the registration statement pertaining to the initial public offering of
the Company's common stock (the "Initial Offering"), provided that the Company
is making reasonable and good faith efforts to cause such registration statement
to become effective. In addition, the Company shall not be required to effect a
registration pursuant to this Section 2.2 if within thirty (30) days of receipt
of a written request from Initiating Holders pursuant to Section 2.2.1, the
Company gives notice to the Holders of the Company's intention to file a
registration statement for its Initial Offering within ninety (90) days.
2.2.5 Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 2.2, a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than ninety (90) days after receipt of the request of
the Initiating Holders; provided that such right to delay a request shall be
exercised by the Company no more than twice in any one-year period.
2.3 Piggyback Registrations. The Company shall notify all Holders of
-----------------------
Registrable Securities in writing at least thirty (30) days prior to the filing
of any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration
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<PAGE>
statements relating to secondary offerings of securities of the Company, but
excluding registration statements relating to employee benefit plans and
corporate reorganizations) and will afford each such Holder an opportunity to
include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within twenty (20) days after receipt of the above-described notice from
the Company, so notify the Company in writing. Such notice shall state the
intended method of disposition of the Registrable Securities by such Holder. If
a Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
2.3.1 Underwriting. If the registration statement under which the
------------
Company gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder to be included in a registration pursuant to this
Section 2.3 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of the
Agreement, if the underwriter determines in good faith that marketing factors
require a limitation of the number of shares to be underwritten, the number of
shares that may be included in the underwriting shall be allocated, first, to
the Company; second, to the Holders on a pro rata basis based on the total
number of Registrable Securities held by the Holders; and third, to any
shareholder of the Company (other than a Holder) on a pro rata basis. No such
reduction shall reduce the securities being offered by the Company for its own
account to be included in the registration and underwriting, except that in no
event shall the amount of securities of the selling Holders included in the
registration be reduced below twenty-five percent (25%) of the total amount of
securities included in such registration, unless such offering is the Initial
Offering and such registration does not include shares of any other selling
shareholders, in which event any or all of the Registrable Securities of the
Holders may be excluded in accordance with the immediately preceding sentence.
In no event will shares of any other selling shareholder be included in such
registration which would reduce the number of shares which may be included by
Holders without the written consent of a majority of the Holders of the
Registrable Securities proposed to be sold in the offering.
2.4 Form S-3 Registration. In case the Company shall receive from any
---------------------
Holder or Holders of Registrable Securities a written request or requests that
the Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
2.4.1 promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders of Registrable
Securities; and
2.4.2 as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or
-5-
<PAGE>
such portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any other Holder or Holders joining in such request as are
specified in a written request given within fifteen (15) days after receipt of
such written notice from the Company; provided, however, that the Company shall
not be obligated to effect any such registration, qualification or compliance
pursuant to this Section 2.4: (i) if Form S-3 is not available for such offering
by the Holders, (ii) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than $500,000, (iii) if the Company shall furnish to
the Holders a certificate signed by the Chairman of the Board of Directors of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than ninety (90) days after
receipt of the request of the Holder or Holders under this Section 2.4, (iv) if
the Company has, within the twelve (12) month period preceding the date of such
request, already effected two (2) registrations on Form S-3 for the Holders
pursuant to this Section 2.4, or (v) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
2.4.3 Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All such Registration Expenses incurred in
connection with registrations requested pursuant to this Section 2.4 after the
first two (2) registrations shall be paid by the selling Holders pro rata in
proportion to the number of shares sold by each.
2.5 Expenses of Registration. Except as provided in Section 2.4.3, all
------------------------
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2, Section 2.3 or Section 2.4
herein shall be borne by the Company. All Selling Expenses incurred in
connection with any registrations hereunder, shall be borne by the holders of
the securities so registered pro rata on the basis of the number of shares so
registered. The Company shall not, however, be required to pay for expenses of
any registration proceeding begun pursuant to Section 2.2 or 2.4, the request of
which has been subsequently withdrawn by the Initiating Holders unless (a) the
withdrawal is based upon material adverse information concerning the Company of
which the Initiating Holders were not aware at the time of such request or (b)
the Holders of a majority of Registrable securities agree to forfeit their right
to one requested registration pursuant to Section 2.2 or Section 2.4 (in which
event such right shall be forfeited by all Holders). If the Holders are
required to pay the Registration Expenses, such expenses shall be borne by the
holders of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested. If the Company is required to pay the Registration Expenses of a
withdrawn offering pursuant to Section 2.5(a), then the Holders shall not
forfeit their rights pursuant to Section 2.2 or Section 2.4 to a demand
registration.
2.6 Obligations of the Company. Whenever required to effect the
--------------------------
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
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<PAGE>
2.6.1 Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to ninety (90) days.
2.6.2 Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
2.6.3 Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
2.6.4 Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
2.6.5 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
2.6.6 Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
2.6.7 Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable Securities
are delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public
-7-
<PAGE>
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities.
2.7 Termination of Registration Rights. All registration rights granted
----------------------------------
under this Article II shall terminate and be of no further force and effect
seven (7) years after the date following the Company's Initial Offering.
2.8 Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article II.
2.9 Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under Sections 2.2, 2.3 or 2.4:
2.9.1 To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, officers and directors of each
Holder, any underwriter (as defined in the Securities Act) for such Holder and
each person, if any, who controls such Holder or underwriter within the meaning
of the Securities Act or the Securities Exchange Act of 1934, as amended, (the
"1934 Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the 1934 Act
or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation") by
the Company: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the Statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any state securities law or any
rule or regulation promulgated under the Securities Act, the 1934 Act or any
state securities law in connection with the offering covered by such
registration statement; and the Company will reimburse each such Holder,
partner, officer or director, underwriter or controlling person for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this Section 2.9.1 shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
2.9.2 To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers, each person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter and any other Holder selling securities
under such registration statement or any of such other Holder's partners,
directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or
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<PAGE>
several) to which the Company or any such director, officer, controlling person,
underwriter or other such Holder, or partner, director, officer or controlling
person of such other Holder may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder under an instrument duly executed by such Holder and
stated to be specifically for use in connection with such registration; and each
such Holder will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer, controlling person, underwriter or
other Holder, or partner, officer, director or controlling person of such other
Holder in connection with investigating or defending any such loss, claim,
damage, liability or action if it is judicially determined that there was such a
Violation; provided, however, that the indemnity agreement contained in this
Section 2.9.2 shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld;
provided further, that in no event shall any indemnity under this Section 2.9
exceed the gross proceeds from the offering received by such Holder.
2.9.3 Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.9.
2.9.4 If the indemnification provided for in this Section 2.9 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to herein,
the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties'
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<PAGE>
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
2.9.5 The foregoing indemnity agreements of the Company and Holders
are subject to the condition that, insofar as they relate to any Violation made
in a preliminary prospectus but eliminated or remedied in the amended prospectus
on file with the SEC at the time the registration statement in question becomes
effective or the amended prospectus filed with the SEC pursuant to SEC Rule
424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus was furnished to the
indemnified party and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.
2.9.6 The obligations of the Company and Holders under this Section
2.9 shall survive the completion of any offering of Registrable Securities in a
registration statement, and otherwise.
2.10 Assignment of Registration Rights. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant to this Article II may be assigned by a
Holder to a transferee or assignee of Registrable Securities; provided, however,
that no such transferee or assignee shall be entitled to registration rights
under Sections 2.2, 2.3 or 2.4 hereof unless it acquires at least one hundred
thousand (100,000) shares of Registrable Securities (as adjusted for stock
splits and combinations) and the Company shall, within twenty (20) days after
such transfer, be furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned. Notwithstanding the foregoing, rights
to cause the Company to register securities may be assigned to any subsidiary,
parent, general partner or limited partner of a Holder.
2.11 Amendment of Registration Rights. Any provision of this Article II
--------------------------------
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at a majority of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 2. 11 shall be binding upon each Holder and the Company. By acceptance
of any benefits under this Article II, Holders of Registrable Securities hereby
agree to be bound by the provisions hereunder.
2.12 Limitation on Subsequent Registration Rights. After the date of this
--------------------------------------------
Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company that
would permit such holder to require that the Company register any securities
held by such holder, or that would permit such holder to include shares in any
registration under Section 2.2, 2.3 or 2.4 of this Agreement unless the
inclusion of such holder's shares would in no way reduce the number of shares
includable in any such registration by any Holder.
2.13 "Market Stand-Off" Agreement. If requested by the Company and an
----------------------------
underwriter of Common Stock (or other securities) of the Company, each Purchaser
or his permitted assignee holding more than one percent (1%) of the Company's
voting securities shall not sell or otherwise transfer or dispose of any Common
Stock (or other securities) of the Company held by such Purchaser (other than
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<PAGE>
those included in the registration) for a period specified by the underwriters
not to exceed one hundred eighty (180) days following the effective date of a
mention statement of the Company filed under the Securities Act, provided that:
(i) such agreement shall apply only to the Company's Initial
Offering; and
(ii) all officers and directors of the Company enter into similar
agreements.
The obligations described in this Section 2.13 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose stop-
transfer instructions with respect to the shares (or securities) subject to the
foregoing restriction until the end of said one hundred eighty (180) day period.
III. COVENANTS OF THE COMPANY
------------------------
3.1 Basic Financial Information and Reporting.
-----------------------------------------
3.1.1 The Company will maintain true books and records of account in
which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
3.1.2 As soon as practicable after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, the Company will furnish
each Purchaser a consolidated balance sheet of the Company, as at the end of
such fiscal year, and a consolidated statement of income and a consolidated
statement of cash flows of the Company, for such year, all prepared in
accordance with generally accepted accounting principles and setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail. Such financial statements shall be accompanied by a report
and opinion thereon by independent public accountants of national standing
selected by the Company's Board of Directors.
3.1.3 The Company will furnish each Purchaser, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within forty-five
(45) days thereafter, a consolidated balance sheet of the Company as of the end
of each such quarterly period, and a consolidated statement of income and a
consolidated statement of cash flows of the Company for such period and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made.
3.1.4 So long as a Purchaser (with its affiliates) shall own not
less than five hundred thousand (500,000) shares of Registrable Securities (a
"Major Purchaser"), the Company will furnish each
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such Major Purchaser (i) at least thirty (30) days prior to the beginning of
each fiscal year an annual budget and operating plans for such fiscal year, and
(ii) within thirty (30) days after the end of each month, an unaudited balance
sheet and statements of income and cash flows, prepared in accordance with
generally accepted accounting principles, with the exception that no notes need
be attached to such statements and year-end audit adjustments may not have been
made, but such statement shall set forth applicable budget figures and variances
from budget.
3.2 Inspection Rights. Each Major Purchaser shall have the right to visit
-----------------
and inspect any of the properties of the Company or any of its subsidiaries, and
to discuss the affairs, finances and accounts of the Company or any of its
subsidiaries with its officers, all at such reasonable times and as often as may
be reasonably requested; provided, however, that the Company shall not be
obligated under this Section 3.2 with respect to a competitor of the Company or
with respect to information which the Board of Directors determines in good
faith is confidential and should not, therefore, be disclosed.
3.3 Confidentiality of Records. Each Purchaser agrees to use, and to use
--------------------------
its best efforts to insure that its authorized representatives use, the same
degree of care as such Purchaser uses to protect its own confidential
information to keep confidential any information furnished to it which the
Company identifies as being confidential or proprietary (so long as such
information is not in the public domain), except that such Purchaser may
disclose such proprietary or confidential information to any partner, subsidiary
or parent of such Purchaser for the purpose of evaluating its investment in the
Company as long as such partner, subsidiary or parent is advised of the
confidentiality provisions of this Section 3.3.
3.4 Reservation of Common Stock. The Company will at all times reserve
---------------------------
and keep available, solely for issuance and delivery upon the conversion of the
Preferred Stock, all Common Stock issuable from time to time upon such
conversion.
3.5 Stock Vesting. Unless otherwise approved by the Board of Directors,
-------------
all stock and stock equivalents issued after the date of this Agreement to
employees, directors and consultants will be subject to four-year vesting with
no vesting until the end of the first year and monthly vesting thereafter. The
repurchase option, to which all unvested shares of stock shall be subject, shall
provide that upon termination of the employment of the shareholder, with or
without cause, the Company or its assignee (to the extent permissible under
applicable securities laws) retains the option to repurchase at cost any
unvested shares held by such shareholder.
3.6 Key Man Insurance. Subject to the approval of the Board of Directors,
-----------------
the Company will use its best efforts to obtain and maintain in full force and
effect term life insurance in the amount of one million ($1,000,000) dollars on
the life of Don McKinney naming the Company as beneficiary.
3.7 Proprietary Information and Inventions Agreement. The Company shall
------------------------------------------------
require all employees to execute and deliver a Proprietary Information and
Inventions Agreement substantially in the form attached to the Purchase
Agreement as Exhibit H.
3.8 Real Property Holding Corporation. The Company covenants that it will
---------------------------------
operate in a manner such that it will not become a "United States real property
holding corporation" as that term is
-12-
<PAGE>
defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended,
and the regulations thereunder ("FIRPTA"). The Company agrees to make
determinations as to its status as a USRPHC, and will file statements concerning
those determinations with the Internal Revenue Service, in the manner and at the
times required under Reg. (S) 1.897-2(h), or any supplementary or successor
provision thereto. Within 30 days of a request from an Purchaser or any of its
partners, the Company will inform the requesting party, in the manner set forth
in Reg. (S) 1.897-2(h)(1)(iv) or any supplementary or successor provision
thereto, whether that party's interest in the Company constitutes a United
States real property interest (within the meaning of Internal Revenue Code
Section 897(c)(1) and the regulations thereunder) and whether the Company has
provided to the Internal Revenue Service all required notices as to its USRPHC
status.
3.9 Audit Committee. The Company covenants that it shall take all
---------------
appropriate action to create and maintain an Audit Committee consisting of two
members of the Board of Directors. Immediately following the Closing, the
members of the Audit Committee shall be Lawrence Finch and one outside director
approved by the Company and a majority of the holders of the Company's Series B
Stock.
3.10 Compensation Committee. The Company covenants that it shall take all
----------------------
appropriate action to create and maintain a Compensation Committee consisting of
two members of the Board of Directors. Immediately following the Closing, the
members of the Compensation Committee shall be Lawrence Finch and McKinney. The
Company shall not (i) pay any employee annual compensation (including salary,
stock, loans and/or other perquisites) which exceeds $75,000, or (ii) enter into
any transaction with a relative or "affiliate" (as such term is defined under
the Securities Act) of any member of the Company's management, without the
unanimous consent of the Compensation Committee.
3.11 Termination of Covenants. All covenants of the Company contained in
------------------------
Article III of this Agreement shall expire and terminate as to each Purchaser
after the time of effectiveness of the Company's first firm commitment
underwritten public offering registered under the Securities Act.
IV. RIGHTS OF FIRST REFUSAL.
-----------------------
4.1 Subsequent Offerings. Each Major Purchaser shall have a right of
--------------------
first refusal to purchase its pro rata share of all Equity Securities, as
defined below, that the Company may, from time to time, propose to sell and
issue after the date of this Agreement, other than the Equity Securities
excluded by Section 4.6 hereof. Each Major Purchaser's pro rata share is equal
to the ratio of the number of shares of the Company's Common Stock (including
all shares of Common Stock issued or issuable upon conversion of Preferred
Stock) which such Major Purchaser is deemed to be a holder immediately prior to
the issuance of such Equity Securities to the total number of shares of the
Company's outstanding Common Stock (including all shares of Common Stock
issuable upon conversion of all outstanding shares of Preferred Stock). The term
"Equity Securities" shall mean (i) any stock or similar security of the Company,
(ii) any security convertible, with or without consideration, into any stock or
similar security (including any option to purchase such a convertible security),
(iii) any security carrying any warrant or right to subscribe to or purchase any
stock or similar security or (iv) any such warrant or right.
-13-
<PAGE>
4.2 Exercise of Rights. If the Company proposes to issue any Equity
------------------
Securities, it shall give each Major Purchaser written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. Each Major Purchaser shall have
fifteen (15) days from the giving of such notice to agree to purchase its pro
rata share of the Equity Securities for the price and upon the terms and
conditions specified in the notice by giving written notice to the Company and
stating therein the quantity of Equity Securities to be purchased.
Notwithstanding the foregoing, the Company shall not be required to offer or
sell such Equity Securities to any Major Purchaser who would cause the Company
to be in violation of applicable federal securities laws by virtue of such offer
or sale.
4.3 Issuance of Equity Securities to Other Persons. If not all of the
----------------------------------------------
Major Purchasers elect to purchase their pro rata share of the Equity
Securities, then the Company shall promptly notify in writing the Major
Purchasers who do so elect and shall offer such Major Purchasers the right to
acquire such unsubscribed shares ("Subscription Notice"). The Major Purchasers
shall have five (5) days after receipt of the Subscription Notice to notify the
Company of its election to purchase all or a portion thereof of the unsubscribed
shares. If the Major Purchasers fail to exercise in full the rights of first
refusal, the Company shall have sixty (60) days thereafter to sell the Equity
Securities in respect of which the Major Purchasers' rights were not exercised,
at a price and upon terms and conditions no more favorable to the purchasers
thereof than specified in the Company's notice to the Major Purchasers pursuant
to Section 4.2 hereof. If the Company has not sold such Equity Securities within
such ninety (90) days, the Company shall not thereafter issue or sell any Equity
Securities, without first offering such securities to the Major Purchasers in
the manner provided above.
4.4 Termination of Rights of First Refusal. The rights of first refusal
--------------------------------------
established by this Article IV shall terminate upon the closing of an
underwritten public offering of Common Stock of the Company made pursuant to an
effective registration statement under the Securities Act.
4.5 Transfer of Rights of First Refusal. The rights of first refusal of
-----------------------------------
each Major Purchaser under this Article IV may be transferred to any constituent
partner or affiliate of such Major Purchaser, to any successor in interest to
all or substantially all the assets of such Major Purchaser, or to a transferee
who acquires one hundred thousand (100,000) shares of Registrable Securities (as
adjusted for stock splits and combinations), provided, the Company must receive,
within twenty (20) days after such transfer, written notice of the name and
address of such transferee or assignee and the securities with respect to which
the rights of first refusal are being transferred.
4.6 Excluded Securities. The rights of first refusal established by this
-------------------
Article IV shall have no application to any of the following Equity Securities:
4.6.1 shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to the Company or any subsidiary, pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board;
-14-
<PAGE>
4.6.2 stock issued pursuant to any rights or agreements outstanding
as of the date of this Agreement, options and warrants outstanding as of the
date of this Agreement, and stock issued pursuant to any such rights or
agreements granted after the date of this Agreement, provided that the rights of
first refusal established by this Article IV applied with respect to the initial
sale or grant by the Company of such rights or agreements;
4.6.3 any Equity Securities issued pursuant to a merger,
consolidation, acquisition or similar business combination;
4.6.4 any Equity Securities that are issued by the Company as part of
an underwritten public offering referred to in Section 4.4 hereof;
4.6.5 shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
4.6.6 shares of Common Stock issued upon conversion of the Preferred
Stock;
4.6.7 any Equity Securities issued pursuant to any equipment leasing
arrangement, or bank financing; and
4.6.8 securities issued in a transaction with a corporation or other
third party that also involves significant other strategic business elements
such as, but not limited to, a joint marketing agreement, a computer software
development agreement or a license agreement.
V. MISCELLANEOUS.
-------------
5.1 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
5.2 Survival. The representations, warranties, covenants, and agreements
--------
made herein shall survive any investigation made by any Holder and the closing
of the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
5.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the
-15-
<PAGE>
holder of such shares in its records as the absolute owner and holder of such
shares for all purposes, including the payment of dividends or any redemption
price.
5.4 Separability. In case any provision of the Agreement shall be
------------
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.5 Amendment and Waiver.
--------------------
5.5.1 Except as otherwise expressly provided, this Agreement may be
amended or modified only upon the written consent of the Company and a majority
of the Holders of Registrable Securities.
5.5.2 Except as otherwise expressly provided, the obligations of the
Company and the rights of the Holders under this Agreement may be waived only
with the written consent of a majority of the Holders of Registrable Securities.
Except as otherwise expressly provided, the obligations of the Holders and
rights of the Holders and its rights in the Company and McKinney may be waived
only with the Company and McKinney's written consent, respectively.
5.6 Delays or Omissions . It is agreed that no delay or omission to
--------------------
exercise any right, power, or remedy accruing to any party, upon any breach,
default or noncompliance of any other party under this Agreement shall impair
any such right, power, or remedy, nor shall it be construed to be a waiver of
any such breach, default or noncompliance, or any acquiescence therein, or of
any similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any party's part of any breach, default or noncompliance under the Agreement or
any waiver on such Holder's part of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, by law, or otherwise afforded to any party hereunder, shall be
cumulative and not alternative.
5.7 Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (iii) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
party to be notified at the address as set forth on the signature pages hereof
or at such other address as such party may designate by ten (10) days advance
written notice to the other parties hereto.
5.8 Attorneys' Fees. In the event that any dispute among the parties to
---------------
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
-16-
<PAGE>
5.9 Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth in the first paragraph hereof.
COMPANY:
INTERNATIONAL NETWORK SERVICES
4701 Patrick Henry Drive, Suite 1701
Santa Clara, CA 95054
By: /s/ Donald K. McKinney
-----------------------------
President
DONALD K. MCKINNEY AND REBECCA
MCDANIEL MCKINNEY, TRUSTEES OF THE
MCKINNEY FAMILY TRUST,
UAD JUNE 2, 1986
c/o International Network Services
4701 Patrick Henry Drive, Suite 1701
Santa Clara, CA 95054
/s/ Donald K. McKinney
- -----------------------
Donald K. McKinney
/s/ Rebecca McDaniel McKinney
- ------------------------------
Rebecca McDaniel McKinney
INVESTORS' RIGHTS AGREEMENT
-18-
<PAGE>
PURCHASERS:
SIGMA PARTNERS II, L.P.
2894 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
---------------------------------------
General Partner
SIGMA ASSOCIATES II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
----------------------------------------
General Partner
SEQUOIA CAPITAL V
3000 Sand Hill Road, Building 4, Ste. 280
Menlo Park, CA 94025
BY: Sequoia Partners (F.R.)
Its General Partner
By: /s/ Douglas Leone
----------------------------------------
General Partner
INVESTORS' RIGHTS AGREEMENT
-19-
<PAGE>
SEQUOIA I TECHNOLOGY PARTNERS V
3000 Sand Hill Road, Building 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
----------------------------------------
General Partner
SEQUOIA XXIII
3000 Sand Hill Road, Building 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
----------------------------------------
General Partner
THE BOARD OF TRUSTEES OF THE
LELAND STANFORD JUNIOR UNIVERSITY
c/o Stanford University Investment Management
2770 Sand Hill Road
Menlo Park, CA 94025
By: /s/ Carol Gilmer
----------------------------------------
INVESTORS' RIGHTS AGREEMENT
-20-
<PAGE>
VERNON R. ANDERSON AND LYSBETH W.
ANDERSON, TRUSTEES OF THE
VERNON R. & LYSBETH W. ANDERSON
FAMILY TRUST, UAD 7/13/83
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Vernon R. Anderson
--------------------------------------------
Vernon R. Anderson
/s/ Lysbeth W. Anderson
--------------------------------------------
Lysbeth W. Anderson
/s/ Brenton Warren Anderson
--------------------------------------------
Brenton Warren Anderson
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Tracy S. Bloom
--------------------------------------------
Tracy S. Bloom
5168 Shady Avenue
San Jose, CA 95129
INVESTORS' RIGHTS AGREEMENT
-21-
<PAGE>
FIRST AMENDMENT TO INVESTORS' RIGHTS AGREEMENT
----------------------------------------------
This First Amendment to Investors' Rights Agreement (the "First Amendment")
is entered into as of the 1st day of July 1994 by and among International
Network Services, a California corporation (the "Company"), Donald K. McKinney
and Rebecca McDaniel McKinney, Trustees of the McKinney Family Trust, UAD June
2, 1986 (collectively, "McKinney"), as purchaser of the Company's Series A
Preferred Stock ("Series A Stock"), the purchasers of the Company's Series B
Preferred Stock ("Series B Stock") set forth on Exhibit A of that certain Series
B Preferred Stock Purchase Agreement (the "Series B Purchase Agreement"), the
purchasers of the Company's Series C Preferred Stock ("Series C Stock") set
forth on Exhibit A of that certain Series C Preferred Stock Purchase Agreement
of even date herewith (the "Series C Purchase Agreement"), Cisco Systems as a
purchaser of a warrant to purchase 1,315,789 shares of Series C Preferred Stock
(the "Cisco Warrant") pursuant to the Series C Purchase Agreement, the
purchasers of the warrants to purchase Common Stock (the "Common Warrants")
pursuant to that certain Note and Warrant Purchase Agreement dated as of March
15, 1994, (the "Note and Warrant Purchase Agreement") and Imperial Bank as a
purchaser of a warrant to purchase 63,211 shares of Series C Preferred Stock
(the "Bank Warrant"). The purchasers of the Series B Stock, the Series C Stock,
the Cisco Warrant, the Common Warrants and the Bank Warrant shall be referred to
hereinafter as the "Purchasers" and each individually as a "Purchaser." The
Series A Stock, the Series B Stock and Series C Stock, taken together, shall be
referred to as the "Preferred Stock.
RECITALS
--------
A. The Company, McKinney and the Series B Purchasers previously entered
into the Investors' Rights Agreement to provide McKinney and the Series B
Purchasers with certain registration rights, information rights and a right of
first refusal.
B. The Company is entering into a Series C Purchase Agreement as of the
date hereof pursuant to which the Company is issuing Series C Stock and is
obligated to provide the Purchasers with rights under the Investors' Rights
Agreement.
C. The Company is issuing the Cisco Warrant to Cisco Systems ("Cisco")
and is obligated to provide Cisco with rights under the Investors' Rights
Agreement.
D. The Company is issuing the Common Warrants to purchase shares of the
Company's Common Stock and is obligated to provide purchasers of these Common
Warrants with rights under the Investors' Rights Agreement.
E. The Company is issuing the Bank Warrant to Imperial Bank and is
obligated to provide Imperial Bank with rights under the Investors' Rights
Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this First Amendment, the
Series C Purchase Agreement, the Note and Warrant Purchase Agreement, and the
Imperial Bank Warrant, the parties mutually agree as follows:
1. The definition of "Purchaser" shall be deleted from the first
paragraph of the Investors' Rights Agreement and shall be added to Section 1.1
of the Investors' Rights Agreement and shall read in full as follows:
""Purchaser" shall mean the purchasers of the Series B Stock, the
Series C Preferred Stock (the "Series C Stock"), the warrant to
purchase 1,315,789 shares of Series C Preferred Stock dated July 1,
1994 issued to Cisco Systems (the "Cisco Warrant"), the warrants to
purchase Common Stock issued under the Note and Warrant Purchase
Agreement dated as of March 15, 1994 (the "Common Warrants") and the
warrant to purchase 63,211 shares of Series C Preferred dated July 1,
1994 issued to Imperial Bank (the "Bank Warrant")."
2. The definition of "Shares" contained in Subsection 1.1 of the
Investors' Rights Agreement is hereby amended to read in full as follows:
""Shares" shall mean (i) all outstanding shares of the Company's
Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, (ii) the shares of Series C Preferred Stock issuable
upon the exercise of the Cisco Warrant and the Bank Warrant, and (iii)
the shares of Common Stock issuable upon the exercise of the Common
Warrants."
3. Section 2.2.1 Demand Registration. of the Investors' Rights Agreement
-------------------
is hereby amended to read in full as follows:
"Subject to the conditions of this Section 2.2, if the Company shall
receive at any time after June 30, 1997 a written request from the
Holders of more than fifty percent (50%) of the Registrable Securities
then outstanding (the "Initiating Holders") that the Company file a
registration statement under the Securities Act covering the
registration of Registrable Securities having an aggregate offering
price to the public, in excess of $7,500,000, then the Company shall,
within thirty (30) days of the receipt thereof, give written notice of
such request to all Holders, and subject to the limitations of Section
2.2.2, effect, as soon as practicable, the registration under the
Securities Act of all Registrable Securities that the Holders request
to be registered; provided however that the Initiating Holders may
deliver such written request prior to June 30, 1997 so long as at
least six months have expired from the closing of the Initial Offering
(as defined below) and the other conditions of Section 2.2 have been
met."
-2-
<PAGE>
4. A new Section 3.12 shall be added which shall read in full as follows:
"3.12 Visitation Rights. Except as set forth below, so long as
-----------------
Cisco Systems holds both at least one million two hundred sixty-five
thousand (1,265,000) shares of Series C Preferred Stock and at least
five percent of the outstanding Common Stock on a fully-diluted basis
(including conversion of all Preferred Stock, exercise of options, but
no exercise of warrants), the Company shall invite a representative of
Cisco Systems to attend all meetings of the Company's Board of
Directors in a nonvoting observer capacity and, in this respect, shall
give such representative copies of all notices, minutes, consents and
other materials that are provided generally to the Company's
directors; provided, however, that the Company reserves the right to
exclude such representative from access to any material or meeting or
portion thereof if the Company believes that such exclusion is
reasonably necessary (a) because of a conflict of interest, (b) to
preserve the attorney-client privilege, or (c) to protect confidential
proprietary information. Such representative may participate in
discussion of matters brought to the attention of the Board of
Directors. Cisco Systems shall have no rights under this Section 3.12
while the representative of Cisco Systems is serving as a member of
the Board of Directors of the Company. The rights set forth in the
Section 3.12 may not be transferred."
5. Section 4.1 Subsequent Offerings. of the Investors' Rights Agreement
--------------------
is hereby amended to read in full as follows:
"Each Major Purchaser shall have a right of first refusal to purchase
its pro rata share of all Equity Securities, as defined below, that
the Company may, from time to time, propose to sell and issue after
the date of this First Amendment, other than the Equity Securities
excluded by Section 4.6 hereof. Each Major Purchaser's pro rata share
is equal to the ratio of the number of shares of the Company's Common
Stock (including all shares of Common Stock issued or issuable upon
conversion of Preferred Stock, but excluding any shares issuable
pursuant to an unexercised warrant) which such Major Purchaser is
deemed to be a holder immediately prior to the issuance of such Equity
Securities to the total number of shares of the Company's outstanding
Common Stock (including all shares of Common Stock issuable upon
conversion of all outstanding shares of Preferred Stock, but excluding
any shares issuable pursuant to an unexercised warrant). The term
"Equity Securities" shall mean (i) any stock or similar security of
the Company, (ii) any security convertible, with or without
consideration, into any stock or similar security (including any
option to purchase such convertible security), (iii) any security
carrying any warrant or right to subscribe to or purchase any stock or
similar security of (iv) any such warrant or right."
6. A new Section 4.6.9 shall be added which shall read in full as
follows:
-3-
<PAGE>
"4.6.9. and the Series C Preferred Stock, (including the Common Stock
issuable upon conversion thereof) and the warrant to purchase Series C
Preferred Stock issued to Cisco Systems (including the Series C
Preferred Stock issuable upon exercise thereof and Common Stock issued
upon conversion thereof), all issued either pursuant to the Series C
Preferred Stock Purchase Agreement dated July 1, 1994 or to a
subsequent purchase agreement entered into prior to August 2, 1994."
7. All other provisions of the Investors' Rights Agreement shall remain
in full force and effect.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this First
Amendment as of the date first set forth above.
COMPANY:
INTERNATIONAL NETWORK SERVICES
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Donald K. McKinney
-------------------------
President
MCKINNEY:
DONALD K. MCKINNEY AND REBECCA
MCDANIEL MCKINNEY, TRUSTEES OF THE
MCKINNEY FAMILY TRUST, UAD JUNE 2,
1986
c/o International Network Services
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Donald K. McKinney
------------------------
Donald K. McKinney
/s/ Rebecca McDaniel McKinney
----------------------------------
Rebecca McDaniel McKinney
-5-
<PAGE>
PURCHASERS:
SIGMA PARTNERS II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
----------------------------------
Its General Partner
SIGMA ASSOCIATES II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
----------------------------------
General Partner
SEQUOIA CAPITAL V
3000 Sand Hill Road, Bldg 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
---------------------------------
General Partner
-6-
<PAGE>
SEQUOIA TECHNOLOGY PARTNERS V
3000 Sand Hill Road, Bldg 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
---------------------------------
General Partner
SEQUOIA XXIII
3000 Sand Hill Road, Bldg 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Donald T. Valentine
---------------------------------
General Partner
SEQUOIA XXIV
3000 Sand Hill Road, Bldg 4, Ste. 280
Menlo Park, CA 94025
By: /s/ Donald T. Valentine
---------------------------------
Its General Partner
By: /s/ Donald T. Valentine
---------------------------------
General Partner
-7-
<PAGE>
THE BOARD OF TRUSTEES OF THE LELAND
STANFORD JUNIOR UNIVERSITY
c/o Stanford University Investment Management
2770 Sand Hill Road
Menlo Park, CA 94025
By: /s/ Carol Gilmer
---------------------------------------
VERNON R. ANDERSON AND LYSBETH W.
ANDERSON, TRUSTEES OF THE VERNON R. &
LYSBETH W. ANDERSON FAMILY TRUST, UAD
7/13/83
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Vernon R. Anderson
-------------------------------------------
Vernon R. Anderson
/s/ Lysbeth W. Anderson
-------------------------------------------
Lysbeth W. Anderson
BRENTON WARREN ANDERSON
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Brenton Warren Anderson
-------------------------------------------
Brenton Warren Anderson
TRACY S. BLOOM
5290 Lanagan Street
Colorado Springs, CO 80919
___________________________________________
Tracy S. Bloom
-8-
<PAGE>
CISCO SYSTEMS
170 West Tasman Drive
San Jose, CA 95134
By: /s/ Sally Taylor
---------------------------------------
Title: Controller
IMPERIAL BANK
226 Airport Parkway, Suite 100
San Jose, CA 95110
By: /s/
---------------------------------------
Title: Vice President
-9-
<PAGE>
SECOND AMENDMENT TO INVESTORS' RIGHTS AGREEMENT
-----------------------------------------------
This Second Amendment to Investors' Rights Agreement (the "Second
Amendment") is entered into as of the 29th day of July 1994 by and among
International Network Services, a California corporation (the "Company"), Donald
K. McKinney and Rebecca McDaniel McKinney, Trustees of the McKinney Family
Trust, UAD June 2, 1986 (collectively, "McKinney"), as purchaser of the
Company's Series A Preferred Stock ("Series A Stock"), the purchasers of the
Company's Series B Preferred Stock ("Series B Stock") set forth on Exhibit A of
that certain Series B Preferred Stock Purchase Agreement dated June 11, 1993
(the "Series B Purchase Agreement"), the purchasers (the "Initial Series C
Purchasers") of the Company's Series C Preferred Stock ("Series C Stock") set
forth on Exhibit A of that certain Series C Preferred Stock Purchase Agreement
dated July 1, 1994 (the "Series C Purchase Agreement"), Cisco Systems, Inc., as
a purchaser of a warrant to purchase 1,315,789 shares of Series C Preferred
Stock (the "Cisco Warrant") pursuant to the Series C Purchase Agreement, the
purchasers of the warrants to purchase Common Stock (the "Common Warrants")
pursuant to that certain Note and Warrant Purchase Agreement dated as of March
15, 1994, (the "Note and Warrant Purchase Agreement"), Imperial Bank as a
purchaser of a warrant to purchase 63,291 shares of Series C Preferred Stock
(the "Bank Warrant") and the additional purchasers (the "Additional Series C
Purchasers") of the Company's Series C Stock set forth on Exhibit A to that
certain First Amendment to the Series C Purchase Agreement of even date
herewith. The Series A Stock, the Series B Stock and Series C Stock, taken
together, shall be referred to as the "Preferred Stock."
RECITALS
--------
A. The Company, McKinney, the purchasers of the Series B Stock, the
Initial Series C Purchasers, Cisco Systems, Inc., the purchasers of the Common
Warrants and Imperial Bank previously entered into the Investors' Rights
Agreement, as amended, to provide McKinney, the purchasers of the Series B
Stock, the Initial Series C Purchasers, Cisco Systems, Inc., the purchasers of
the Common Warrants and Imperial Bank with certain registration rights,
information rights and a right of first refusal.
B. The Company is entering into the First Amendment to the Series C
Purchase Agreement as of the date hereof pursuant to which the Company is
issuing additional shares of Series C Stock to the Additional Series C
Purchasers and is obligated to provide the Additional Series C Purchasers with
rights under the Investors' Rights Agreement.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Second Amendment and the
Amendment to the Series C Purchase Agreement, the parties mutually agree as
follows:
<PAGE>
1. The definition of "Purchaser" set forth in Section 1.1 of the
Investors' Rights Agreement is hereby amended to read in full as follows:
""Purchaser" shall mean the purchasers of the Series B Stock, the
Series C Preferred Stock (the "Series C Stock") issued pursuant to the
Series C Preferred Stock Purchase Agreement dated July 1, 1994 and the
First Amendment to the Series C Preferred Stock Purchase Agreement
dated July 29, 1994, the warrant to purchase 1,315,789 shares of
Series C Preferred Stock dated July 1, 1994 issued to Cisco Systems
(the "Cisco Warrant"), the warrants to purchase Common Stock issued
under the Note and Warrant Purchase Agreement dated as of March 15,
1994 (the "Common Warrants") and the warrant to purchase 63,291 shares
of Series C Preferred dated July 1, 1994 issued to Imperial Bank (the
"Bank Warrant")."
2. All other provisions of the Investors' Rights Agreement shall remain
in full force and effect.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this Second
Amendment as of the date first set forth above.
COMPANY:
INTERNATIONAL NETWORK SERVICES
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Donald K. McKinney
-------------------------------
President
MCKINNEY:
DONALD K. MCKINNEY AND REBECCA
MCDANIEL MCKINNEY, TRUSTEES OF THE
MCKINNEY FAMILY TRUST, UAD JUNE 2,
1986
c/o International Network Services
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Donald K. McKinney
-------------------------------
Donald K. McKinney
/s/ Rebecca McDaniel McKinney
----------------------------------
Rebecca McDaniel McKinney
-3-
<PAGE>
PURCHASERS:
SIGMA PARTNERS II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
----------------------------------------
Its General Partner
SIGMA ASSOCIATES II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
-----------------------------------
General Partner
SEQUOIA CAPITAL V
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Doug Leone
----------------------------------------
General Partner
-4-
<PAGE>
SEQUOIA TECHNOLOGY PARTNERS V
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Doug Leone
----------------------------------------
General Partner
SEQUOIA XXIII
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Doug Leone
----------------------------------------
General Partner
SEQUOIA XXIV
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: /s/ Doug Leone
-----------------------------------
Its General Partner
By: /s/ Doug Leone
----------------------------------------
General Partner
-5-
<PAGE>
THE BOARD OF TRUSTEES OF THE LELAND
STANFORD JUNIOR UNIVERSITY
c/o Stanford University Investment Management
2770 Sand Hill Road
Menlo Park, CA 94025
By: /s/ Carol Gilmer
-----------------------------------------
VERNON R. ANDERSON AND LYSBETH W. ANDERSON,
TRUSTEES OF THE VERNON R. & LYSBETH W.
ANDERSON FAMILY TRUST, UAD 7/13/83
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Vernon R. Anderson
----------------------------------------------
Vernon R. Anderson
/s/ Lysbeth W. Anderson
----------------------------------------------
Lysbeth W. Anderson
BRENTON WARREN ANDERSON
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Brenton Warren Anderson
----------------------------------------------
Brenton Warren Anderson
TRACY S. BLOOM
5290 Lanagan Street
Colorado Springs, CO 80919
/s/ Tracy S. Bloom
----------------------------------------------
Tracy S. Bloom
-6-
<PAGE>
CISCO SYSTEMS
170 West Tasman Drive
San Jose, CA 95134
By: ________________________________________
Title
IMPERIAL BANK
226 Airport Parkway, Suite 100
San Jose, CA 95110
By: /s/
----------------------------------------
Title: Vice President
______________________________________________
Canaan Capital Limited Partnership
C/O CANAAN PARTNERS
2884 Sand Hill Road, Suite 115
Menlo Park, CA 94025
By: Canaan Capital Management L.P.,
General Partner
By: Canaan Capital Partners L.P.,
General Partner
By: /s/ Eric Young
----------------------------------------
General Partner
-7-
<PAGE>
Canaan Capital Offshore Limited Partnership, C.V.
C/O CANAAN PARTNERS
2884 Sand Hill Road, Suite 115
Menlo Park, CA 94025
By: Canaan Capital Management L.P.,
General Partner
By: Canaan Capital Partners L.P.,
General Partner
By: /s/ Eric Young
---------------------------------------
Title
Quai Limited
c/o Windlesham Services Limited
22A Old Court Place
London, England W84PP
By: /s/
-------------------------------------------
Title
-8-
<PAGE>
EXHIBIT 4.3
THIRD AMENDMENT TO INVESTORS' RIGHTS AGREEMENT
----------------------------------------------
This Third Amendment to Investors' Rights Agreement (the "Third Amendment")
is entered into as of the 18th day of July 1996, by and among International
Network Services, a California corporation (the "Company"), Donald K. McKinney
and Rebecca McDaniel McKinney, Trustees of the McKinney Family Trust, UAD June
2, 1986 (collectively, "McKinney"), as purchaser of the Company's Series A
Preferred Stock ("Series A Stock"), the purchasers of the Company's Series B
Preferred Stock ("Series B Stock") set forth on Exhibit A of that certain Series
B Preferred Stock Purchase Agreement dated June 11, 1993 (the "Series B Purchase
Agreement"), the purchasers (the "Initial Series C Purchasers") of the Company's
Series C Preferred Stock ("Series C Stock") set forth on Exhibit A of that
certain Series C Preferred Stock Purchase Agreement dated July 1, 1994 (the
"Series C Purchase Agreement"), Cisco Systems, Inc., as a purchaser of a warrant
to purchase 1,315,789 shares of Series C Preferred Stock (the "Cisco Warrant")
pursuant to the Series C Purchase Agreement, the purchasers of the warrants to
purchase Common Stock (the "Common Warrants") pursuant to that certain Note and
Warrant Purchase Agreement dated as of March 15, 1994, (the "Note and Warrant
Purchase Agreement"), Imperial Bank as a purchaser of a warrant to purchase
63,291 shares of Series C Preferred Stock (the "Bank Warrant") and the
additional purchasers (the "Additional Series C Purchasers") of the Company's
Series C Stock set forth on Exhibit A to that certain First Amendment to the
Series C Purchase Agreement dated as of July 29, 1994.
RECITALS
--------
A. The Holders of Registrable Securities (as defined in the Investors'
Rights Agreement) possess certain registration rights pursuant to the Investors'
Rights Agreement dated as of June 11, 1993, as amended by the First Amendment to
Investors' Rights Agreement dated as of July 1, 1994 and the Second Amendment to
Investors' Rights Agreement dated as of July 29, 1994 ( the "Investors' Rights
Agreement").
B. Under Section 2.11 of the Investors' Rights Agreement, the Company and
the Holders of a majority of the Registrable Securities may amend the Investors'
Rights Agreement.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Third Amendment, the
parties mutually agree as follows:
<PAGE>
1. Section 2.3 of the Investors' Rights Agreement is hereby amended and
restated to read in full as follows:
"Piggyback Registrations. The Company shall notify all Holders of
-----------------------
Registrable Securities in writing at least thirty (30) days prior to
the filing of any registration statement under the Securities Act for
purposes of a public offering of securities of the Company (including,
but not limited to, registration statements relating to secondary
offerings of securities of the Company, but excluding registration
statements relating to employee benefit plans and corporate
reorganizations) and will afford each such Holder an opportunity to
include in such registration statement all or part of such Registrable
Securities held by such Holder; provided, however, that the Company
shall not be required to notify Holders of Registrable Securities and
such Holders shall not be entitled to include Registrable Securities
in a registration statement relating to the Company's Initial
Offering, the closing of which occurs on or prior to December 31,
1996. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held by it
shall, within twenty (20) days after receipt of the above-described
notice from the Company, so notify the Company in writing. Such notice
shall state the intended method of disposition of the Registrable
Securities by such Holder. If a Holder decides not to include all of
its Registrable Securities in any registration statement thereafter
filed by the Company, such Holder shall nevertheless continue to have
the right to include any Registrable Securities in any subsequent
registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the
terms and conditions set forth herein."
2. All other provisions of the Investors' Rights Agreement shall remain
in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this Third
Amendment as of the date first set forth above.
COMPANY:
INTERNATIONAL NETWORK SERVICES
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Kevin J. Laughlin
----------------------
Title:
McKINNEY:
DONALD K. McKINNEY AND REBECCA
McDANIEL McKINNEY, TRUSTEES OF THE
McKINNEY FAMILY TRUST, UAD JUNE 2,
1986
c/o International Network Services
650 Castro Street, Suite 260
Mountain View, CA 94041
By: /s/ Donald K. McKinney
--------------------------------
Donald K. McKinney
/s/ Rebecca McDaniel McKinney
-------------------------------------
Rebecca McDaniel McKinney
<PAGE>
SIGMA PARTNERS II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
------------------------------
Its General Partner
SIGMA ASSOCIATES II, L.P.
2884 Sand Hill Road, Ste. 121
Menlo Park, CA 94025
By: Sigma Management II, L.P.
Its General Partner
By: /s/ Lawrence G. Finch
------------------------------
General Partner
SEQUOIA CAPITAL V
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
------------------------------
General Partner
<PAGE>
SEQUOIA TECHNOLOGY PARTNERS V
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
----------------------------
General Partner
SEQUOIA XXIII
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: Sequoia Partners (FR)
Its General Partner
By: /s/ Douglas Leone
----------------------------
General Partner
SEQUOIA XXIV
3000 Sand Hill Road, Bldg. 4, Ste. 280
Menlo Park, CA 94025
By: /s/ Douglas Leone
----------------------------
Its General Partner
By:
----------------------------
General Partner
<PAGE>
THE BOARD OF TRUSTEES OF THE LELAND
STANFORD JUNIOR UNIVERSITY
c/o Stanford University Investment Management
2770 Sand Hill Road
Menlo Park, CA 94025
By:
------------------------------
VERNON R. ANDERSON AND LYSBETH W. ANDERSON,
TRUSTEES OF THE
VERNON R. & LYSBETH W. ANDERSON
FAMILY TRUST, UAD 7/13/83
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Vernon R. Anderson TTEE
-----------------------------------
Vernon R. Anderson
-----------------------------------
Lysbeth W. Anderson
BRENTON WARREN ANDERSON
25225 La Loma Drive
Los Altos Hills, CA 94022
/s/ Brenton Warren Anderson
-----------------------------------
Brenton Warren Anderson
TRACY S. BLOOM
5290 Lanagan Street
Colorado Springs, CO 80919
-----------------------------------
Tracy S. Bloom
<PAGE>
CISCO SYSTEMS
170 West Tasman Drive
San Jose, CA 95134
By: /s/ Donald A. LeBeau
-----------------------------------
Title:
IMPERIAL BANK
226 Airport Parkway, Suite 100
San Jose, CA 95110
By:
-----------------------------------
Title:
-----------------------------------------
Canaan Capital Limited Partnership
C/O CANAAN PARTNERS
2884 Sand Hill Road, Suite 115
Menlo Park, CA 94025
By: Canaan Capital Management L.P.,
General Partner
By: Canaan Capital Partners L.P.,
General Partner
By: /s/ Eric Young
------------------------------------
General Partner
<PAGE>
Canaan Capital Offshore Limited Partnership, C.V.
C/O CANAAN PARTNERS
2884 Sand Hill Road, Suite 115
Menlo Park, CA 94025
By: Canaan Capital Management L.P.,
General Partner
By: Canaan Capital Partners L.P.,
General Partner
By: /s/ Eric Young
-----------------------------------
Title:
Quai Limited
c/o Windlesham Services Limited
22A Old Court Place
London, England W84PP
By:
-----------------------------------
Title:
<PAGE>
EXHIBIT 4.4
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANTT O RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: International Network Services, a California corporation
Number of Shares: 63,291
Class of Stock: Series C Preferred:
Initial Exercise Price: $0.79 per share
Issue Date: July 1, 1994
Expiration Date: July 1, 1999 (subject to Article 4.1)
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, IMPERIAL BANK ("Holder") is entitled
to purchase the number of fully paid and nonassessable shares of the class of
securities (the "Shares") of the corporation (the "Company") at the initial
exercise price per Share (the "Warrant Price") all as set forth above and as
adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth in this Warrant.
Article 1. Exercise
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1.3
<PAGE>
1.4
1.5 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not regularly traded
in a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder shall promptly
agree upon a third party appraiser to undertake such valuation. If the
valuation of such investment banking firm is greater than that determined by the
Board of Directors, then all fees and expenses of such investment banking firm
shall be paid by the Company. In all other circumstances, such fees and
expenses shall be paid by Holder.
1.6 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.7 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.8 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.8.1. "Acquisition". For the purpose of this Warrant, "Acquisition"
-------------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.8.2. Assumption of Warrant. If upon the closing of any Acquisition
---------------------
the successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly. The Company shall use reasonable efforts to cause the surviving
corporation to assume the obligations of this Warrant.
-2-
<PAGE>
1.8.3. Nonassumption. If upon the closing of any Acquisition the
-------------
successor entity does not assume the obligations of his Warrant and Holder has
not otherwise exercised this Warrant in full, then the unexercised portion of
this Warrant shall be deemed to have been automatically converted pursuant to
Section 1.2 and thereafter Holder shall participate in the acquisition on the
same terms as other holders of the same class of securities of the Company.
1.8.4. Purchase Right. Notwithstanding the foregoing, at the
--------------
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
Article 2. Adjustments to the Shares.
-------------------------
2.1 Stock Dividends, Splits. Etc. If the Company declares or pays a
----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
-3-
<PAGE>
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
---------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
----------------------------------
of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time, in the manner set
forth in the Articles of Incorporation.
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
2.7 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder an amount
computed by multiplying the fractional interest by the fair market value of a
full Share.
Article 3. Representations and Covenants of the Company.
---------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
-4-
<PAGE>
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 10 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 10 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all communiques to the shareholders of the Company, (b)
within ninety (90) days after .the end of each fiscal year of the Company, the
annual audited financial statements of the Company certified by independent
public accountants of recognized standing and (c) within forty-five (45) days
after the end of each of the first three quarters of each fiscal year, the
Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
-----------------------------------------------------
agrees that the Shares or, if the Shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth in the Investor Rights Agreement, as amended, a copy of which is attached
as Exhibit A.
Article 4. Miscellaneous.
-------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or
--------------------------
in part, at any time and from time to time on or before the Expiration Date set
forth above. The Company shall give Holder written notice of Holder's right to
exercise this Warrant in the form attached as Appendix 2 not more than 90 days
and not less than 30 days before the Expiration Date. If the notice is not so
-5-
<PAGE>
given, the Expiration Date shall automatically be extended until 30 days after
the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company). The Company
shall not require Holder to provide an opinion of counsel if the transfer is to
an affiliate of Holder or if there is no material question as to the
availability of current information as referenced in Rule 144(c), Holder
represents that it has complied with Rule 144(d) and (e) in reasonable detail,
the selling broker represents that it has complied with Rule 144(f), and the
Company is provided with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder, if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer any portion of this Warrant to any person who directly competes with
the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
-6-
<PAGE>
4.7 Attorneys' Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
International Network Services
By
----------------------------------------
Name
---------------------------------------
(Print)
Title: Chairman of the Board, President,
or Vice President
By
---------------------------------------
Name
--------------------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase ______________________
shares of the Common/Series ____________ Preferred [strike one] Stock of
_________________________________________ pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _________________ of the Shares covered
by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name as is specified
below:
---------------------------------------------
(Name)
---------------------------------------------
---------------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for
its own account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with applicable
securities laws.
---------------------------------------
(Signature)
- --------------------
(Date)
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
--------------------------------------
______________________________, _______
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear __________________ :
This is to advise you that the Warrant issued to you described below will
expire on ________________________________, 19___.
Issuer:
Issue Date:
Class of Security Issuable:
Exercise Price Per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
------------------------------------
(Name of Issuer)
By
---------------------------------
Its
---------------------------------
<PAGE>
[LOGO APPEARS HERE] EXHIBIT 10.1
________________________________________________________________________________
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this ___ day of ____,
19 __ by and between International Network Services, a California corporation
(the "Company"), and ___________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting officers, directors and key
employees to expensive litigation risks at the same time as the availability and
coverage of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other officers, directors
and key employees of the Company may not be willing to continue to serve as
officers, directors and key employees without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers, directors and
key employees of the Company and to indemnify its officers, directors and key
employees so as to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
-----------------------
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
or by reason of any action or inaction on the part of Indemnitee while serving
in such capacity, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by Indemnitee in connection with such action or proceeding
if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe Indemnitee's conduct
was unlawful. The termination of any action or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that (i) Indemnitee did not act in
good faith and in a manner which Indemnitee reasonably believed to be in the
best interests of the Company, or (ii) with respect to any criminal action or
proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct
was unlawful.
(b) Proceedings By or in the Right of the Company. The Company
---------------------------------------------
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding by
or in the right of the Company or any subsidiary of the Company to procure a
judgment in its
Page 1 of 7
<PAGE>
favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
or by reason of any action or inaction on the part of Indemnitee while serving
in such capacity, against expenses (including attorneys' fees) and, to the
fullest extent permitted by law, amounts paid in settlement, in each case to the
extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or proceeding if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in the best interests
of the Company and its shareholders, except that no indemnification shall be
made in respect of any claim, issue or matter as to which Indemnitee shall have
been adjudged to be liable to the Company in the performance of Indemnitee's
duty to the Company and its shareholders unless and only to the extent that the
court in which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
2. EXPENSES; INDEMNIFICATION PROCEDURE
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action or proceeding referenced in Section
1(a) or (b) hereof (but not amounts actually paid in settlement of any such
action or proceeding). Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within forty-five (45) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to his right to be indemnified under this Agreement, give the Company
notice in writing as soon as practicable of any claim made against Indemnitee
for which indemnification will or could be sought under this Agreement. Notice
to the Company shall be directed to the Chief Executive Officer of the Company
at the address shown on the signature page of this Agreement (or such other
address as the Company shall designate in writing to Indemnitee). Notice shall
be deemed received three business days after the date postmarked if sent by
domestic certified or registered mail, properly addressed; otherwise notice
shall be deemed received when such notice shall actually be received by the
Company. In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) Procedure. Any indemnification provided for in Section 1 shall be
---------
made no later than forty-five (45) days after receipt of the written request of
Indemnitee. If a claim under this Agreement, under any statute, or under any
provision of the Company's Articles of Incorporation or By-laws providing for
indemnification, is not paid in full by the Company within forty-five (45) days
after a written request for payment thereof has first been received by the
Company, Indemnitee may, but need not, at any time thereafter bring an action
against the Company to recover the unpaid amount of the claim and, subject to
Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for
the reasonable expenses (including attorneys' fees) of bringing such action. It
shall be a defense to any such action (other than an action brought to enforce a
claim for expenses incurred in connection with any action or proceeding in
advance of its final disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the Company to
indemnify Indemnitee for the amount claimed, but the burden of proving such
defense shall be on the Company, and Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 2(a) unless and until such
defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the parties' intention that if the Company
contests Indemnitee's
Page 2 of 7
<PAGE>
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its shareholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of a
------------------
claim pursuant to Section 2(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there is an actual conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Articles of
Incorporation, the Company's By-laws or by statute. In the event of any change,
after the date of this Agreement, in any applicable law, statute or rule which
expands the right of a California corporation to indemnify a member of its board
of directors or an officer, employee or agent, such changes shall be, ipso
facto, within the purview of Indemnitee's rights and Company's obligations,
under this Agreement. In the event of any change in any applicable law, statute
or rule which narrows the right of a California corporation to indemnify a
member of its Board of Directors or an officer, an employee or agent, such
changes, to the extent not otherwise required by such law, statute or rule to be
applied to this Agreement shall have no effect on this Agreement or the parties'
rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
--------------
not be deemed exclusive of any rights to which Indemnitee may be entitled under
the Company's Articles of Incorporation, its By-laws, any agreement, any vote of
shareholders or disinterested directors, the California Corporations Code, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for
Page 3 of 7
<PAGE>
any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action or
other covered proceeding.
4. PARTIAL INDEMNIFICATION
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of the expenses, judgments,
fines or penalties actually and reasonably incurred by him in the investigation,
defense, appeal or settlement of any civil or criminal action or proceeding, but
not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such expenses, judgments, fines or
penalties to which Indemnitee is entitled.
5. MUTUAL ACKNOWLEDGMENT
Both the Company and Indemnitee acknowledge that in certain instances, Federal
law or applicable public policy may prohibit the Company from indemnifying its
directors, officers, employees and agents under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
6. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Company shall, from time to time, make the good faith determination whether
or not it is practicable for the Company to obtain and maintain a policy or
policies of insurance with reputable insurance companies providing the officers,
directors, employees and agents of the Company with coverage for losses from
wrongful acts, or to ensure the Company's performance of its indemnification
obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection
afforded by such coverage. In all policies of directors' and officers'
liability insurance, Indemnitee shall be named as an insured in such a manner as
to provide Indemnitee the same rights and benefits as are accorded to the most
favorably insured of the Company's directors, if Indemnitee is a director; or of
the Company's non-director officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's non-director and non-officer key
employees and agents, if Indemnitee is not an officer or director but is a key
employee or agent. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
7. SEVERABILITY
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable as provided in
this Section 7. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
Page 4 of 7
<PAGE>
8. EXCEPTIONS
Any other provision herein to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or
-------------
transactions from which a director may not be relieved of liability under the
California Corporations Code.
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to
------------------------------
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California Corporations Code, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred
------------------
by the Indemnitee with respect to any proceeding instituted by Indemnitee to
enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by the Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or liabilities
--------------
of any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been paid
directly to Indemnitee by an insurance carrier under a policy of directors' and
officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16. To indemnify Indemnitee for expenses and the
-----------------------
payment of profits arising under Section 16 of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
9. EFFECTIVENESS OF AGREEMENT
To the extent that the indemnification permitted under the terms of certain
provisions of this Agreement exceeds the scope of the indemnification provided
for in the California Corporations Code, such provisions shall not be effective
unless and until the Company's Articles of Incorporation authorize such
additional rights of indemnification. In all other respects, the balance of
this Agreement shall be effective as of the date set forth on the first page and
may apply to acts or omissions of Indemnitee which occurred prior to such date
if Indemnitee was an officer, director, employee or other agent of the Company,
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, at the time such act or omission occurred.
10. CONSTRUCTION OF CERTAIN PHRASES
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or
Page 5 of 7
<PAGE>
other enterprise, Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
11. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which shall
constitute an original.
12. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon the Company and its successors and assigns,
and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs,
legal representatives and assigns.
13. ATTORNEYS' FEES
In the event that any action is instituted by Indemnitee under this Agreement to
enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be
paid all court costs and expenses, including reasonable attorneys' fees,
incurred by Indemnitee with respect to such action, unless as a part of such
action, the court of competent jurisdiction determines that each of the material
assertions made by Indemnitee as a basis for such action was not made in good
faith or was frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines that
each of Indemnitee's material defenses to such action were made in bad faith or
were frivolous.
14. NOTICE
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed duly given (i) if delivered by hand and
receipted for by the party addressee, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notice to either
party are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
15. CONSENT TO JURISDICTION
The Company and Indemnitee each hereby irrevocably consent to the jurisdiction
of the courts of the State of California for all purposes in connection with any
action or proceeding which arises out of or relates to this Agreement and agree
that any action instituted under this Agreement shall be brought only in the
state courts of the State of California.
Page 6 of 7
<PAGE>
16. CHOICE OF LAW
This Agreement shall be governed by and its provisions construed in accordance
with the laws of the State of California as applied to contracts between
California residents entered into and to be performed entirely within
California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
INTERNATIONAL NETWORK SERVICES
By: _____________________________________________
Kevin J. Laughlin
Title: Chief Financial Officer and Secretary
-------------------------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
_____________________________________ __________________________________
Signature Residential Address
_____________________________________ __________________________________
Name City, State, Zip Code
_____________________________________
Title
Page 7 of 7
<PAGE>
EXHIBIT 10.2
INTERNATIONAL NETWORK SERVICES
AMENDED AND RESTATED 1992 FLEXIBLE STOCK INCENTIVE PLAN
1. Establishment, Purpose, and Definitions.
---------------------------------------
(a) There is hereby adopted the Amended and Restated 1992
Flexible Stock Incentive Plan (the "Plan") of International Network Services, a
California corporation (the "Company").
(b) The purpose of the Plan is to provide a means whereby
eligible individuals (as defined in paragraph_4, below) can acquire Common Stock
of the Company (the "Stock"). The Plan provides employees (including officers
and directors who are employees) of the Company and of its Affiliates an
opportunity to purchase shares of Stock pursuant to options which may qualify as
incentive stock options (referred to as "incentive stock options") under
SectionE422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
employees, officers, directors, independent contractors, and consultants of the
Company and of its Affiliates an opportunity to purchase shares of Stock
pursuant to options which are not described in Sections_422 or_423 of the Code
(referred to as "nonqualified stock options"). The Plan also provides for the
sale or bonus of Stock to eligible individuals in connection with the
performance of services for the Company or its Affiliates. Finally, the Plan
authorizes the grant of stock appreciation rights ("SARs"), either separately or
in tandem with stock options, entitling holders to cash compensation measured by
appreciation in the value of the Stock.
(c) The term "Affiliates" as used in the Plan means parent
or subsidiary corporations, as defined in Sections_424(e) and (f) of the Code
(but substituting "the Company" for "employer corporation"), including parents
or subsidiaries which become such after adoption of the Plan.
2. Administration of the Plan.
--------------------------
(a) The Plan shall be administered by the Board of
Directors of the Company (the "Board"). The Board may delegate the
responsibility for administering the Plan to a committee, under such terms and
conditions as the Board shall determine (the "Committee"). The Committee shall
consist of two or more members of the Board or such lesser number of members of
the Board as permitted by Rule_16b-3 promulgated under the Securities Exchange
Act of 1934, as amended ("Rule_16b-3"). None of the members of the Committee
shall receive, while serving on the Committee, or during the one-year period
preceding appointment to the Committee, a grant or award of equity securities
under (i)_the Plan or (ii)_any other plan of the Company or its affiliates under
which the participants are entitled to acquire Stock (including restricted
Stock), stock options, stock bonuses, related rights or stock appreciation
rights of the Company or any of its affiliates, other than pursuant to
transactions in any such other plan which do not disqualify a director from
being a disinterested person under Rule_16b-3. The limitations set forth in this
Section 2(a) shall automatically incorporate any additional requirements that
may in the future be necessary for the Plan to comply with Rule_16b-3. Members
of the Committee shall serve at the pleasure of the Board. The Committee shall
select one of its members as chairman, and shall hold meetings at such times and
places as it may determine. A majority of the Committee shall constitute a
quorum and acts of the Committee at which a quorum is present, or acts reduced
to or approved in writing by all the members of the Committee, shall be the
valid acts of the Committee. If the Board does not delegate administration of
the Plan to the Committee, then each reference in this Plan to "the Committee"
shall
1
<PAGE>
be construed to refer to the Board.
(b) The Committee shall determine which eligible
individuals (as defined in paragraph_4, below) shall be granted options under
the Plan, the timing of such grants, the terms thereof (including any
restrictions on the Stock), and the number of shares subject to such options.
(c) The Committee may amend the terms of any outstanding
option granted under this Plan, but any amendment which would adversely affect
the optionee's rights under an outstanding option shall not be made without the
optionee's written consent. Without limitation of the foregoing, the Committee
shall have the right, with the optionee's consent, to accelerate the exercise
date of any options issued pursuant to the Plan or terminate the restrictions
applicable to any stock issued pursuant to the Plan. The Committee may, with the
optionee's written consent, cancel any outstanding stock option or accept any
outstanding stock option in exchange for a new option.
(d) The Committee shall also determine which eligible
individuals (as defined in paragraph_4, below) shall be issued Stock or SARs
under the Plan, the timing of such grants, the terms thereof (including any
restrictions), and the number of shares or SARs to be granted. The Stock shall
be issued for such consideration (if any) as the Committee deems appropriate.
Stock issued subject to restrictions shall be evidenced by a written agreement
(the "Restricted Stock Purchase Agreement" or the "Restricted Stock Bonus
Agreement"). The Committee may amend any Restricted Stock Purchase Agreement or
Restricted Stock Bonus Agreement, but any amendment which would adversely affect
the shareholder's rights to the Stock shall not be made without his or her
written consent.
(e) The Committee shall have the sole authority, in its
absolute discretion to adopt, amend, and rescind such rules and regulations as,
in its opinion, may be advisable for the administration of the Plan, to construe
and interpret the Plan, the rules and the regulations, and the instruments
evidencing options or Stock granted under the Plan and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
All decisions, determinations, and interpretations of the Committee shall be
binding on all participants.
3. Stock Subject to the Plan.
-------------------------
(a) An aggregate of not more than 4,643,104 shares of Stock
shall be available for the grant of stock options or the issuance of Stock under
the Plan. If an option is surrendered (except surrender for shares of Stock) or
for any other reason ceases to be exercisable in whole or in part, the shares
which were subject to such option but as to which the option had not been
exercised shall continue to be available under the Plan. Any Stock which is
retained by the Company upon exercise of an option in order to satisfy the
exercise price for such option or any withholding taxes due with respect to such
option exercise shall be treated as issued to the optionee and will thereafter
not be available under the Plan.
(b) If there is any change in the Stock subject to the
Plan, an Option Agreement, a Restricted Stock Purchase Agreement, a Restricted
Stock Bonus Agreement, or a SAR Agreement through merger, consolidation,
reorganization, recapitalization, reincorporation, stock split, stock dividend
(in excess of two percent (2%)), or other change in the corporate structure of
the Company, appropriate adjustments shall be made by the Committee in order to
preserve but not to increase the benefits to the individual, including
adjustments to the aggregate number, kind and price per share of shares subject
to the Plan, an Option Agreement, a Restricted Stock Purchase Agreement, a
Restricted Stock Bonus Agreement, or a SAR Agreement.
2
<PAGE>
4. Eligible Individuals. Individuals who shall be eligible to
--------------------
have granted to them the options, Stock or SARs provided for by the Plan shall
be such employees, officers, directors, independent contractors and consultants
of the Company or an Affiliate as the Committee, in its discretion, shall
designate from time to time. Notwithstanding the foregoing, only employees of
the Company or an Affiliate (including officers and directors who are bona fide
employees) shall be eligible to receive incentive stock options.
5. The Option Price. The exercise price of the Stock covered
----------------
by each incentive stock option shall be not less than the per share fair market
value of such Stock on the date the option is granted. The exercise price of the
Stock covered by each nonqualified stock option shall be not less than eighty-
five percent (85%) of the per share fair market value of such stock on the date
the option is granted. Notwithstanding the foregoing, in the case of an
incentive stock option granted to a person possessing more than ten percent
(10%) of the combined voting power of the Company or an Affiliate, the exercise
price shall be not less than one hundred ten percent (110%) of the fair market
value of the Stock on the date the option is granted. The exercise price of an
option shall be subject to adjustment to the extent provided in paragraph_3(b),
above.
6. Terms and Conditions of Options.
-------------------------------
(a) Each option granted pursuant to the Plan shall be
evidenced by a written Stock Option Agreement executed by the Company and the
person to whom such option is granted.
(b) The Committee shall determine the term of each option
granted under the Plan; provided, however, that the term of an incentive stock
-------- -------
option shall not be for more than 10_years and that, in the case of an incentive
stock option granted to a person possessing more than ten percent (10%) of the
combined voting power of the Company or an Affiliate, the term shall be for no
more than five years.
(c) In the case of incentive stock options, the aggregate
fair market value (determined as of the time such option is granted) of the
Stock with respect to which incentive stock options are exercisable for the
first time by an eligible employee in any calendar year (under this Plan and any
other plans of the Company or its Affiliates) shall not exceed $100,000.
(d) The Stock Option Agreement may contain such other
terms, provisions and conditions consistent with this Plan as may be determined
by the Committee. If an option, or any part thereof is intended to qualify as an
incentive stock option, the Stock Option Agreement shall contain those terms and
conditions which are necessary to so qualify it as an incentive stock option.
Notwithstanding the foregoing, no option granted under the Plan may vest at less
than 20% per year over five consecutive years.
7. Terms and Conditions of Stock Purchases and Bonuses.
---------------------------------------------------
(a) Each sale or grant of stock pursuant to the Plan shall
be evidenced by a written Restricted Stock Purchase Agreement or Restricted
Stock Bonus Agreement executed by the Company and the person to whom such Stock
is sold or granted.
(b) The Restricted Stock Purchase Agreement or Restricted
Stock Bonus Agreement may contain such other terms, provisions and conditions
consistent with this Plan as may be determined by the Committee, including not
by way of limitation, restrictions on transfer, forfeiture provisions,
repurchase provisions and vesting provisions.
3
<PAGE>
(c) At the time of each sale or grant of Stock or option
pursuant to the Plan, a copy of the Plan shall be delivered by the Company to
the person to whom such Stock is sold or option granted.
8. Terms and Conditions of SARs. The Committee may, under such
----------------------------
terms and conditions as it deems appropriate, authorize the issuance of SARS
evidenced by a written SAR agreement (which, in the case of tandem options, may
be part of the option agreement to which the SAR relates) executed by the
Company and the person to whom such SAR is granted. The SAR agreement may
contain such terms, provisions and conditions consistent with this Plan as may
be determined by the Committee.
9. Use of Proceeds. Cash proceeds realized from the sale of
---------------
Stock under the Plan shall constitute general funds of the Company.
10. Amendment, Suspension, or Termination of the Plan.
-------------------------------------------------
(a) The Board may at any time amend, suspend or terminate
the Plan as it deems advisable; provided that such amendment, suspension or
termination complies with all applicable requirements of state and federal law,
including any applicable requirement that the Plan or an amendment to the Plan
be approved by the Company's shareholders, and provided further that, except as
provided in paragraph_3(b), above, the Board shall in no event amend the Plan in
the following respects without the consent of shareholders then sufficient to
approve the Plan in the first instance:
(i) To increase the maximum number of shares subject
to incentive stock options issued under the Plan; or
(ii) To change the designation or class of persons
eligible to receive incentive stock options under the Plan.
(b) No option may be granted nor any Stock issued under the
Plan during any suspension or after the termination of the Plan, and no
amendment, suspension or termination of the Plan shall, without the affected
individual's consent, alter or impair any rights or obligations under any option
previously granted under the Plan. The Plan shall terminate with respect to the
grant of incentive stock options on May 28, 2003, unless previously terminated
by the Board pursuant to this paragraph_10.
11. Assignability. Each option granted pursuant to this Plan
-------------
shall, during the optionee's lifetime, be exercisable only by such optionee or
by such optionee's guardian or legal representative, and neither the option nor
any right hereunder shall be transferable by optionee by operation of law or
otherwise other than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code. Stock subject to
a Restricted Stock Purchase Agreement or a Restricted Stock Bonus Agreement
shall be transferable only as provided in such Agreement.
12. Payment Upon Exercise of Options. Payment of the purchase
--------------------------------
price upon exercise of any option granted under this Plan shall be made in cash;
provided, however, that the Committee, in its sole discretion, may permit an
optionee to pay the option price in whole or in part (i)_with shares of Stock
owned by the optionee; (ii)_by delivery on a form prescribed by the Committee of
an irrevocable direction to a securities broker approved by the Committee to
sell shares and deliver all or a portion of the proceeds to the Company in
payment for the Stock; (iii)_by delivery of the optionee's promissory note with
such recourse, interest, security, and redemption provisions as the Committee in
its discretion determines appropriate; or (iv)_in any combination of the
foregoing. Any Stock used to exercise options shall be valued at its fair market
value on the date of the
4
<PAGE>
exercise of the option. In addition, the Committee, in its sole discretion, may
authorize the surrender by an optionee of all or part of an unexercised option
and authorize a payment in consideration thereof of an amount equal to the
difference between the aggregate fair market value of the Stock subject to such
option and the aggregate option price of such Stock. In the Committee's
discretion, such payment may be made in cash, shares of Stock with a fair market
value on the date of surrender equal to the payment amount, or some combination
thereof.
13. Withholding Taxes. No Stock shall be granted or sold under
-----------------
the Plan to any participant, and no SAR may be exercised, until the participant
has made arrangements acceptable to the Committee for the satisfaction of
federal, state, and local income and social security tax withholding
obligations, including without limitation obligations incident to the receipt of
Stock under the Plan, the lapsing of restrictions applicable to such Stock, the
failure to satisfy the conditions for treatment as incentive stock options under
applicable tax law, or the receipt of cash payments. Upon exercise of a stock
option or lapsing or restriction on stock issued under the Plan, the Company may
satisfy its withholding obligations by withholding from the optionee or
requiring the Shareholder to surrender shares of the Company's Stock sufficient
to satisfy federal, state, and local income and social security tax withholding
obligations.
14. Restrictions on Transfer of Shares. The Stock acquired
----------------------------------
pursuant to the Plan shall be subject to such restrictions and agreements
regarding sale, assignment, encumbrances or other transfer as are in effect
among the shareholders of the Company at the time such Stock is acquired, as
well as to such other restrictions as the Committee shall deem advisable.
15. Corporate Transaction.
---------------------
(a) For purposes of this Section_15, a "Corporate
Transaction" shall include any of the following shareholder-approved
transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is
not the surviving entity, except for a transaction the principal purpose of
which is to change the state of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or
dissolution of the Company; or
(iii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred to a holder or holders different from those who
held such securities immediately prior to such merger.
(b) In the event of any Corporate Transaction, any option
or outstanding SAR shall terminate and any restricted stock shall be reconveyed
to or repurchased by the Company immediately prior to the specified effective
date of the Corporate Transaction unless assumed by the successor corporation or
its parent company, pursuant to options, restricted stock agreements or SARs
providing substantially equal value and having substantially equivalent
provisions as the options, restricted stock or SARs granted pursuant to this
Plan.
16. Shareholder Approval. This Plan shall only become effective
--------------------
with regard to incentive
5
<PAGE>
stock options upon its approval by a majority of the shareholders voting (in
person or by proxy) at a shareholders' meeting held within 12Emonths of the
Board's adoption of the Plan. The Committee may grant incentive stock options
under the Plan prior to the shareholders' meeting, but until shareholder
approval of the Plan is obtained, no incentive stock option shall be
exercisable.
17. Information to Plan Participants. The Company shall provide
--------------------------------
to each Plan participant, not less frequently than annually, copies of annual
financial statements. The Company shall also provide such statements to each
individual who acquires Stock pursuant to the Plan while such individual owns
such Stock. The Company shall not be required to provide such statements to key
employees whose duties in connection with the Company assure their access to
equivalent information.
6
<PAGE>
AMENDMENT TO THE INTERNATIONAL NETWORK SERVICES
AMENDED AND RESTATED 1992 FLEXIBLE STOCK INCENTIVE PLAN
Section 15(b) of the corporation's Amended and Restated 1992 Flexible Stock
Incentive Plan is amended effective ___________, 1996, to read in its entirety
as follows:
"(b) In the event of any Corporate Transaction, any option or
outstanding SAR shall be assumed or an equivalent option or right
substituted by the successor corporation or a the parent of the successor
corporation, and each share of restricted stock shall be exchanged for the
consideration received in the Corporate Transaction by holders of Common
Stock for each share held on the effective date of the Corporate
Transaction. In the event that the successor corporation refuses to assume
or substitute for an option or right, the holder shall fully vest in and
have the right to exercise the option or right as to all of the Common
Stock covered thereby, including shares as to which it would not otherwise
be vested or exercisable. If an option or right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a
Corporate Transaction, the Committee shall notify the Optionee that the
option or right shall be fully vested and exercisable for a period of
fifteen (15) days from the date of such notice, and the option or right
shall terminate upon the expiration of such period. For the purposes of
this paragraph, an option or right shall be considered assumed if,
following the Corporate Transaction, the option or right confers the right
to purchase or receive, for each share of Common Stock subject to the
option or right immediately prior to the Corporate Transaction, the
consideration (whether stock, cash, or other securities or property)
received in the Corporate Transaction by holders of Common Stock for each
Share held on the effective date of the Corporate Transaction (and if
holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the Corporate Transaction
is not solely common stock of the successor corporation or its parent, the
Committee may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the option or right,
for each share of Common Stock subject to the option or right, to be solely
common stock of the successor corporation or its parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the Corporate Transaction."
<PAGE>
INTERNATIONAL NETWORK SERVICES
INCENTIVE STOCK OPTION TERMS
1. Option Grant. The Company has granted to Optionee the right
------------
and option to purchase from the Company shares of the Common Stock of the
Company (the "Stock") on the terms and conditions hereinafter set forth. The
option is intended to satisfy the requirements of SectionE422 of the Internal
Revenue Code of 1986, as amended (the "Code") and qualify as an incentive stock
option.
2. Option Price. The per share purchase price of the Stock
------------
subject to the option shall be not less than the per share fair market value of
such Stock as of the Grant Date as determined by the Board of Directors of the
Company or a Committee (defined below) designated by it, or, if Optionee
possesses more than ten percent of the combined voting power of the Company or
any of its Affiliates, not less than one hundred ten percent (110%) of the per
share fair market value of the Stock as of the Grant Date as determined by the
Committee. The term "Option Price" as used herein refers to the purchase price
of the Stock subject to the option.
3. Option Period. The option shall be exercisable only during
-------------
the Option Period and, during such Option Period, the exercisability of the
option shall be subject to the limitations of paragraph_4 and the vesting
provisions of paragraph_5. The Option Period shall commence on the Grant Date
and, except as provided in paragraph_4, shall terminate 10 years from the Grant
Date (the "Termination Date"); provided, however, that the Option Period for a
person possessing more than ten percent of the combined voting power of the
Company or an Affiliate shall terminate five years from the Grant Date.
4. Limits on Option Period. The Option Period may end before
-----------------------
the Termination Date, as follows:
(a) If Optionee ceases to be a bona fide employee of the
Company or an Affiliate for any reason other than disability (within the
meaning of subparagraph_(c)) or death during the Option Period, the Option
Period shall terminate three months after the date of such cessation of
employment or on the Termination Date, whichever shall first occur, and the
option shall be exercisable only to the extent exercisable under
paragraph_5 on the date of Optionee's cessation of employment.
(b) If Optionee dies while in the employ of the Company or
any of its Affiliates, the Option Period shall end one year after the date
of death or on the Termination Date, whichever shall first occur, and
Optionee's executor or administrator or the person or persons to whom
Optionee's rights under the option shall pass by will or by the applicable
laws of descent and distribution may exercise the option only to the extent
exercisable under paragraph_5 on the date of Optionee's death.
(c) If Optionee's employment is terminated by reason of
disability, the Option Period shall end one year after the date of
Optionee's cessation of employment or on the Termination Date, whichever
shall first occur, and the option shall be exercisable only to the extent
exercisable under paragraph_5 on the date of Optionee's cessation of
employment, provided, however, that if such disability is not a
"disability" as such term is defined in Section 22(e)(3) of the Code, the
option shall automatically convert to a nonstatutory stock option on the
day three months and one day following such termination.
1
<PAGE>
(d) If Optionee is on a leave of absence from the Company
or an Affiliate because of his disability, or for the purpose of serving
the government of the country in which the principal place of employment of
Optionee is located, either in a military or civilian capacity, or for such
other purpose or reason as the Committee may approve, Optionee shall not be
deemed during the period of such absence, by virtue of such absence alone,
to have terminated employment with the Company or an Affiliate except as
the Committee may otherwise expressly provide.
(e) If Optionee's employment with the Company or any of its
Affiliates terminates for cause during the Option Period, the Option Period
shall terminate 30 days after the date of such Optionee's termination of
employment or on the Termination Date, whichever shall first occur, and
this option shall be exercisable only to the extent exercisable under
paragraph 5 on the date of Optionee's cessation of employment.
5. Vesting of Right to Exercise Options. Subject to other
------------------------------------
limitations contained herein, Optionee shall have the right to exercise the
option in accordance with the following schedule:
(a) As to 24% of the number of shares of Stock covered by
the option, on the Initial Vest Date.
(b) As to an additional 2% of the number of shares of Stock
covered by the option, each month thereafter until the option shall be
fully exercisable.
(c) Any portion of the option that is not exercised shall
accumulate and may be exercised at any time during the Option Period prior
to the Termination Date. No partial exercise of the option may be for less
than five_percent (5%) of the total number of shares of Stock then
available under the option. In no event shall the Company be required to
issue fractional shares.
(d) Notwithstanding the foregoing, the aggregate fair
market value (determined as of the time such option is granted) of the
Stock with respect to which incentive stock options are exercisable for the
first time in any calendar year (under the Plan and any other incentive
stock option plans of the Company or its Affiliates) shall not exceed
$100,000.
6. Method of Exercise. Optionee may exercise the option with
------------------
respect to all or any part of the shares of Stock then subject to such exercise
as follows:
(a) By giving the Company written notice of such exercise,
specifying the number of such shares as to which this option is exercised.
Such notice shall be accompanied by an amount equal to the Option Price of
such shares in cash, or by personal or certified check.
(b) Optionee (and Optionee's spouse, if any) shall be
required, as a condition precedent to acquiring Stock through exercise of
the option, to execute one or more agreements relating to obligations in
connection with ownership of the Stock or restrictions on transfer of the
Stock no less restrictive than the obligations and restrictions to which
the other shareholders of the Company are subject at the time of such
exercise.
(c) If required by the Committee, Optionee shall give the
Company satisfactory assurance in writing, signed by Optionee or Optionee's
legal representative, as the case may be, that such shares are being
purchased for investment and not with a view to the distribution thereof,
provided that such assurance shall be deemed inapplicable to (1)_any sale
of such shares by such Optionee made in
2
<PAGE>
acccordance with the terms of a registration statement covering such sale
which may hereafter be filed and become effective under the Securities Act
of 1933, as amended, and with respect to which no stop order suspending the
effectiveness thereof has been issued, and (2)_any other sale of such
shares with respect to which in the opinion of counsel for the Company,
such assurance is not required to be given in order to comply with the
provisions of the Securities Act of 1933, as amended.
As soon as practicable after receipt of the notice required
in paragraph_6(a) and satisfaction of the conditions set forth in
paragraphsE6(b) and 6(c), the Company shall, without transfer or issue tax and
without other incidental expense to Optionee, deliver to Optionee at the office
of the Company, at 650 Castro Street, Suite 260, Mountain View, CA 94041,
attention of the Secretary, or such other place as may be mutually acceptable to
the Company and Optionee, a certificate or certificates of such shares of Stock;
provided, however, that the time of such delivery may be postponed by the
Company for such period as may be required for it with reasonable diligence to
comply with applicable registration requirements under the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, any
applicable listing requirements of any national securities exchange, and
requirements under any other law or regulation applicable to the issuance or
transfer of such shares.
7. Corporate Transactions.
----------------------
(a) If there should be any change in a class of Stock
subject to the option, through merger, consolidation, reorganization,
recapitalization, reincorporation, stock split, stock dividend (in excess of two
percent (2%)) or other change in the corporate structure of the Company, the
Company may make appropriate adjustments in order to preserve, but not to
increase, the benefits to Optionee, including adjustments in the number of
shares of such Stock subject to this option and in the price per share. Any
adjustment made pursuant to this paragraph_7 as a consequence of a change in the
corporate structure of the Company shall not entitle Optionee to acquire a
number of shares of such Stock of the Company or shares of stock of any
successor company greater than the number of shares Optionee would receive if,
prior to such change, Optionee had actually held a number of shares of such
Stock equal to the number of shares subject to this option.
(b) For purposes of this paragraph 7, a "Corporate
Transaction" shall include any of the following shareholder-approved
transactions to which the Company is a party:
(i) a merger or consolidation in which the Company
is not the surviving entity, except for a transaction the
principal purpose of which is to change the state of the
Company's incorporation; the sale, transfer or other disposition
of all or substantially all of the assets of the Company in
liquidation or dissolution of the Company; or
(ii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than
fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a holder or
holders different from those who held such securities immediately
prior to such merger.
(c) In the event of any Corporate Transaction, the option
shall terminate immediately prior to the specified effective date
of the Corporate Transaction unless assumed by the successor
corporation or its parent company, pursuant to options providing
substantially equal value and having substantially equivalent
provisions as the options granted pursuant to this Agreement.
3
<PAGE>
8. Limitations on Transfer. The option shall, during
-----------------------
Optionee's lifetime, be exercisable only by Optionee or Optionee's
representative or legal guardian, and neither the option nor any right hereunder
shall be transferable by Optionee by operation of law or otherwise other than by
will or the laws of descent and distribution. In the event of any attempt by
Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of the
option or of any right hereunder, except as provided for in this Agreement, or
in the event of the levy of any attachment, execution or similar process upon
the rights or interest hereby conferred, the Company at its election may
terminate the option by notice to Optionee and the option shall thereupon become
null and void.
9. No Shareholder Rights. Neither Optionee nor any person
---------------------
entitled to exercise Optionee's rights in the event of his death shall have any
of the rights of a shareholder with respect to the shares of Stock subject to
the option except to the extent the certificates for such shares shall have been
issued upon the exercise of the option.
10. NO EFFECT ON TERMS OF EMPLOYMENT. SUBJECT TO THE TERMS OF
--------------------------------
ANY WRITTEN EMPLOYMENT CONTRACT TO THE CONTRARY, THE COMPANY (OR ITS AFFILIATE
WHICH EMPLOYS OPTIONEE) SHALL HAVE THE RIGHT TO TERMINATE OR CHANGE THE TERMS OF
EMPLOYMENT OF OPTIONEE AT ANY TIME AND FOR ANY REASON WHATSOEVER, WITH OR
WITHOUT CAUSE.
11. Right of First Refusal. In the event the Optionee proposes
----------------------
to sell, pledge or otherwise transfer any shares which have been issued upon
exercise of all or a portion of the option (the "Transfer Shares") to any person
or entity, including, without limitation, any shareholder of the Company, the
Company shall have the right to repurchase the Transfer Shares under the terms
and subject to the conditions set forth in this paragraph_11 (the "Right of
First Refusal").
(a) Escrow. To ensure shares subject to the Right of First
------
Refusal will be available for repurchase, the Optionee shall, upon exercise
of the option, instruct the Company to deposit the certificates evidencing
the shares which the Optionee purchases upon exercise of this option with
an escrow agent designated by the Committee under the terms and conditions
of an escrow agreement approved by the Committee. The Company shall bear
the expenses of the escrow.
(b) Notice of Proposed Transfer. Prior to any proposed
---------------------------
transfer of the Transfer Shares, Optionee shall give a written notice (the
"Transfer Notice") to the Company describing fully the proposed transfer,
including the number of Transfer Shares, the name and address of the
proposed transferee (the "Proposed Transferee") and, if the transfer is
voluntary, the proposed transfer price. In the event Optionee proposed to
transfer any Vested Shares to more than one proposed transferee, Optionee
shall provide a separate Transfer Notice for the proposed transfer to each
Proposed Transferee. The Transfer Notice shall be signed by both Optionee
and the Proposed Transferee and must constitute a binding commitment of
Optionee and the Proposed Transferee for the transfer of the Transfer
Shares to the Proposed Transferee subject only to the Right of First
Refusal.
(c) Bona Fide Transfer. Within ten (10) days after receipt
------------------
of the Transfer Notice, the Committee shall determine the bona fide nature
of the proposed voluntary transfer and give Optionee written notice of the
Committee's determination. If the proposed transfer is deemed not to be
bona fide, Optionee shall be responsible for providing additional
information to the Committee to show the bona fide nature of the proposed
transfer. The Committee shall have the right to demand further assurances
from Optionee and the Proposed Transferee (in a form satisfactory to the
Committee) that the Transfer Notice fully and accurately sets forth all of
the terms and conditions of the proposed transfer, including, without
limitation, assurance that the Transfer Notice fully and accurately sets
forth the consideration
4
<PAGE>
actually paid for the Transfer Shares and all transactions, directly or
indirectly, between the parties which may have affected the price the
Proposed Transferee was willing to pay for the Transfer Shares.
(d) Exercise of the Right of First Refusal. In the event
--------------------------------------
the proposed transfer is deemed to be bona fide, the Company shall have the
right to purchase all, but not less than all, of the Transfer Shares at the
purchase price and on the terms set forth in the Transfer Notice by
delivery to Optionee of a notice of exercise of the Right of First Refusal
within thirty (30) days after the date the Transfer Notice is delivered to
the Company or ten (10) days after the Committee has approved the proposed
transfer as bona fide, whichever is later. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's
ability to exercise the Right of First Refusal with respect to any proposed
transfer described in any other Transfer Notice, whether or not such other
Transfer Notice is issued by Optionee or issued by a person other than
Optionee with respect to a proposed transfer to the same Proposed
Transferee. If the Company exercises the Right of First Refusal, the
Company and Optionee shall thereupon consummate the sale of the Transfer
Shares to the Company on the terms set forth in the Transfer Notice;
provided, however, that in the event the Transfer Notice provides for the
payment for the Transfer Shares other than in cash, the Company shall have
the option of paying for the Transfer Shares by the discounted cash
equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Committee. For purposes of the foregoing,
cancellation of any indebtedness from Optionee to the Company shall be
treated as payment to Optionee in cash to the extent of the unpaid
principal and any accrued interest cancelled. In the event of a bona fide
gift or involuntary transfer, the purchase price shall be the fair market
value of the Transfer Shares as determined by the Committee in good faith.
(e) Failure to Exercise Right of First Refusal. If the
------------------------------------------
Company fails to exercise the Right of First Refusal in full within the
period specified in paragraph_11(d) above, Optionee may conclude a transfer
to the Proposed Transferee of the Transfer Shares on the terms and
conditions described in the Transfer Notice, provided such transfer occurs
not later than one hundred twenty (120) days following delivery to the
Company of the Transfer Notice. The Committee shall have the right to
demand further assurance from Optionee and the Proposed Transferee (in a
form satisfactory to the Committee) that the transfer of the Transfer
Shares was actually carried out on the terms and conditions described in
the Transfer Notice. No Transfer Shares shall be transferred on the books
of the Company until the Committee has received such assurances, if so
demanded, and has approved the proposed transfer as bona fide, pursuant to
paragraph_11(c) above. Any proposed transfer on terms and conditions
different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by Optionee with the
procedure described in this paragraph_11.
(f) Transfers of the Transfer Shares. All transferees of
--------------------------------
the Transfer Shares or any interest therein, other than the Company shall
be required as a condition of such transfer to agree in writing (in a form
satisfactory to the Committee) that such transferee shall receive and hold
such Transfer Shares or interests subject to the provisions of this
paragraph_11 providing for the Right of First Refusal with respect to any
subsequent transfer. Any sale or transfer of any shares acquired upon
exercise of the option shall be void unless the provisions of this
paragraph_11 are met.
(g) Transfers Not Subject to the Right of First Refusal.
---------------------------------------------------
5
<PAGE>
(i) The Right of First Refusal shall not apply to a
transfer to the Optionee's ancestors, descendants, spouse or to a
trustee solely for benefit of the Optionee or the Optionee's
ancestors, descendants or spouse; provided, however that such
transferee shall agree in writing (in a form satisfactory to the
Committee) to take the stock subject to all the terms of this
paragraph_11 providing for a Right of First Refusal with respect
to any subsequent transfer.
(ii) The Right of First Refusal shall not apply to
any transfer or exchange of the shares acquired pursuant to the
exercise of the option if such transfer is in connection with a
Transfer of Control. If the consideration received pursuant to
such transfer or exchange consists of stock of the Company, such
consideration shall remain subject to the Right of First Refusal
unless the provisions of subparagraph_(g)(iv) result in a
termination of the Right of First Refusal.
(iii) Assignment of the Right of First Refusal. The
----------------------------------------
Company shall have the right to assign the Right of First Refusal
at any time, whether or not the Optionee has attempted a
transfer, to one or more persons as may be selected by the
Committee.
(iv) Early Termination of the Right of First Refusal.
-----------------------------------------------
The foregoing provisions of this paragraph_11 notwithstanding,
the Right of First Refusal shall terminate and be of no further
force and effect upon (i)_the occurrence of a Corporate
Transaction as described in paragraph_7 unless the surviving,
continuing, successor or purchasing corporation, as the case may
be, assumes the Company's rights and obligations under the Plan,
or (ii)_the existence of a public market for the Company's common
stock (or any other stock issued by the Company, or any
successor, in exchange for such stock). A "public market" shall
be deemed to exist if (i)_such stock is listed on a national
securities exchange (as that term is used in the Securities
Exchange Act of 1934), or (ii)_such stock is traded on the over-
the-counter market and prices therefor are published daily on
business days in a recognized financial journal.
(h) Legends. In addition to any other legends required
-------
pursuant to applicable federal or state securities laws, each certificate
evidencing the Stock or a portion thereof issued upon exercise of the
option shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR
OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN AN
AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED
HOLDER, OR HIS PREDECESSOR IN INTEREST, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS
CORPORATION."
12. Lock-Up Agreement. Optionee, if requested by an underwriter
-----------------
of Common Stock or other securities of the Company, shall agree not to sell or
otherwise transfer or dispose of any Common Stock of the Company held by
Optionee (except Common Stock included in such registration) during the 180 day
period following the effective date of a registration statement of the Company
filed under the Securities Act of 1933, as amended, or such shorter period of
time as the underwriter shall require. Such agreement shall be in writing in the
form satisfactory to such underwriter. The Company may impose stop-transfer
instructions with respect to such Common Stock subject to the foregoing
restriction until the end of said period.
6
<PAGE>
INTERNATIONAL NETWORK SERVICES
STOCK OPTION EXERCISE FORM
International Network Services
650 Castro Street, Suite 260
Mountain View, California 94041
Gentlemen:
The undersigned optionee (the "Optionee"), elects to exercise the
option to purchase _________ shares of Common Stock (the "Shares") of
International Network Services, a California corporation (the "Company"), under
and pursuant to the stock option granted to the Optionee by the Company pursuant
to the Company's Amended and Restated 1992 Flexible Stock Incentive Plan (the
"Plan") and that certain Notice of Stock Option Grant and Stock Option Agreement
dated ___________________, 19__ by and between Optionee and the Company (the
"Option Agreement").
Prior to issuance of the Shares, Optionee will make full payment
of the option price for the Shares in cash or by personal or certified check
payable to the Company.
Optionee acknowledges that the exercise of the option and any
subsequent transfer of the Shares may have state and federal income tax
consequences, and that Optionee should consult his or her tax advisor concerning
such consequences. Optionee will make adequate provision for federal and state
income tax withholding obligations of the Company, if any, which arise upon
exercise, in whole or in part, of the option or upon a subsequent transfer of
any of the Shares.
Optionee represents and agrees that Optionee is over eighteen
(18) years of age, that Optionee is acquiring the Shares for investment and that
Optionee has no present intention to transfer, sell or otherwise dispose of such
Shares, except as permitted pursuant to the Plan and in compliance with all
applicable securities laws.
Optionee further acknowledges and understands that the Shares
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and that consequently the Shares must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available. Optionee further acknowledges and
understands that the Company is under no obligation to register the Shares and
that, in the absence of registration, the Shares may not be transferred.
Optionee understands that the instrument evidencing the Shares will be imprinted
with legends which prohibit the transfer of the Shares unless the Shares are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company. Optionee does not have any contract, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person with respect to any of the Shares.
Optionee is aware of the adoption of Rule_144 by the Securities
and Exchange Commission, promulgated under the Securities Act, which permits
limited public resale of securities acquired in an non-public offering subject
to the satisfaction of certain conditions, including, among other things: the
availability of certain public information about the Company, the resale
occurring not less than two (2) years after the party has purchased and paid for
the securities to be sold, the sale being through a broker in an unsolicited
"broker's transaction", and the amount of securities being sold during any three
- -month period not exceeding specified
<PAGE>
limitations.
Optionee agrees further that the Shares are being acquired by
Optionee in accordance with and subject to the terms, provisions and conditions
of the Option Agreement, which Option Agreement shall bind and inure to the
benefit of Optionee's heirs, legal representatives, successors and assigns.
Optionee agrees further that the Shares are being acquired by the
Optionee in accordance with and subject to the Bylaws of the Company, which
Bylaws shall bind and inure to the benefit of Optionee's heirs, legal
representatives, successors and assigns.
Optionee agrees that Optionee will notify the Company in writing
if Optionee transfers any of the shares purchased pursuant to this option within
one (1) year from the date Optionee exercises all or part of this Option or
within two (2) years from the date the Optionee was granted the option.
Optionee agrees to obtain the consent of Optionee's spouse of any
such agreement which may be required by the Company.
Optionee certifies that the forgoing is true. Optionee's address of record is:
____________________________________________ ________________________________
_________
Signature
____________________________________________ ________________________________
_________
Printed Name
____________________________________________ ________________________________
_______
Social Security Number
______________________
Date
Receipt of the above is hereby acknowledged.
INTERNATIONAL NETWORK SERVICES
____________________________________________
Signature
Secretary
- ---------------------------------------------
Title
<PAGE>
PROMISSORY NOTE
$ -----------------------------------
- ------------- (City, State)
, 199
-------- --
FOR VALUE RECEIVED, promises to pay to International Network
--------------
Services, a California corporation (the "Company"), or order, the principal sum
of dollars ($ ), together with interest on the unpaid
--------------------- -------
principal hereof from the date hereof at the rate of percent ( %) per
----------- ---
annum, compounded semiannually.
Principal and interest shall be due and payable on , 19 . Should the
------ --
undersigned fail to make full payment of principal or interest for a period of
10 days or more after the due date thereof, the whole unpaid balance on this
Note of principal and interest shall become immediately due at the option of the
holder of this Note. Payments of principal and interest shall be made in lawful
money of the United States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of . This
-------
Note is secured by a pledge of the Company's Common Stock under the terms of a
Security Agreement of even date herewith and is subject to all the provisions
hereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee or consultant of
the Company for any reason, this Note shall, at the option the Company, be
accelerated, and the whole unpaid balance on this Note of principal and accrued
interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
-------------------------
-------------------------
<PAGE>
Exhibit 10.3
INTERNATIONAL NETWORK SERVICES
1996 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means International Network Services, a California
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services and who is compensated
for such services.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Section 16(b) Officers and
--------
Directors, employed by the Company or any Parent or Subsidiary of the Company.
A Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between locations of
the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Section 16(b) Officer" means a person who is an officer of the
---------------------
Company within the meaning of Section 16(b) of the Exchange Act and the rules
and regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
options are surrendered in exchange for options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1996 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 below.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
-3-
<PAGE>
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is five million five hundred thousand (5,500,000) Shares, plus
any unused Shares, any forfeited Shares and any annual increase in the number of
Shares as provided for below. For purposes of this Section 3, (i) "unused
Shares" means Shares reserved for issuance but not covered by grants under the
Amended and Restated 1992 Flexible Stock Incentive Plan of the Company (the
"1992 Plan") (which 1992 Plan shall be terminated as of the effective date of
the Plan), and (ii) "forfeited Shares" means any Shares covered by grants under
the 1992 Plan that are not issued to participants or that are returned to the
Company upon forfeiture of such Shares.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered
------------------------------
by different Committees with respect to different groups of Service Providers.
-4-
<PAGE>
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the Plan shall be
administered by the Board or a Committee of two or more "non-employee directors"
within the meaning of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which Committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
-5-
<PAGE>
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(ix) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
-6-
<PAGE>
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
-7-
<PAGE>
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of Fair Market Value on the date of
grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a formal
cashless exercise program adopted by the Company in connection with the Plan;
-8-
<PAGE>
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Options.
-------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that he or she is
entitled to exercise it on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the
-9-
<PAGE>
Optionee's termination. If, on the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option at any time within twelve (12) months from the date of
termination, but only to the extent that the Optionee is entitled to exercise it
on the date of termination (and in no event later than the expiration of the
term of the Option as set forth in the Option Agreement). If, on the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the Shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Optionee would have been entitled to exercise
the Option on the date of death. If, at the time of death, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
-10-
<PAGE>
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities
-11-
<PAGE>
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
-12-
<PAGE>
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-13-
<PAGE>
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-14-
<PAGE>
INTERNATIONAL NETWORK SERVICES
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
Vesting Schedule:
- ----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[24% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 2% of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates].
<PAGE>
Termination Period:
------------------
This Option may be exercised for _____ [days/months] after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-2-
<PAGE>
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit C, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair
-3-
<PAGE>
Market Value of the Exercised Shares on the date of exercise over their
aggregate Exercise Price. If the Optionee is an Employee or a former Employee,
the Company will be required to withhold from his or her compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an ISO,
----------------------
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one year,
---
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one year
---
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
-4-
<PAGE>
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: INTERNATIONAL NETWORK SERVICES
________________________________ ___________________________________
Signature By
________________________________ ___________________________________
Print Name Title
________________________________
-5-
<PAGE>
Residence Address
____________________________________
-6-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________________
Spouse of Optionee
-7-
<PAGE>
EXHIBIT A
---------
1996 STOCK PLAN
EXERCISE NOTICE
International Network Services
650 Castro Street, Suite 260
Mountain View, CA 94041
Attention: Corporate Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
------------------
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of International Network Services (the
"Company") under and pursuant to the 1996 Stock Plan (the "Plan") and the Stock
Option Agreement dated _____________, 19___ (the "Option Agreement"). The
purchase price for the Shares shall be $_____________, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing
<PAGE>
signed by the Company and Purchaser. This agreement is governed by the internal
substantive laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: INTERNATIONAL NETWORK SERVICES
_________________________________ ________________________________
Signature By
_________________________________ ________________________________
Print Name Its
Address: Address:
- ------- -------
_________________________________ 650 Castro Street, Suite 260
Mountain View, CA 94041
_________________________________
________________________________
Date Received
-2-
<PAGE>
Exhibit 10.4
INTERNATIONAL NETWORK SERVICES
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of International Network Services.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean International Network Services and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight-time gross earnings,
------------
payments for overtime, shift premiums, commissions, and performance bonuses
(other than referral and "spot" bonuses).
(f) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period or Special Offering Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock for
the day of determination, as reported in The Wall Street Journal or such other
source as the Board deems reliable;
(3) For the purposes of the Enrollment Date under the first
Offering Period under the Plan, the Fair Market Value of the Common Stock shall
be the price to public as set forth in the final prospectus included within the
Registration Statement on form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Common Stock; or
(4) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(k) "Offering Period" shall mean a period of approximately
---------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 or November
1 of each year and terminating on the last Trading Day in the period ending
twenty-four months later. The first Offering Period shall commence on the date
on which the Company's registration statement on Form S-1 is declared effective
by the Securities and Exchange Commission and shall terminate on the last
Trading Day on or before October 31, 1998. The duration and timing of Offering
Periods may be changed pursuant to Section 4 of this Plan. As used herein,
"Offering Period" shall also mean "Special Offering Period," where applicable.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the last Trading Day prior to the
Enrollment Date or such Fair Market Value on the Exercise Date, whichever is
lower. With respect to the first Offering Period and the Special Offering
Periods, the Purchase Price shall be 85% of the Fair Market
-2-
<PAGE>
Value of a share of Common Stock on the Enrollment Date or on the Exercise Date,
whichever is lower.
(n) "Purchase Period" shall mean the approximately six-month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date. The
first Purchase Period of any Offering Period shall commence on the Enrollment
Date and end on the next Exercise Date. The first Purchase Period of the first
Offering Period shall commence on the Enrollment Date and shall end on the last
trading day on or before April 30, 1997.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Special Offering Period" shall mean one of two Offering Periods
-----------------------
that commence on November 29, 1996 and February 14, 1997. The Special Offering
Periods shall be coterminous with the First Offering Period and shall end on the
last Trading Day on or before October 31, 1998. The first Purchase Period of
each Special Offering Period shall commence on the applicable Enrollment Date
and shall end on the last Trading Day on or before April 30, 1997.
(q) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(r) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee (as defined in Section 2(g)), who shall be employed
by the Company on a given Enrollment Date shall be eligible to participate in
the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock representing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
-3-
<PAGE>
4. Offering Periods. Generally, the Plan shall be implemented by
----------------
consecutive, overlapping Offering Periods with a new Offering Period commencing
on the first Trading Day on or after May 1 and November 1 each year, or on such
other date as the Board shall determine, and continuing thereafter until
terminated in accordance with Section 19 hereof. The first Offering Period
shall commence on the effective date of the initial public offering of the
Company's Common Stock that is filed with the Securities and Exchange Commission
and shall end on the last Trading Day on or before October 31, 1998. The
Special Offering Periods shall commence on the first Trading Day on or after
November 29, 1996 and February 14, 1997, and shall end on the last Trading Day
on or before October 31, 1998. The Board shall have the power to change the
duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement provided by the Company authorizing payroll
deductions and filing it with the Company's payroll office prior to the
applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may decrease the rate of his or her
payroll deductions one time during a Purchase Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. In addition, a participant may increase or decrease his or her
deduction rate upon the commencement of a Purchase Period. The change in rate
shall be effective with the first full payroll period following five (5)
business days after the Company's receipt of the new subscription agreement
unless the Company elects to process a given change in
-4-
<PAGE>
participation more quickly. A participant's subscription agreement shall remain
in effect for successive Offering Periods unless terminated as provided in
Section 10 hereof.
(d) Notwithstanding the foregoing, a participant's payroll deductions
may be decreased to zero percent (0%) at any time during an Purchase Period to
the extent necessary to comply with Section 423(b)(8) of the Code and Section
3(b) hereof. Payroll deductions shall recommence at the rate provided in such
participant's subscription agreement at the beginning of the first Purchase
Period during which an employee's participation shall so comply, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price. During a six-month Purchase
Period an Employee shall in no event be permitted to purchase more than the
lesser of 2,000 shares or such number of shares as may be determined by the Plan
administrator; provided, however, that such limit shall be adjusted
proportionately in the case of a Purchase Period longer than six months. The
number of shares that may be purchased shall also be subject to the limitations
set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant to
Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a
-5-
<PAGE>
participant's lifetime, a participant's option to purchase shares hereunder is
exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date, the
--------
shares purchased upon exercise of an option shall be credited to an account in
the participant's name with a brokerage firm selected by the Company to hold the
shares in its street name.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by completing a notice of withdrawal
provided by the Company and filing it with the Company's payroll office. All of
the participant's payroll deductions credited to his or her account shall be
paid to such participant promptly after receipt of notice of withdrawal and such
participant's option for the Offering Period shall be automatically terminated,
and no further payroll deductions for the purchase of shares shall be made for
such Offering Period. If a participant withdraws from an Offering Period,
payroll deductions shall not resume at the begin ning of the succeeding Offering
Period unless the participant delivers to the Company a new subscription
agreement.
(b) Upon a participant's ceasing to be an Employee (as defined in
Section 2(g) hereof), for any reason, he or she shall be deemed to have elected
to withdraw from the Plan and the payroll deductions credited to such
participant's account during the Offering Period but not yet used to exercise
the option shall be returned to such participant or, in the case of his or her
death, to the person or persons entitled thereto under Section 14 hereof, and
such participant's option shall be automatically terminated.
(c) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
12. Stock.
-----
(a) Subject to Section 18, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be one million two hundred thousand (1,200,000) shares. If, on a given
-6-
<PAGE>
Exercise Date, the number of shares with respect to which options are to be
exercised exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration.
--------------
(a) Administrative Body. The Plan shall be administered by the Board
-------------------
or a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
(b) Rule 16b-3 Limitations. Notwithstanding the provisions of
----------------------
Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor provision ("Rule 16b-3") provides specific requirements for the
administrators of plans of this type, the Plan shall be administered only by
such a body and in such a manner as shall comply with the applicable
requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion
concerning decisions regarding the Plan shall be afforded to any committee or
person that is not "disinterested" as that term is used in Rule 16b-3.
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
-7-
<PAGE>
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, as well as the price per share and
the number of shares of Common Stock covered by each option under the Plan which
has not yet been exercised, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
-8-
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Periods shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, any Purchase Periods then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date") and any
Offering Periods then in progress shall end on the New Exercise Date. The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
-9-
<PAGE>
19. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 18 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such
-10-
<PAGE>
shares if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned applicable provisions of law.
22. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
23. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the
Common Stock on any Exercise Date in an Offering Period is lower than the Fair
Market Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically withdrawn
from such Offering Period immediately after the exercise of their option on such
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of the first day thereof.
-11-
<PAGE>
EXHIBIT 10.5
LEASE AGREEMENT
By And Between
AETNA LIFE INSURANCE COMPANY,
A Connecticut Corporation
As Landlord
And
INTERNATIONAL NETWORK SERVICES, INC.,
A California corporation
As Tenant
Dated may 8, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Basic Lease Information...................................................... iv
1. Demise......................................................................1
2. Premises....................................................................1
3. Term........................................................................1
4. Rent........................................................................2
5. Late Charge.................................................................5
6. Security for Tenants Obligations............................................5
7. Possession..................................................................6
8. Use Of Premises.............................................................7
9. Acceptance Of Premises......................................................8
10. Surrender..................................................................8
11. Alterations And Additions..................................................9
12. Maintenance Of Premises....................................................9
13. Landlords Insurance.......................................................11
14. Tenants Insurance.........................................................11
15. Indemnification...........................................................12
16. Subrogation...............................................................12
17. Abandonment...............................................................13
18. Free From Liens...........................................................13
19. Advertisements And Signs..................................................13
20. Utilities.................................................................14
21. Entry By Landlord.........................................................14
22. Destruction And Damage....................................................14
23. Condemnation..............................................................16
24. Assignment And Subletting.................................................17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
25. Tenants Default...........................................................19
26. Landlords Remedies........................................................21
27. Attorneys Fees............................................................23
28. Taxes.....................................................................24
29. Effect Of Conveyance......................................................24
30. Tenants Estoppel Certificate..............................................24
31. Subordination.............................................................25
32. Environmental Covenants...................................................25
33. Notices...................................................................28
34. Waiver....................................................................28
35. Holding Over..............................................................28
36. Successors And Assigns....................................................29
37. Time......................................................................29
38. Brokers...................................................................29
39. Limitation Of Liability...................................................29
40. Financial Statements......................................................29
41. Rules And Regulations.....................................................30
42. Mortgagee Protection......................................................30
43. Entire Agreement..........................................................31
44. Interest..................................................................31
45. Construction..............................................................31
46. Representations And Warranties Of Tenant..................................31
</TABLE>
ii
<PAGE>
Exhibit
A Diagram of the Premises
B Tenant Improvements
B-1 Final Plans and Specifications for Tenant Improvements
C Commencement Date Memorandum
iii
<PAGE>
Lease Agreement
BASIC LEASE INFORMATION
Lease Date: May 8, 1996
Landlord: Aetna Life Insurance Company, a Connecticut
corporation
Landlords Address: c/o Aetna Realty Investors, Inc.
Kodak Center
1740 Technology Drive, Suite 600
San Jose, California 95110
Tenant: International Network Services, Inc.,
a California corporation
Tenants Address: 1213 Innsbruck Drive
Sunnyvale, California 94089
Attention: Manager of Corporate Services
Copies of all notices sent to Tenant under this
-----------------------------------------------
Lease shall also be delivered to:
--------------------------------
1213 Innsbruck Drive
Sunnyvale, California 94089
Attention: Director of Legal Services
Premises: The building commonly known as 1213 Innsbruck Drive,
Sunnyvale, California, containing approximately
Thirty-one Thousand Two Hundred Ninety-three
(31,293) rentable square feet
Anticipated
Commencement Date: July 26, 1996
Months of Term: Sixty (60) months
Monthly Base Rent:
<TABLE>
<CAPTION>
Monthly Monthly Rent
Months Sq. Ft. Rate
<S> <C> <C> <C>
1-30 31,293 $1.05 $32,857.65
31-60 31,293 $1.15 $35,986.95
</TABLE>
iv
<PAGE>
Prepaid Rent: Thirty-two Thousand Eight Hundred Fifty-seven and
65/100 Dollars ($32,857.65)
Month To Which Prepaid First (1st) month of the Term
Rent Applied:
Security Deposit: Thirty-five Thousand Nine Hundred Eighty-six and
95/100 Dollars ($35,986.95)
Permitted Use: General office, engineering and warehouse uses
Brokers: CPS
Cornish & Carey Commercial
Tenant Improvements Six Hundred Twenty-five Thousand Eight Hundred Sixty
Allowance: Dollars ($625,860.00)
Tenant Improvements Loan: Up to Ninety-three Thousand Eight Hundred Seventy-
nine Dollars ($93,879.00)
Architect: DES
v
<PAGE>
LEASE AGREEMENT
This Lease Agreement is made and entered into by and between Landlord and
Tenant on the Lease Date. The defined terms used in this Lease which are
defined in the Basic Lease Information attached to this Lease Agreement ("Basic
Lease Information") shall have the meaning and definition given them in the
Basic Lease Information. The Basic Lease Information, the exhibits, and this
Lease Agreement are and shall be construed as a single instrument and are
referred to herein as the "Lease".
1. DEMISE
In consideration for the rents and all other charges and payments payable
by Tenant, and for the agreements, terms and conditions to be performed by
Tenant in this Lease, Landlord does hereby lease to Tenant, and Tenant does
hereby hire and take from Landlord, the Premises described below (the
"Premises"), upon the agreements, terms and conditions of this Lease for the
Term hereinafter stated.
2. PREMISES
The Premises demised by this Lease is the building specified in the Basic
Lease Information. The Premises contains the square footage specified in the
Basic Lease Information. The location and dimensions of the Premises are
depicted on Exhibit A, which is attached hereto and incorporated herein by this
reference. Tenant shall have the non-exclusive right to use the parking and
other common areas on the real property on which the Premises is situated (the
"Property"). No easement for light or air is incorporated in the Premises.
The Premises demised by this Lease shall also include the Tenant
Improvements (as that term is defined in Exhibit B, attached hereto and
incorporated herein by this reference) to be constructed by Landlord within the
interior of the Premises. Landlord shall construct the Tenant Improvements on
the terms and conditions set forth in Exhibit B. Landlord and Tenant agree to
and shall be bound by the terms and conditions of Exhibit B.
3. TERM
The term of this Lease (the "Term") shall be for the period of months
specified in the Basic Lease Information, commencing on the earliest to occur of
the following dates (the "Commencement Date"):
(a) The date (i) the Tenant Improvements are approved by the appropriate
governmental agency as being in accordance with its building code and the
building permit issued for such improvements, as evidenced by the issuance of a
final building inspection approval, and (ii) Landlords architect and general
contractor have both certified in writing
1
<PAGE>
to Tenant that the Tenant Improvements have been substantially completed in
accordance with the plans and specifications therefor; or
(b) The date Tenant commences occupancy of the Premises; provided,
however, that Tenant shall not be deemed to have commenced occupancy in the
Premises for purposes of this Section 3(b) if Tenant enters upon the Premises
for the sole purpose of installing its fixtures and equipment and preparing the
Premises for Tenants business operations in accordance with Section 7(c) below.
When the Commencement Date has been determined pursuant to the foregoing,
Landlord and Tenant shall promptly execute a Commencement Date Memorandum in the
form attached hereto as Exhibit C.
4. RENT
(a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day
of each month, without further notice or demand and without offset or deduction,
the monthly installments of rent specified in the Basic Lease Information (the
"Base Rent").
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid
Rent specified in the Basic Lease Information to be applied toward Base Rent for
the month of the Term specified in the Basic Lease Information.
(b) ADDITIONAL RENT. This Lease is intended to be a net Lease; and
subject to Paragraph 12(c) below and any specific exclusions set forth herein,
the Rent owing hereunder is to be paid by Tenant absolutely net of all costs and
expenses relating to Landlord's ownership of the Property and the Premises. The
provisions of this Paragraph 4(b) for the payment of Expenses (as hereinafter
defined) are intended to pass on to Tenant all such costs and expenses. In
addition to the Base Rent, Tenant shall pay to Landlord, in accordance with this
Paragraph 4, all costs and expenses paid or incurred by Landlord in connection
with the management, operation, maintenance and repair of the Property and the
Premises (the "Expenses"), including, without limitation, all the following
items related to the Premises, the Property, and/or the Outside Areas (as
defined in Paragraph 4(b)(3)) (the "Additional Rent"):
(1) Taxes and Assessments. All real estate taxes and assessments.
Real estate taxes and assessments shall include any form of assessment, license,
fee, tax, levy, penalty (if a result of Tenant's delinquency), or tax (other
than net income, estate, succession, inheritance, transfer or franchise taxes),
imposed by any authority having the direct or indirect power to tax, or by any
city, county, state or federal government or any improvement or other district
or division thereof, whether such tax is (i) determined by the area of the
Premises or the Property, or any part thereof, or the Rent and other sums
payable hereunder by Tenant or by other tenants, including, but not limited to,
any gross income or excise tax levied by any of the foregoing authorities with
respect to receipt of Rent or other sums due under this Lease; (ii) upon any
legal or equitable interest of
2
<PAGE>
Landlord in the Premises or the Property, or any part thereof; (iii) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest in the Premises or the Property; (iv) levied or assessed in lieu
of, in substitution for, or in addition to, existing or additional taxes against
the Premises or the Property, whether or not now customary or within the
contemplation of the parties; or (v) surcharged against the parking area. Tenant
and Landlord acknowledge that Proposition 13 was adopted by the voters of the
State of California in the June, 1978 election and that assessments, taxes,
fees, levies and charges may be imposed by governmental agencies for such
purposes as fire protection, street, sidewalk, road, utility construction and
maintenance, refuse removal and for other governmental services which may
formerly have been provided without charge to property owners or occupants. It
is the intention of the parties that all new and increased assessments, taxes,
fees, levies and charges due to Proposition 13 or any other cause are to be
included within the definition of real property taxes for purposes of this
Lease.
(2) Insurance. All insurance premiums, including premiums for "all
risk" fire and extended coverage (including earthquake endorsements) insurance
for the Premises, commercial general liability insurance, other insurance as
Landlord deems necessary, and any deductibles paid under policies of any such
insurance.
(3) Outside Areas Expenses. All costs to maintain, repair, replace,
supervise, insure (including provision of commercial general liability
insurance) and administer the areas outside of the Premises ("Outside Areas"),
including parking areas, landscaping (including maintenance contracts),
sprinkler systems, sidewalks, driveways, curbs, lighting systems, and utilities
for Outside Areas.
(4) Parking Charges. Any parking charges or other costs levied,
assessed or imposed by, or at the direction of, or resulting from statutes or
regulations, or interpretations thereof, promulgated by any governmental
authority or insurer in connection with the use or occupancy of the Premises,
the Outside Areas and/or the Property.
(5) Maintenance and Repair of Premises. Except for costs which are
the responsibility of Landlord pursuant to Section 12(c) below, all costs to
maintain, repair, and replace the Premises, including without limitation, the
roof coverings of the Premises, the heating, ventilation, and air conditioning
("HVAC") systems serving the Premises (including the cost of maintenance
contracts), and all utility and plumbing systems, fixtures and equipment serving
the Premises but which are located in the Outside Areas. Notwithstanding
anything in this Section 4(b)(5) to the contrary, with respect to all sums
payable by Tenant as Additional Rent under this Section 4(b)(5) for the repair
or replacement of any item or the construction of any new item in connection
with the physical operation of the Premises (i.e., HVAC, roof membrane or
coverings, plumbing, electrical and utility systems and parking area) which is a
capital item the repair or replacement of which properly would be capitalized
under generally accepted accounting principles, Tenant shall be required to pay
only the prorata share of the cost of the item
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falling due within the Term (including any Renewal Term) based upon the
amortization of the same over the useful life of such item, as reasonably
determined by Landlord.
(6) Management and Administration. All costs for management and
administration of the Premises and the Property, including a property management
fee, accounting, auditing, billing, postage, employee benefits, payroll taxes,
etc.
(c) EXCLUSIONS FROM ADDITIONAL RENT. Notwithstanding anything to the
contrary contained in Section 4(b) above, the following items shall be
specifically excluded from the definition of "Expenses":
(1) Costs occasioned by fire, acts of God or other casualties or by
the exercise of the power of eminent domain; and
(2) Costs incurred by Landlord in remediating Hazardous Materials
from the Premises or the Property.
Nothing contained in this Section 4(c) shall be deemed to restrict or limit the
obligations and liabilities of Tenant under Sections 15, 22, 23 or 32 below or
any other applicable provisions of this Lease.
(d) PAYMENT OF ADDITIONAL RENT.
(1) Upon commencement of this Lease, Landlord shall submit to Tenant
an estimate of monthly Additional Rent for the period between the Commencement
Date and the following December 31 and Tenant shall pay such estimated
Additional Rent on a monthly basis concurrently with the payment of the Base
Rent. Tenant shall continue to make said monthly payments until notified by
Landlord of a change therein. By March 1 of each calendar year, Landlord shall
endeavor to provide to Tenant a statement showing the actual Additional Rent due
to Landlord for the prior calendar year, prorated from the Commencement Date
during the first year. If the total of the monthly payments of Additional Rent
that Tenant has made for the prior calendar year is less than the actual
Additional Rent chargeable to Tenant for such prior calendar year, then Tenant
shall pay the difference in a lump sum within ten (10) days after receipt of
such statement from Landlord. Any overpayment by Tenant of Additional Rent for
the prior calendar year shall be credited towards the Additional Rent next due.
(2) The actual Additional Rent for the prior calendar year shall be
used for purposes of calculating Tenant's monthly payment of estimated
Additional Rent for the current year, subject to adjustment as provided above,
except that in any year in which resurfacing of the parking area or material
roof repairs are planned, the cost of which is not required to be borne by
Landlord as explicitly set forth elsewhere herein, Landlord may include the
estimated cost of such work in the estimated monthly Additional Rent. Landlord
shall make the final determination of Additional Rent for the year in which this
Lease terminates as soon as possible after termination of such year. Tenant
shall remain
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liable for payment of any amount due to Landlord in excess of the estimated
Additional Rent previously paid by Tenant, and, conversely, Landlord shall
promptly return to Tenant any overpayment, even though the Term has expired and
Tenant has vacated the Premises. Failure of Landlord to submit statements as
called for herein shall not be deemed a waiver of Tenants obligation to pay
Additional Rent as herein provided.
(e) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other
sums payable by Tenant to Landlord hereunder (including without limitation,
installments of principal and interest due under the Tenant Improvements Loan,
as defined in Exhibit B hereto) are referred to as the "Rent". All Rent shall
be paid without deduction, offset or abatement in lawful money of the United
States of America. Checks are to be made payable to ALIC SA87 IODCG AAF REI 3261
and shall be mailed to: Moffett Park, 27102 100 2, Dept. 66268, El Monte,
California 91735-6268, or to such other person or place as Landlord may, from
time to time, designate to Tenant in writing. Rent for any partial month during
the Term shall be prorated for the portion thereof falling due within the Term.
5. LATE CHARGE
Notwithstanding any other provision of this Lease, Tenant hereby
acknowledges that late payment to Landlord of Rent, or other amounts due
hereunder will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. If any Rent or
other sums due from Tenant are not received by Landlord or by Landlords
designated agent within ten (10) days after their due date, then Tenant shall
pay to Landlord a late charge equal to ten percent (10%) of such overdue amount,
plus any attorneys' fees incurred by Landlord by reason of Tenants failure to
pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby
agree that such late charges represent a fair and reasonable estimate of the
cost that Landlord will incur by reason of Tenants late payment. Landlords
acceptance of such late charges shall not constitute a waiver of Tenants default
with respect to such overdue amount or estop Landlord from exercising any of the
other rights and remedies granted under this Lease.
Initials: Landlord _______ Tenant _______
6. SECURITY FOR TENANTS OBLIGATIONS
(a) SECURITY DEPOSIT. Concurrently with Tenants execution of the Lease,
Tenant shall deposit with Landlord the Security Deposit specified in the Basic
Lease Information as security for the full and faithful performance of each and
every term, covenant and condition of this Lease. Landlord may use, apply or
retain the whole or any part of the Security Deposit as may be reasonably
necessary (a) to remedy Tenant's default in the payment of any Rent, (b) to
repair damage to the Premises caused by Tenant, (c) to clean the Premises upon
termination of this Lease, (d) to reimburse Landlord for the payment of any
amount which Landlord may reasonably spend or be required to spend by reason of
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Tenant's default, or (e) to compensate Landlord for any other loss or damage
which Landlord may suffer by reason of Tenant's default. Within thirty (30) days
following the expiration of the Term and the performance of Tenant's obligations
with respect to the surrender of the Premises, the Security Deposit or any
balance thereof shall be returned to Tenant or, at the option of Landlord, to
the last assignee of Tenant's interest in this Lease. Landlord shall not be
required to keep the Security Deposit separate from its general funds and Tenant
shall not be entitled to any interest on such deposit. If Landlord so uses or
applies all or any portion of said deposit, within five (5) days after written
demand therefor Tenant shall deposit cash with Landlord in an amount sufficient
to restore the Security Deposit to the full extent of the above amount, and
Tenant's failure to do so shall be a default under this Lease. In the event
Landlord transfers its interest in this Lease, Landlord shall transfer the then
remaining amount of the Security Deposit to Landlord's successor in interest,
and thereafter Landlord shall have no further liability to Tenant with respect
to such Security Deposit, provided that Landlords successor assumes Landlords
obligations hereunder in writing.
7. POSSESSION
(a) TENANT'S RIGHT OF POSSESSION. Subject to Paragraphs 7(b) and (c)
below, Tenant shall be entitled to possession of the Premises upon commencement
of the Term.
(b) DELAY IN DELIVERING POSSESSION. If for any reason whatsoever, Landlord
cannot deliver possession of the Premises to Tenant on or before the Anticipated
Commencement Date specified in the Basic Lease Information, then subject to
Section 7(c) below, this Lease shall not be void or voidable, nor shall
Landlord, or Landlord's agents, be liable to Tenant for any loss or damage
resulting therefrom. Tenant shall not be liable for Rent until Landlord
delivers possession of the Premises to Tenant. The expiration date of the Term
shall be extended by the same number of days that Tenants possession of the
Premises was delayed.
(c) EARLY OCCUPANCY. Notwithstanding anything to the contrary contained in
Section 7(a), Tenant shall have the right to enter upon the Premises at such
times as shall be acceptable to Landlord during the fourteen (14) day period
prior to the Commencement Date for the sole purpose of installing Tenants
fixtures and equipment and preparing the Premises for its business operations,
provided, however, that such entry shall be subject to all of the terms and
provisions of this Lease, excepting only the obligation to pay Rent and,
provided further, that Tenant shall not conduct business in the Premises during
such period. Tenant understands and agrees that Landlord shall not be liable to
Tenant or its Agents (as hereinafter defined) for any loss or damage to
property, or injury to person, arising from or related to construction of the
Tenant Improvements. Tenant shall take all reasonable precautions to protect
against such loss, damage or injury during construction of the Tenant
Improvements, and shall not interfere with the conduct of the Tenant Improvement
work. Tenant shall cooperate with all reasonable directives of
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Landlord and Landlord's contractor in order to minimize any disruption or delay
in completion of the Tenant Improvements work.
(d) TENANT'S RIGHT TO TERMINATE. Notwithstanding anything herein to the
contrary, in the event Landlord fails to deliver possession of the Premises to
Tenant on or before December 31, 1996, then Tenant shall have the right as its
sole remedy for such failure to terminate this Lease upon ten (10) days' notice
to Landlord, which notice shall be given, if at all, on or before January 5,
1997.
8. USE OF PREMISES
(a) PERMITTED USES. The Premises shall be used for the Permitted Uses
specified in the Basic Lease Information and for no other use without the prior
written consent of Landlord, which consent may be given or withheld in
Landlord's sole discretion. The Premises shall not be used to create any
nuisance or trespass, for any illegal purpose, for any purpose not permitted by
applicable laws and regulations, or for any purpose that would vitiate the
insurance or increase the premiums for insurance on the Premises. Tenant agrees
not to overload the floor(s) of the Premises.
(b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Tenant shall, at Tenant's
expense, faithfully observe and comply with all municipal, state and federal
statutes, rules, regulations, ordinances, requirements, and orders, now in force
or which may hereafter be in force pertaining to the Premises or Tenant's use
thereof, whether substantial in cost or otherwise, and all recorded covenants,
conditions and restrictions affecting the Property ("Private Restrictions") now
in force or which may hereafter be in force; provided, however, that Tenant
shall not be required to make or, except as provided in Section 4 above or any
other provision of this Lease, pay for, structural changes to the Premises,
including, without limitation, the installation of fire sprinkler systems,
seismic reinforcement and related alterations, and the removal of asbestos, not
related to Tenant's specific use of the Premises unless the requirement for such
changes is imposed as a result of any improvements or additions made or proposed
to be made at Tenant's request. The judgment of any court of competent
jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated any
such rule, regulation, ordinance, statute or Private Restrictions, shall be
conclusive of that fact as between Landlord and Tenant, but shall not be
conclusive as to whether Tenant had an obligation to comply with such law under
this Lease, although if such court makes a determination as to which party is
responsible for compliance with the law in question, then such determination
shall be conclusive of that issue as between Landlord and Tenant.
9. ACCEPTANCE OF PREMISES
Subject to Landlord's completion of any "punch-list" items agreed to by
Landlord and Tenant in writing within thirty (30) days after the Commencement
Date, by entry hereunder, Tenant accepts the Premises as suitable for Tenants
intended use and as being
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in good and sanitary operating order, condition and repair, AS IS, and without
representation or warranty by Landlord as to the condition, use or occupancy
which may be made thereof; provided, however, that Landlord shall cause the
HVAC, electrical and plumbing systems serving the Premises to be in good working
order and the roof on the Premises to be in good condition on the Commencement
Date. Any exceptions to the foregoing must be by written agreement executed by
Landlord and Tenant. Nothing contained in this Section 9 shall limit or restrict
Landlords repair and maintenance obligations under Section 12 below.
10. SURRENDER
Tenant agrees that on the last day of the Term, or on the sooner
termination of this Lease, Tenant shall surrender the Premises to Landlord (a)
in good condition and repair (damage by Acts of God, fire, condemnation,
Hazardous Materials (except to the extent Tenant is responsible for the removal
or remediation of such Hazardous Materials pursuant to Section 32 below), and
normal wear and tear excepted), but with all interior walls cleaned, any carpets
cleaned, and with all floors cleaned and waxed, together with all alterations,
additions and improvements which may have been made in or on the Premises;
except that Tenant shall remove any alterations, additions and improvements as
to which Landlord has, prior to the date of surrender, consented to or requested
removal; and (b) otherwise in accordance with Paragraph 32(f). Tenant shall
repair all damage caused by such removal and otherwise restore the Premises in
accordance with the preceding sentence at Tenant's sole cost and expense. On or
before the expiration or sooner termination of this Lease, Tenant shall remove
all of Tenant's trade fixtures and personal property from the Premises. All
property of Tenant not so removed, unless such non-removal is consented to by
Landlord, shall be deemed abandoned by Tenant, provided that in such event
Tenant shall remain liable to Landlord for all costs incurred in storing and
disposing of such abandoned property of Tenant. If the Premises are not
surrendered at the end of the Term or sooner termination of this Lease, and in
accordance with the provisions of this Paragraph 10 and of Paragraph 32(f),
Tenant shall indemnify, defend and hold Landlord harmless from and against any
and all loss or liability resulting from delay by Tenant in so surrendering the
Premises including, without limitation, any loss or liability resulting from any
claim against Landlord made by any succeeding tenant founded on or resulting
from such delay and losses to Landlord due to lost opportunities to lease any
portion of the Premises to succeeding tenants, together with, in each case,
reasonable attorneys fees and costs.
11. ALTERATIONS AND ADDITIONS
(a) Tenant shall not make, or permit to be made, any alteration or
addition to the Premises, or any part thereof, without the prior written consent
of Landlord, such consent not to be unreasonably withheld.
(b) Any alteration or addition to the Premises undertaken by or on behalf
of Tenant shall be at Tenants sole cost and expense, in compliance with all
applicable laws and
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requirements requested by Landlord, and in accordance with plans and
specifications approved in writing by Landlord, and shall be constructed and
installed by a contractor approved in writing by Landlord.
(c) In the event Landlord consents to a proposed alteration or addition,
such consent shall include Landlords advice whether or not such proposed
alteration or addition shall be required to be removed at the expiration or
termination of this Lease. If Landlord fails so to advise Tenant regarding
whether or not a proposed alteration or addition may be removed at the
expiration or termination of this Lease, then Tenant shall be required to
surrender the alteration or addition to Landlord with the Premises, without
compensation to Tenant, at the expiration or termination of this Lease. Subject
to the foregoing, all additions, alterations or improvements, including, but not
limited to, heating, lighting, electrical, air conditioning, fixed partitioning,
drapery, wall covering and paneling, built-in cabinet work and carpeting
installations made by Tenant, together with all property that has become an
integral part of the Premises, shall become the property of Landlord upon the
expiration or sooner termination of this Lease, and shall not be deemed trade
fixtures.
(d) Tenant agrees not to proceed to make such alterations or additions,
notwithstanding consent from Landlord to do so, until five (5) days after
Tenants receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Tenants improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work.
12. MAINTENANCE OF PREMISES
(a) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole
expense, (1) keep and maintain in good order and condition, repair, and replace
the Premises, and every part thereof, including glass, windows, window frames,
skylights, interior and exterior doors and door frames, and the interior of the
Premises, (excepting only those portions of the Premises to be maintained by
Landlord, as provided in Paragraph 12(c) below), (2) keep and maintain in good
order and condition, repair, and replace all utility and plumbing systems,
fixtures and equipment, including without limitation, electricity, gas, water,
and sewer, located in or on the Premises, and furnish all expendables, including
light bulbs, paper goods and soaps, used in the Premises, (3) repair all damage
to the Premises or the Outside Areas caused by the negligence or willful
misconduct of Tenant or its agents, employees, contractors or invitees. Tenant
shall not do anything to cause any damage, deterioration or unsightliness to the
Premises and the Outside Areas.
(b) LANDLORD'S RIGHT TO MAINTAIN AND REPAIR AT TENANT'S EXPENSE.
Notwithstanding the foregoing, in the event of a Default by Tenant under this
Lease, Landlord shall have the right, but not the obligation, at Tenants
expense, to enter the Premises and perform Tenant's maintenance, repair and
replacement work. Within ten
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(10) days after invoice therefor from Landlord, Tenant shall pay all costs and
expenses incurred by Landlord in connection with such maintenance, repair and
replacement work.
(c) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs
12(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4
to reimburse Landlord, in the form of Additional Rent, for the cost and expense
of the following items, Landlord agrees to repair and maintain the following
items: the roof coverings (provided that Tenant installs no additional air
conditioning or other equipment on the roof that damages the roof coverings);
the HVAC systems serving the Premises; the utility and plumbing systems,
fixtures, and equipment located outside the Premises; and the parking areas,
pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and
lighting systems in the Outside Areas. Subject to the provisions of Paragraphs
12(a), 22 and 23, Landlord, at its own cost and expense, agrees to repair and
maintain the following items: the structural portions of the roof, provided that
Tenant installs no additional air conditioning or other equipment on the roof
that damages structural portions of the roof (and specifically excluding the
roof coverings), the foundation, the footings, the floor slab, the load bearing
walls, and the exterior walls (excluding any glass therein) of the Premises.
Except to the extent specifically set forth in Paragraph 22 below, Landlord
shall not be required to repair or maintain conditions created due to any act,
negligence or omission of Tenant or its agents, contractors, employees or
invitees. Landlords obligation hereunder to repair and maintain is subject to
the condition precedent that Landlord shall have received written notice of the
need for such repairs and maintenance. Tenant shall promptly report in writing
to Landlord any defective condition known to it which Landlord is required to
repair, and failure to so report such defects shall make Tenant responsible to
Landlord for any liability incurred by Landlord by reason of such condition.
Tenant shall promptly report in writing to Landlord any defective condition
which Landlord is required to repair, and failure to so report such defects
shall make Tenant responsible to Landlord for the costs and expenses of
repairing any additional damage or deterioration occurring after the date Tenant
obtains knowledge of such defective condition and any liability incurred by
Landlord by reason of Tenants failure to notify Landlord of such defective
condition in a timely manner as provided herein.
(d) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights
to make repairs at the expense of Landlord or to terminate this Lease, as
provided for in California Civil Code Sections 1941 and 1942, and 1932(1),
respectively, and any similar or successor statute or law in effect or any
amendment thereof during the Term.
13. LANDLORD'S INSURANCE
Landlord shall purchase and keep in force fire, extended coverage and "all
risk" insurance covering the Premises to the extent of the full replacement cost
thereof. Tenant shall, at its sole cost and expense, comply with any and all
reasonable requirements pertaining to the Premises of any insurer necessary for
the maintenance of reasonable fire and commercial general liability insurance,
covering the Premises and the appurtenances. Landlord, at Tenants cost, may
maintain "Loss of Rents" insurance, insuring that the Rent
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will be paid in a timely manner to Landlord for a period of at least twelve (12)
months if the Premises are destroyed or rendered unusable or inaccessible by any
cause insured against under this Lease.
14. TENANT'S INSURANCE
(a) COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant shall, at Tenants
expense, secure and keep in force a commercial general liability insurance and a
property damage policy covering the Premises, insuring Tenant, and naming
Landlord and its lenders as additional insureds, against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises to the
extent such coverage is available in a standard tenants form of commercial
general policy without special endorsement. The minimum limit of coverage of
such policy shall be in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of one person in any one accident or
occurrence and in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of more than one person in any one accident
or occurrence, shall include an extended liability endorsement providing
contractual liability coverage (which shall include coverage for Tenants
indemnification obligations in this Lease), and shall contain a severability of
interest clause or a cross liability endorsement. Such insurance shall further
insure Landlord and Tenant against liability for property damage of at least
Three Million Dollars ($3,000,000.00). The limit of any insurance shall not
limit the liability of Tenant hereunder. No policy shall be cancelable or
subject to reduction of coverage, and loss payable clauses shall be subject to
Landlords approval. Such policies of insurance shall be issued as primary
policies and not contributing with or in excess of coverage that Landlord may
carry, by an insurance company authorized to do business in the State of
California for the issuance of such type of insurance coverage and rated A:XIII
or better in Best's Key Rating Guide. A copy of said policy or a certificate
evidencing to Landlords reasonable satisfaction that such insurance is in effect
shall be delivered to Landlord upon commencement of the Term, and thereafter
whenever Landlord shall reasonably request.
(b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and
effect on all of its fixtures and equipment on the Premises, a policy or
policies of fire and extended coverage insurance with standard coverage
endorsement to the extent of the full replacement cost thereof. During the term
of this Lease the proceeds from any such policy or policies of insurance shall
be used for the repair or replacement of the fixtures and equipment so insured.
Landlord shall have no interest in the insurance upon Tenants equipment and
fixtures and will sign all documents reasonably necessary in connection with the
settlement of any claim or loss by Tenant. Landlord will not carry insurance on
Tenant's possessions. Tenant shall furnish Landlord with a certificate
evidencing to Landlords reasonable satisfaction that such insurance is in
effect, and whenever required, shall satisfy Landlord that such policy is in
full force and effect.
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15. INDEMNIFICATION
(a) OF LANDLORD. Except to the extent caused by the negligence or willful
misconduct of Landlord or Landlord's Agents, Tenant shall indemnify and hold
harmless Landlord and agents, employees, partners, shareholders, directors,
invitees, and independent contractors (collectively "Agents") of Landlord
against and from any and all claims, liabilities, judgments, costs, demands,
causes of action and expenses (including, without limitation, reasonable
attorney's fees) arising from (1) Tenant's use of the Premises or from any
activity done, permitted or suffered by Tenant in or about the Premises or the
Property, and (2) any act, neglect, fault, willful misconduct or omission of
Tenant, or Tenant's Agents or from any breach or default in the terms of this
Lease by Tenant, and (3) any action or proceeding brought on account of any
matter in items (1) or (2). If any action or proceeding is brought against
Landlord by reason of any such claim, upon notice from Landlord, Tenant shall
defend the same at Tenant's expense by counsel reasonably satisfactory to
Landlord. As a material part of the consideration to Landlord, Tenant hereby
assumes all risk of damage to property or injury to persons in or about the
Premises from any cause whatsoever (except that which is caused by the gross
negligence or willful misconduct by Landlord or its Agents or by the failure of
Landlord to observe any of the terms and conditions of this Lease, if such
failure has persisted for an unreasonable period of time after written notice of
such failure), and Tenant hereby waives all claims in respect thereof against
Landlord. The obligations of Tenant under this Paragraph 15 shall survive any
termination of this Lease.
(b) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve
any insurance carrier of its obligations under any policies required to be
carried by either party pursuant to this Lease, to the extent that such policies
cover the peril or occurrence that results in the claim that is subject to the
foregoing indemnity.
16. SUBROGATION
Landlord and Tenant hereby mutually waive any claim against the other
during the Term for any injury to person or loss or damage to any of their
property located on or about the Premises or the Property that is caused by or
results from perils covered by insurance carried by the respective parties or
required to be carried by the respective parties under the terms of this Lease,
to the extent of the proceeds of such insurance actually received with respect
to such injury, loss or damage (or, with respect to insurance required to be
carried under this Lease but not actually carried, the proceeds of such
insurance which would have been received had the party required to carry such
insurance actually maintained such coverage), whether or not due to the
negligence of the other party or its agents. Because the foregoing waivers will
preclude the assignment of any claim by way of subrogation to an insurance
company or any other person, each party now agrees to immediately give to its
insurer written notice of the terms of these mutual waivers and shall have their
insurance policies endorsed to prevent the invalidation of the insurance
coverage because of these waivers. Nothing in this Paragraph shall relieve a
party of liability to the other for failure to carry insurance required by this
Lease.
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17. ABANDONMENT
Tenant shall not abandon the Premises at any time during the Term for a
period in excess of thirty (30) days, whether consecutive or nonconsecutive. In
the event of abandonment in excess of thirty (30) days, the rights and remedies
of Tenant and Landlord shall be determined in accordance with the applicable
California statutes in effect at the time of abandonment.
18. FREE FROM LIENS
Tenant shall keep the Premises and the Property free from any liens arising
out of any work performed, materials furnished, or obligations incurred by or
for Tenant.
19. ADVERTISEMENTS AND SIGNS
Tenant shall not place or permit to be placed in, upon, or about the
Premises or the Property any signs, advertisements or notices without obtaining
Landlord's prior written consent or without complying with applicable laws and
will not conduct, or permit to be conducted, any sale by auction on the Premises
or otherwise on the Property. Tenant shall remove any sign, advertisement or
notice placed on the Premises by Tenant upon the expiration of the Term or
sooner termination of this Lease, and Tenant shall repair any damage or injury
to the Premises or the Property caused thereby, all at Tenant's expense. If any
signs are not removed, or necessary repairs not made, Landlord shall have the
right to remove the signs and repair any damage or injury to the Premises or the
Property at Tenants sole cost and expense.
20. UTILITIES
Tenant shall pay for all water, gas, heat, light, power, telephone service
and all other materials and services supplied to the Premises. If Tenant fails
to pay for any of the foregoing when due, Landlord may pay the same and add such
amount to the Rent.
21. ENTRY BY LANDLORD
Tenant shall permit Landlord and its Agents to enter into and upon the
Premises at all reasonable times, upon reasonable notice (except in the case of
an emergency, for which no notice shall be required), and subject to Tenant's
reasonable security arrangements, for the purpose of inspecting the same or
showing the Premises to prospective purchasers, lenders or tenants or to alter,
improve, maintain and repair the Premises as required or permitted of Landlord
under the terms hereof, without any rebate of Rent and without any liability to
Tenant for any loss of occupation or quiet enjoyment of the Premises thereby
occasioned (except for actual damages resulting from the negligence or willful
misconduct of Landlord or its agents); and Tenant shall permit Landlord to post
notices of non-responsibility and ordinary "for sale" or "for lease" signs,
provided that Landlord may post such for lease signs and exhibit the Premises to
prospective tenants only during the six
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(6) months prior to termination of this Lease. No such entry shall be construed
to be a forcible or unlawful entry into, or a detainer of, the Premises, or an
eviction of Tenant from the Premises.
22. DESTRUCTION AND DAMAGE
(a) If the Premises is damaged by fire or other perils covered by extended
coverage insurance, Landlord shall, at Landlord's option:
(1) In the event of total destruction (which shall mean destruction
or damage in excess of twenty-five percent (25%) of the full insurable value
thereof) of the Premises, elect either to commence promptly to repair and
restore the Premises and prosecute the same diligently to completion, in which
event this Lease shall remain in full force and effect; or not to repair or
restore the Premises, in which event this Lease shall terminate. Landlord shall
give Tenant written notice of its intention and, if Landlord elects to repair
and restore the Premises, of the length of time Landlord reasonably anticipates
such repair will take, within sixty (60) days after the occurrence of such
destruction. If Landlord elects not to restore the Premises, this Lease shall be
deemed to have terminated as of the date of such total destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent (25%) of
the full insurable value thereof) of the Premises for which Landlord will
receive insurance proceeds (including as insurance proceeds the amount of any
deductible included within the definition of Expenses and paid by Tenant as
Additional Rent pursuant to Paragraph 4(b)(2) above) sufficient to cover the
cost to repair and restore such partial destruction and, if the damage thereto
is such that the Premises may be substantially repaired or restored to its
condition existing immediately prior to such damage or destruction within one
hundred eighty (180) days from the date of such destruction, Landlord shall
commence and proceed diligently with the work of repair and restoration, in
which event the Lease shall continue in full force and effect. If such repair
and restoration requires longer than one hundred eighty (180) days or if the
insurance proceeds therefor (including as insurance proceeds the amount of any
deductible included within the definition of Expenses and paid by Tenant as
Additional Rent pursuant to Paragraph 4(b)(2) above), plus any amounts Tenant
may elect or is obligated to contribute, are not sufficient to cover the cost of
such repair and restoration, Landlord may elect either to so repair and restore,
in which event the Lease shall continue in full force and effect, or not to
repair or restore, in which event the Lease shall terminate. In either case,
Landlord shall give written notice to Tenant of its intention and, if Landlord
elects to repair and restore the Premises, of the length of time Landlord
reasonably anticipates such repair will take, within sixty (60) days after the
destruction occurs. If Landlord elects not to restore the Premises, this Lease
shall be deemed to have terminated as of the date of such partial destruction.
(b) If the Premises are damaged by any peril not covered by extended
coverage insurance, and the cost to repair such damage exceeds any amount Tenant
may agree to
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contribute, Landlord may elect either to commence promptly to repair and restore
the Premises and prosecute the same diligently to completion, in which event
this Lease shall remain in full force and effect; or not to repair or restore
the Premises, in which event this Lease shall terminate. Landlord shall give
Tenant written notice of its intention and, if Landlord elects to repair and
restore the Premises, of the length of time Landlord reasonably anticipates such
repair will take, within sixty (60) days after the occurrence of such damage. If
Landlord elects not to restore the Premises, this Lease shall be deemed to have
terminated as of the date on which Tenant surrenders possession of the Premises
to Landlord, except that if the damage to the Premises materially impairs
Tenant's ability to continue its business operations in the Premises and if
Tenant ceases its operations in the Premises as of the date of such damage, then
this Lease shall be deemed to have terminated as of the date such damage
occurred.
(c) Notwithstanding anything to the contrary contained in this Paragraph
22, in the event of damage to the Premises occurring during the last twelve (12)
months of the Term, Landlord and Tenant shall each have the right to terminate
this Lease by written notice of such election given to the other within thirty
(30) days after the damage occurs; provided, however, that Tenant shall have the
right to terminate this Lease under this Section 22(c) only if the Premises
shall be untenantable for the conduct of Tenant's business operations after such
damage. In the event either party elects to terminate this Lease under this
Section 22(c), this Lease shall be deemed to have terminated as of the date on
which Tenant surrenders possession of the Premises to Landlord, except that if
the damage to the Premises materially impairs Tenant's ability to continue its
business operations in the Premises and if Tenant ceases its operations in the
Premises as of the date of such damage, then this Lease shall be deemed to have
terminated as of the date such damage occurred.
(d) Notwithstanding anything to the contrary contained in this Paragraph
22, if the Premises are damaged by any peril and if the damage thereto is such
that the Premises may not be substantially repaired or restored to its condition
existing immediately prior to such damage or destruction within one hundred
eighty (180) days from the date of such destruction, Tenant shall have the right
to terminate this Lease by written notice to Landlord, which notice shall be
given, if at all, within fifteen (15) days after Landlord informs Tenant of the
expected duration of the period of repair or restoration. In the event Tenant
elects to terminate this Lease under this Paragraph 22(d), this Lease shall be
deemed to have terminated as of the date on which Tenant surrenders possession
of the Premises to Landlord, except that if the damage to the Premises
materially impairs Tenant's ability to continue its business operations in the
Premises and if Tenant ceases its operations in the Premises as of the date of
such damage, then this Lease shall be deemed to have terminated as of the date
such damage occurred.
(e) In the event of repair and restoration as herein provided, the monthly
installments of Base Rent shall be abated proportionately in the ratio which
Tenant's use of the Premises is impaired during the period of such repair or
restoration, to the extent of rental abatement insurance proceeds received by
Landlord. Tenant shall not be entitled to
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any compensation or damages for loss of use of the whole or any part of the
Premises and/or any inconvenience or annoyance occasioned by such damage, repair
or restoration.
(f) If Landlord is obligated to or elects to repair or restore as herein
provided, and provided that Tenant does not exercise its right to terminate as
set forth above, Landlord shall repair or restore only those portions of the
Premises which were originally provided at Landlord's expense, substantially to
their condition existing immediately prior to the occurrence of the damage or
destruction; and Tenant shall promptly repair and restore, at Tenant's expense,
Tenant's fixtures, improvements, alterations and additions in and to the
Premises which were not provided at Landlord's expense.
(g) Tenant hereby waives the provisions of California Civil Code Section
1932(2) and Section 1933(4) which permit termination of a lease upon destruction
of the leased premises, and the provisions of any similar law now or hereinafter
in effect, and the provisions of this Paragraph 22 shall govern exclusively in
case of such destruction.
23. CONDEMNATION
If twenty-five percent (25%) or more of the Premises is taken for any
public or quasi-public purpose by any lawful governmental power or authority, by
exercise of the right of appropriation, inverse condemnation, condemnation or
eminent domain, or sold to prevent such taking (each such event being referred
to as a "Condemnation"), Landlord may, at its option, terminate this Lease as of
the date title vests in the condemning party. If the Premises after any
Condemnation and any repairs by Landlord would be untenantable for the conduct
of Tenant's business operations, Tenant shall have the right to terminate this
Lease as of the date title vests in the condemning party. If either party elects
to terminate this Lease as provided herein, such election shall be made by
written notice to the other party given within thirty (30) days after the nature
and extent of such Condemnation have been finally determined. Tenant shall not
because of such taking assert any claim against Landlord. Landlord shall be
entitled to receive the proceeds of all Condemnation awards, and Tenant hereby
assigns to Landlord all of its interest in such awards. If twenty-five percent
(25%) or more of the parking area for the Premises is taken, Landlord at its
option may terminate this Lease. If neither Landlord nor Tenant elects to
terminate this Lease to the extent permitted above, Landlord shall promptly
proceed to restore the Premises to the extent of any Condemnation award received
by Landlord, to substantially the same condition as existed prior to such
Condemnation, allowing for the reasonable effects of such Condemnation, and a
proportionate abatement shall be made to the Rent corresponding to the time
during which, and to the portion of the floor area of the Premises (adjusted for
any increase thereto resulting from any reconstruction) of which, Tenant is
deprived on account of such Condemnation and restoration. The provisions of
California Code of Civil Procedure Section 1265.130, which allows either party
to petition the Superior Court to terminate the Lease in the event of a partial
taking of the Premises, and any other applicable law now or hereafter enacted,
are hereby waived by Landlord and Tenant.
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24. ASSIGNMENT AND SUBLETTING
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or
transfer this Lease or any interest herein, sublease the Premises or any part
thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees, agents and invitees of Tenant excepted) to occupy or use
the Premises, or any portion thereof, without first obtaining the written
consent of Landlord, which consent shall not be withheld unreasonably. When
Tenant requests Landlord's consent to such assignment or subletting, it shall
notify Landlord in writing of the name and address of the proposed assignee or
subtenant and the nature and character of the business of the proposed assignee
or subtenant and shall provide current financial statements for the proposed
assignee or subtenant prepared in accordance with generally accepted accounting
principles. Tenant shall also provide Landlord with a copy of the proposed
sublease or assignment agreement, including all material terms and conditions
thereof. Except in the case of an assignment or sublease to a Tenant Affiliate
(as hereinafter defined), Landlord shall have the option, to be exercised within
thirty (30) days of receipt of the foregoing, to (1) terminate this Lease as of
the commencement date stated in the proposed sublease or assignment; provided,
however, that if Tenant proposes to sublease twenty-five percent (25%) or less
of the Premises, then Landlord shall only have the right under this subsection
(1) to terminate this Lease as to the portion of the Premises proposed to be
covered by such sublease, (2) sublease or take an assignment, as the case may
be, from Tenant of the interest, or any portion thereof, in this Lease and/or
the Premises that Tenant proposes to assign or sublease, on the same terms and
conditions as stated in the proposed sublet or assignment agreement, (3) consent
to the proposed assignment or sublease, or (4) refuse its consent to the
proposed assignment or sublease, providing that such consent shall not be
unreasonably withheld.
(b) Notwithstanding anything to the contrary contained in Section 24(a)
above, Tenant shall have the right with the consent of Landlord, which consent
shall not be unreasonably withheld, to assign this Lease or to sublease the
Premises or any part thereof to a Tenant Affiliate. In the event Tenant proposes
to enter into an assignment or sublease with a Tenant Affiliate, then Tenant
shall provide Landlord with the information required to be delivered pursuant to
said Section 24(a). Landlord shall have the option, to be exercised within
thirty (30) days of receipt of the foregoing, to (1) consent to the proposed
assignment or sublease, or (2) refuse its consent to the proposed assignment or
sublease, providing that such consent shall not be unreasonably withheld. For
purposes of this Section 24, a "Tenant Affiliate" shall mean an entity that
controls, is controlled by or is under common control with, Tenant; and a party
shall be deemed to "control" another party for purposes of the aforesaid
definition only if the first party owns more than fifty percent (50%) of the
stock or other beneficial interests of the second party.
(c) Without otherwise limiting the criteria upon which Landlord may
withhold its consent under Sections 24(a) and (b) above, Landlord shall be
entitled to consider all reasonable criteria including, but not limited to, the
following: (i) whether or not the
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proposed subtenant or assignee is engaged in a business which, and the use of
the Premises will be in an manner which, is in keeping with the then character
and nature of all other tenancies in the Project, (ii) whether the use to be
made of the Premises by the proposed subtenant or assignee will conflict with
any so-called "exclusive" use then in favor of any other tenant of the Building,
and whether such use would be prohibited by any other portion of this Lease,
including, but not limited to, any rules and regulations then in effect, or
under applicable Laws, and whether such use imposes a greater load upon the
Premises and the Building and Project services then imposed by Tenant, (iii) the
business reputation of the proposed individuals who will be managing and
operating the business operations of the assignee or subtenant, and the long-
term financial and competitive business prospects of the proposed assignee or
subtenant, (iv) the creditworthiness and financial stability of the proposed
assignee or subtenant in light of the responsibilities involved, and (v) that
the sublease or assignment agreement requires payment of the rent and other
amounts as required of Tenant hereunder with respect to the space being
subleased or assigned which are in no event less than that being offered by
Landlord for similar space in the Building under leases then being negotiated.
In any event, Landlord may withhold its consent to any assignment or sublease,
if (1) the actual use proposed to be conducted in the Premises or portion
thereof conflicts with the provisions of Paragraph 8(a) or (b) above or with any
other lease which restricts the use to which any space in the Building may be
put, or (2) the proposed assignment or sublease requires alterations,
improvements or additions to the Premises or portions thereof with a cost in
excess of one thousand dollars ($1,000.00).
(d) If Landlord approves an assignment or subletting as herein provided,
Tenant shall pay to Landlord, as Additional Rent, the difference, if any,
between (1) the Base Rent plus Additional Rent allocable to that part of the
Premises affected by such assignment or sublease pursuant to the provisions of
this Lease, and (2) the rent and any additional rent payable by the assignee or
sublessee to Tenant, after deducting the costs incurred by Tenant in connection
with any such assignment or sublease. The assignment or sublease agreement, as
the case may be, after approval by Landlord, shall not be amended without
Landlord's prior written consent, and shall contain a provision directing the
assignee or subtenant to pay the rent and other sums due thereunder directly to
Landlord upon receiving written notice from Landlord that Tenant is in default
under this Lease with respect to the payment of Rent. Landlord's collection of
such rent and other sums shall not constitute an acceptance by Landlord of
attornment by such assignee or subtenant. A consent to one assignment,
subletting, occupation or use shall not be deemed to be a consent to any other
or subsequent assignment, subletting, occupation or use, and consent to any
assignment or subletting shall in no way relieve Tenant of any liability under
this Lease. Any assignment or subletting without Landlord's consent shall be
void, and shall, at the option of Landlord, constitute a Default under this
Lease.
(e) Tenant shall pay Landlord's reasonable fees (including, without
limitation, the fees of Landlord's counsel), incurred in connection with
Landlord's review and processing of documents regarding any proposed assignment
or sublease.
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(f) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest herein, to sublet the Premises or any part
thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4,
as amended from time to time, and for all other purposes, reasonable at the time
that the Lease was entered into, and shall be deemed to be reasonable at the
time that Tenant seeks to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or
privilege appurtenant to the Premises, or to allow any other person to occupy or
use the Premises or any portion thereof.
25. TENANT'S DEFAULT
The occurrence of any one of the following events shall constitute an event
of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant for a period in excess of
thirty (30) days, whether consecutive or nonconsecutive;
(b) Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of three (3) business
days after notice from Landlord given in accordance with the terms of this
Lease;
(c) A general assignment by Tenant for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant, the filing
of a voluntary petition for an arrangement, the filing of a petition, voluntary
or involuntary, for reorganization, or the filing of an involuntary petition by
Tenant's creditors, said involuntary petition remaining undischarged for a
period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after the
levy thereof;
(f) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time periods
and in the manner required by Paragraph 30 or 31 or 42;
(g) An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph 24,
unless such assignment or sublease is expressly conditioned upon Tenant having
received Landlord's consent thereto;
(h) Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 6 above;
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(i) Failure in the performance of any of Tenant's covenants, agreements or
obligations hereunder (except those failures specified as events of Default in
other Paragraphs of this Paragraph 25, which shall be governed by such other
Paragraphs), which failure continues for ten (10) days after written notice
thereof from Landlord to Tenant provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured
within such ten (10) day period despite reasonable diligence, Tenant shall not
be in default under this subparagraph unless Tenant fails thereafter diligently
and continuously to prosecute the cure to completion; and
(j) Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease within three (3) business days
after written notice thereof for any three (3) months (consecutive or
nonconsecutive) during any twelve (12) month period. In the event of a Chronic
Delinquency, in addition to Landlord's other remedies for Default provided in
this Lease, at Landlord's option, Landlord shall have the right to require that
Rent be paid by Tenant quarterly, in advance.
Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(b)
or (i) above and the third notice given by Landlord pursuant to Paragraph 25(j)
above shall satisfy the requirements for notice under California Code of Civil
Procedure Section 1161, and Landlord shall not be required to give any
additional notice in order to be entitled to commence an unlawful detainer
proceeding.
26. LANDLORD'S REMEDIES
(a) TERMINATION. In the event of any Default by Tenant, then in addition
to any other remedies available to Landlord at law or in equity and under this
Lease, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such termination;
plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned after
termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
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(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom, including, without limitation, any costs or expenses incurred by
Landlord (i) in retaking possession of the Premises; (ii) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering or
rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus
(5) such reasonable attorneys' fees incurred by Landlord as a result
of a Default, and costs in the event suit is filed by Landlord to enforce such
remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under any other present or future law, in the event Tenant is
evicted or Landlord takes possession of the Premises by reason of any Default of
Tenant hereunder.
(b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's
Default and abandonment and recover Rent as it becomes due, provided Tenant has
the right to sublet or assign, subject only to reasonable limitations).
(c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, in compliance with
applicable law, to re-enter the Premises and remove all persons and property
from the Premises; such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant.
(d) RELETTING. In the event of the abandonment of the Premises by Tenant
or in the event that Landlord shall elect to re-enter as provided in Paragraph
26(c) or shall take possession of the Premises pursuant to legal proceeding or
pursuant to any notice provided by law, then if Landlord does not elect to
terminate this Lease as provided in Paragraph 26(a), Landlord may from time to
time, without terminating this Lease, relet the Premises or any part thereof for
such term or terms and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable with
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the right to make alterations and repairs to the Premises. In the event that
Landlord shall elect to so relet, then rentals received by Landlord from such
reletting shall be applied in the following order: (1) to reasonable attorneys'
fees incurred by Landlord as a result of a Default and costs in the event suit
is filed by Landlord to enforce such remedies; (2) to the payment of any
indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the
payment of any costs of such reletting; (4) to the payment of the costs of any
alterations and repairs to the Premises; (5) to the payment of Rent due and
unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and
applied in payment of future Rent and other sums payable by Tenant hereunder as
the same may become due and payable hereunder. Should that portion of such
rentals received from such reletting during any month, which is applied to the
payment of Rent hereunder, be less than the Rent payable during the month by
Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting. Notwithstanding any provision to the
contrary in this Lease, this Lease shall terminate, as set forth in California
Civil Code Section 1951.2(a), if Landlord terminates Tenant's right to
possession of the Premises.
(e) TERMINATION. No re-entry or taking of possession of the Premises by
Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default. Notwithstanding any
provision to the contrary in this Lease, this Lease shall terminate, as set
forth in California Civil Code Section 1951.2(a), if Landlord terminates
Tenant's right to possession of the Premises.
(f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive
and Landlord shall have any and all other remedies provided herein or by law or
in equity.
(g) NO SURRENDER. No act or conduct of Landlord, whether consisting of
the acceptance of the keys to the Premises, or otherwise, shall be deemed to be
or constitute an acceptance of the surrender of the Premises by Tenant prior to
the expiration of the Term, and such acceptance by Landlord of surrender by
Tenant shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects
in writing that such merger take place, but shall operate as an assignment to
Landlord of any and all existing subleases, or Landlord may, at its option,
elect in writing to treat such surrender as a merger terminating Tenant's estate
under this Lease, and thereupon Landlord may terminate any or all such subleases
by notifying the sublessee of its election so to do within five (5) days after
such surrender.
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27. ATTORNEY'S FEES
If either party hereto fails to perform any of its obligations under this
Lease or if any dispute arises between the parties hereto concerning the meaning
or interpretation of any provision of this Lease, then the defaulting party or
the party not prevailing in such dispute, as the case may be, shall pay any and
all costs and expenses incurred by the other party on account of such default
and/or in enforcing or establishing its rights hereunder, including, without
limitation, court costs and reasonable attorneys' fees and disbursements. Any
such attorneys' fees and other expenses incurred by either party in enforcing a
judgment in its favor under this Lease shall be recoverable separately from and
in addition to any other amount included in such judgment, and such attorneys'
fees obligation is intended to be severable from the other provisions of this
Lease and to survive and not be merged into any such judgment.
28. TAXES
Tenant shall be liable for and shall pay, prior to delinquency, all taxes
levied against personal property and trade or business fixtures of Tenant. If
any alteration, addition or improvement installed by Tenant pursuant to
Paragraph 11, or any personal property, trade fixture or other property of
Tenant, is assessed and taxed with the Property, Tenant shall pay such taxes to
Landlord within ten (10) days after delivery to Tenant of a statement therefor.
29. EFFECT OF CONVEYANCE
The term "Landlord" as used in this Lease, means only the owner for the
time being of the Property containing the Premises, so that, in the event of any
sale of the Property or the Premises, Landlord shall be and hereby is entirely
freed and relieved of all covenants and obligations of Landlord hereunder
accruing from and after the transfer, provided that the purchaser at any such
sale has assumed and agreed in writing to carry out any and all covenants and
obligations of Landlord hereunder and Landlord has delivered any advance rentals
and any remaining balance of the Security Deposit to such purchaser.
30. TENANT'S ESTOPPEL CERTIFICATE
From time to time, upon written request of Landlord, Tenant shall execute,
acknowledge and deliver to Landlord or its designee, a written certificate
stating (a) the date this Lease was executed, the Commencement Date of the Term
and the date the Term expires; (b) the date Tenant entered into occupancy of the
Premises; (c) the amount of Rent and the date to which such Rent has been paid;
(d) that this Lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (or, if assigned, modified,
supplemented or amended, specifying the date and terms of any agreement so
affecting this Lease); (e) that this Lease represents the entire agreement
between the parties with respect to Tenant's right to use and occupy the
Premises (or specifying such other agreements, if any); (f) that all obligations
under this Lease to be
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performed by Landlord as of the date of such certificate have been satisfied (or
specifying those as to which Tenant claims that Landlord has yet to perform);
(g) that all required contributions by Landlord to Tenant on account of Tenant's
improvements have been received (or stating exceptions thereto); (h) that on
such date there exist no defenses or offsets that Tenant has against the
enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that
no Rent or other sum payable by Tenant hereunder has been paid more than one (1)
month in advance (or stating exceptions thereto); (j) that security has been
deposited with Landlord, stating the amount thereof; and (k) any other matters
evidencing the status of this Lease that may be required either by a lender
making a loan to Landlord to be secured by a deed of trust covering the Premises
or by a purchaser of the Premises. Any such certificate delivered pursuant to
this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's
interest or a mortgagee of Landlord's interest or assignee of any mortgage upon
Landlord's interest in the Premises. If Tenant shall fail to provide such
certificate within ten (10) days after receipt by Tenant of a written request by
Landlord as herein provided, such failure shall, at Landlord's election,
constitute a Default under this Lease, and Tenant shall be deemed to have given
such certificate as above provided without modification and shall be deemed to
have admitted the accuracy of any information supplied by Landlord to a
prospective purchaser or mortgagee.
31. SUBORDINATION
Landlord shall have the right to cause this Lease to be and remain subject
and subordinate to any and all mortgages, deeds of trust and ground leases, if
any ("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only, that in the event of termination of any such ground
lease or upon the foreclosure of any such mortgage or deed of trust, so long as
Tenant is not in default, the holder thereof ("Holder") shall agree in writing
to recognize Tenant's rights under this Lease as long as Tenant shall pay the
Rent and observe and perform all the provisions of this Lease to be observed and
performed by Tenant. Within ten (10) days after Landlord's written request,
Tenant shall execute, acknowledge and deliver any and all reasonable documents
required by Landlord or the Holder to effectuate such subordination, provided
that such Holder shall concurrently execute, acknowledge and deliver a
nondisturbance agreement in favor of Tenant. If Tenant fails to do so, such
failure shall constitute a Default by Tenant under this Lease. Notwithstanding
anything to the contrary set forth in this Paragraph 31, Tenant hereby attorns
and agrees to attorn to any person or entity purchasing or otherwise acquiring
the Premises at any sale or other proceeding or pursuant to the exercise of any
other rights, powers or remedies under such Encumbrance.
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32. ENVIRONMENTAL COVENANTS
(a) As used in this Lease, the term "Hazardous Materials" shall mean and
include any substance that is or contains (a) any "hazardous substance" as now
or hereafter defined in (S) 101(14) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. (S)
9601 et seq.) or any regulations promulgated under CERCLA; (b) any "hazardous
waste" as now or hereafter defined in the Resource Conservation and Recovery
Act, as amended ("RCRA") (42 U.S.C. (S) 6901 et seq.) or any regulations
promulgated under RCRA; (c) any substance now or hereafter regulated by the
Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. (S) 2601 et seq.)
or any regulations promulgated under TSCA; (d) petroleum, petroleum by-products,
gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and
asbestos-containing material, in any form, whether friable or non-friable; (f)
polychlorinated biphenyls; (g) lead and lead-containing materials; or (h) any
additional substance, material or waste (A) the presence of which on or about
the Premises (i) requires reporting, investigation or remediation under any
Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a
nuisance on the Premises or any adjacent property or poses or threatens to pose
a hazard to the health or safety of persons on the Premises or any adjacent
property, or (iii) which, if it emanated or migrated from the Premises, could
constitute a trespass, or (B) which is now or is hereafter classified or
considered to be hazardous or toxic under any Environmental Laws.
(b) As used in this Lease, the term "Environmental Laws" shall mean and
include (a) CERCLA, RCRA and TSCA; and (b) any other federal, state or local
laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or
hereinafter in effect relating to (i) pollution, (ii) the protection or
regulation of human health, natural resources or the environment, (iii) the
treatment, storage or disposal of Hazardous Materials, or (iv) the emission,
discharge, release or threatened release of Hazardous Materials into the
environment.
(c) Tenant agrees that during its use and occupancy of the Premises it
will (a) not (i) permit Hazardous Materials to be present on or about the
Premises except in a manner and quantity necessary for the ordinary performance
of Tenant's business or (ii) release, discharge or dispose of any Hazardous
Materials on, in, at, under, or emanating from, the Premises or the Property;
provided, however, that Tenant shall have the right to use and dispose of de
minimis amounts of cleaning materials, toner fluids and other office and
janitorial supplies, provided that the same are necessary for the conduct of
Tenant's business operators in the Premises and are used and disposed of at all
times in full compliance with all Environmental Laws; (b) comply with all
Environmental Laws relating to the Premises and the use of Hazardous Materials
on or about the Premises and not engage in or permit others to engage in any
activity at the Premises in violation of any Environmental Laws; and (c)
immediately notify Landlord of (i) any inquiry, test, investigation or
enforcement proceeding by any governmental agency or authority against Tenant,
Landlord (to the extent Tenant has knowledge thereof) or the Premises (to the
extent Tenant has knowledge thereof) relating to any Hazardous Materials or
under any
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Environmental Laws or (ii) the occurrence of any event or existence of any
condition that would cause a breach of any of Tenant's covenants set forth in
this Section 32.
(d) If Tenant's use of Hazardous Materials on or about the Premises
results in a release, discharge or disposal of Hazardous Materials on, in, at,
under, or emanating from, the Premises or the Property, Tenant agrees to
investigate, clean up, remove or remediate such Hazardous Materials in full
compliance with (a) the requirements of (i) all Environmental Laws and (ii) any
governmental agency or authority responsible for the enforcement of any
Environmental Laws; and (b) any additional requirements of Landlord that are
reasonably necessary to protect the value of the Premises or the Property.
(e) Upon reasonable notice to Tenant, Landlord may inspect the Premises
for the purpose of determining whether there exists on the Premises any
Hazardous Material or other condition or activity that is in violation of the
requirements of this Lease or of any Environmental Laws. Tenant will supply to
Landlord such historical and operational information regarding the Premises as
may be reasonably requested to facilitate any such inspection and will make
available for meetings appropriate personnel having knowledge of such matters.
Tenant agrees to give Landlord at least sixty (60) days' prior notice of its
intention to vacate the Premises so that Landlord will have an opportunity to
perform such an inspection prior to such vacation. The right granted to Landlord
herein to perform inspections shall not create a duty on Landlord's part to
inspect the Premises, or liability on the part of Landlord for Tenant's use,
storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith.
(f) Landlord shall have the right, but not the obligation, prior or
subsequent to an event of default, without in any way limiting Landlord's other
rights and remedies under this Lease, to enter upon the Premises, or to take
such other actions as it deems necessary or advisable, to investigate, clean up,
remove or remediate any Hazardous Materials or contamination by Hazardous
Materials present on, in, at, under, or emanating from, the Premises or the
Property in violation of Tenant's obligations under this Lease or under any
Environmental Laws. Notwithstanding any other provision of this Lease, Landlord
shall also have the right, at its election, in its own name or as Tenant's
agent, to negotiate, defend, approve and appeal any action taken or order issued
by any governmental agency or authority with regard to any such Hazardous
Materials or contamination by Hazardous Materials. Subject to Subsection 32(i)
below, all costs and expenses paid or incurred by Landlord in the exercise of
the rights set forth in this Subsection 32(f) shall be payable by Tenant upon
demand.
(g) Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste or Hazardous Materials
placed on or about the Premises by Tenant or its agents, employees, contractors
or invitees, and in a condition which complies with all Environmental Laws.
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(h) Tenant agrees to indemnify and hold harmless Landlord from and against
any and all claims, losses (including, without limitation, loss in value of the
Premises or the Property, liabilities and expenses (including attorney's fees)
sustained by Landlord attributable to (i) any Hazardous Materials placed on or
about the Premises by Tenant or its agents, employees, contractors or invitees
or (ii) Tenant's breach of any provision of this Section 32.
(i) Notwithstanding anything in this Section 32 to the contrary, Tenant
shall not be responsible for the clean up or remediation of, and shall not
required to indemnify Landlord against, any costs or liabilities attributable
to, Hazardous Materials placed on or about the Premises (i) prior to the
Commencement Date by third parties not related to Tenant or its Agents, or (ii)
by Landlord at any time, except in either case to the extent that Tenant or its
Agents have contributed to or exacerbated the presence of such Hazardous
Materials.
(j) The provisions of this Section 32 shall survive the expiration or
earlier termination of this Lease.
33. NOTICES
All notices and demands which may or are to be required or permitted to be
given to either party by the other hereunder shall be in writing and shall be
sent (i) by United States mail, postage prepaid, certified, or (ii) by personal
delivery or (iii) by overnight courier, addressed to the addressee at the
address for such addressee as specified in the Basic Lease Information, or to
such other place as such party may from time to time designate in a notice to
the other party given as provided herein, or by telex or telecopy at the number
therefor designated by the addressee in a written notice given as provided
herein. Notice shall be deemed given upon actual receipt (or attempted delivery
if delivery is refused).
34. WAIVER
The waiver of any breach of any term, covenant or condition of this Lease
shall not be deemed to be a waiver of such term, covenant or condition or any
subsequent breach of the same or any other term, covenant or condition herein
contained. The subsequent acceptance of Rent by Landlord shall not be deemed to
be a waiver of any preceding breach by Tenant, other than the failure of Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such Rent. No delay or
omission in the exercise of any right or remedy of Landlord on any Default by
Tenant shall impair such a right or remedy or be construed as a waiver. Any
waiver by Landlord of any Default must be in writing and shall not be a waiver
of any other Default concerning the same or any other provisions of this Lease.
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35. HOLDING OVER
Any holding over after the expiration of the Term, without the express
written consent of Landlord, shall constitute a Default and, without limiting
Landlord's remedies provided in this Lease, such holding over shall be construed
to be a tenancy at sufferance, at a rental rate of one hundred fifty percent
(150%) of the Base Rent last due in this Lease, plus Additional Rent, and shall
otherwise be on the terms and conditions herein specified, so far as applicable.
36. SUCCESSORS AND ASSIGNS
The terms, covenants and conditions of this Lease shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto. If Tenant shall consist
of more than one entity or person, the obligations of Tenant under this Lease
shall be joint and several.
37. TIME
Time is of the essence of this Lease and each and every term, condition and
provision herein.
38. BROKERS
Landlord and Tenant each represents and warrants to the other that neither
it nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate broker except the Broker(s) specified in the Basic Lease Information
in the negotiating or making of this Lease, and each party agrees to indemnify
and hold harmless the other from any claim or claims, and costs and expenses,
including attorneys' fees, incurred by the indemnified party in conjunction with
any such claim or claims of any other broker or brokers to a commission in
connection with this Lease as a result of the actions of the indemnifying party.
39. LIMITATION OF LIABILITY
Tenant agrees that, in the event of any default or breach by Landlord with
respect to any of the terms of the Lease to be observed and performed by
Landlord (a) Tenant shall look solely to the estate and property of Landlord or
any successor in interest in the Property and the Premises, for the satisfaction
of Tenant's remedies for the collection of a judgment (or other judicial
process) requiring the payment of money by Landlord; (b) no other property or
assets of Landlord, its partners, shareholder, officers, directors or any
successor in interest shall be subject to levy, execution or other enforcement
procedure for the satisfaction of Tenant's remedies; (c) no personal liability
shall at any time be asserted or enforceable against Landlord's partners or
successors in interest (except to the extent permitted in (a) above), or against
Landlord's shareholders, officers or directors, or their respective partners,
shareholders, officers, directors or successors in interest; and (d) no
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judgment will be taken against any partner, shareholder, officer or director of
Landlord. The provisions of this section shall apply only to the Landlord and
the parties herein described, and shall not be for the benefit of any insurer
nor any other third party.
40. FINANCIAL STATEMENTS
Within thirty (30) days after Landlord's request, Tenant shall deliver to
Landlord the then current financial statements of Tenant (including interim
periods following the end of the last fiscal year for which annual statements
are available), including a balance sheet and profit and loss statement for the
most recent prior year, all prepared in accordance with generally accepted
accounting principles consistently applied. Such financial statements shall not
be required to be prepared or compiled by a certified public accountant,
provided, however, that if Tenant does retain a certified public accountant to
prepare or compile such statements, then Landlord shall have the right to review
the same. Landlord shall keep Tenant's financial statements confidential, except
that Landlord shall have the right to disclose such statements to Landlord's
partners, lenders, consultants and advisors, including accountants and
attorneys, and otherwise as required by law or legal process.
41. RULES AND REGULATIONS
Tenant agrees to comply with such reasonable rules and regulations as
Landlord may adopt from time to time for the orderly and proper operating of the
Premises and parking and other common areas. Such rules may include but shall
not be limited to the following: (a) restriction of employee parking to a
limited, designated area or areas reasonably conveniently located with respect
to the Premises; and (b) regulation of the removal, storage and disposal of
Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The
rules and regulations shall be binding upon Tenant upon delivery of a copy of
them to Tenant. Landlord shall not be responsible to Tenant for the failure of
any other person to observe and abide by any of said rules and regulations.
42. MORTGAGEE PROTECTION
(a) Modifications for Lender. If, in connection with obtaining financing
for the Premises or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay or defer its consent to such
modifications, provided such modifications do not materially adversely affect
Tenant's rights or increase Tenant's obligations under this Lease.
(b) Rights to Cure. Tenant agrees to give to any trust deed or mortgage
holder ("Holder"), by certified mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that prior
to such notice Tenant has been notified, in writing, (by way of notice of
assignment of rents and leases, or otherwise) of the address of such Holder.
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for in this Lease, then the Holder shall have an
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additional twenty (20) days after expiration of such period, or after receipt of
such notice from Tenant (if such notice to the Holder is required by this
Paragraph 42(b)), whichever shall last occur within which to cure such default
or if such default cannot be cured within that time, then such additional time
as may be necessary if within such twenty (20) days, any Holder has commenced
and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated.
43. ENTIRE AGREEMENT
This Lease, including the Exhibits and any Addenda attached hereto, which
are hereby incorporated herein by this reference, contains the entire agreement
of the parties hereto, and no representations, inducements, promises or
agreements, oral or otherwise, between the parties, not embodied herein or
therein, shall be of any force and effect.
44. INTEREST
Any installment of Rent and any other sum due from Tenant under this Lease
which is not received by Landlord within ten (10) days from when the same is due
shall bear interest from such tenth (10th) day until paid at an annual rate
equal to the maximum rate of interest permitted by law. Payment of such interest
shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay
all costs and attorneys' fees incurred by Landlord in collection of such
amounts.
45. CONSTRUCTION
This Lease shall be construed and interpreted in accordance with the laws
of the State of California. The parties acknowledge and agree that no rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Lease, including
the Exhibits and any Addenda attached hereto. All captions in this Lease are for
reference only and shall not be used in the interpretation of this Lease.
Whenever required by the context of this Lease, the singular shall include the
plural, the masculine shall include the feminine, and vice versa. If any
provision of this Lease shall be determined to be illegal or unenforceable, such
determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect.
46. REPRESENTATIONS AND WARRANTIES OF TENANT
Tenant hereby makes the following representations and warranties, each of
which is material and being relied upon by Landlord, is true in all respects as
of the date of this Lease, and shall survive the expiration or termination of
the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and
in good standing under the laws of the state of its organization and the persons
executing this
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Lease on behalf of Tenant have the full right and authority to execute this
Lease on behalf of Tenant and to bind Tenant without the consent or approval of
any other person or entity. Tenant has full power, capacity, authority and legal
right to execute and deliver this Lease and to perform all of its obligations
hereunder. This Lease is a legal, valid and binding obligation of Tenant,
enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing
of an involuntary petition by any creditors, (3) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, (4)
suffered the attachment or other judicial seizure of all or substantially all of
its assets, (5) admitted in writing its inability to pay its debts as they come
due, or (6) made an offer of settlement, extension or composition to its
creditors generally.
Landlord and Tenant have executed and delivered this Lease as of the Lease
Date specified in the Basic Lease Information.
Landlord: Tenant:
Aetna Life Insurance Company, International Network Services, Inc.,
a Connecticut corporation a California corporation
By: Aetna Realty Investors, Inc.,
a corporation, By: _________________________________
Its Agent Print Name:__________________________
Its:_________________________________
By:_________________________________
By: _________________________________
Its: _______________________________ Print Name:__________________________
Its:_________________________________
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Exhibit A
DIAGRAM OF THE PREMISES
<PAGE>
Exhibit B
TENANT IMPROVEMENTS
This exhibit, entitled Tenant Improvements, is and shall constitute Exhibit
B to the Lease Agreement, dated as of the Lease Date, by and between Landlord
and Tenant for the Premises. The terms and conditions of this Exhibit B are
hereby incorporated into and are made a part of the Lease. Capitalized terms
used, but not otherwise defined, in this Exhibit B have the meanings ascribed to
such terms in the Lease.
1. LANDLORD'S WORK
In addition to the Tenant Improvements (as defined in Paragraph 3 below) to
be constructed in the Premises pursuant to this Exhibit B, prior to the
Commencement Date, Landlord shall demolish the interior tenant improvements
existing in the Premises on the date of this Lease (except for the restroom
cores and sprinkler system risers) at Landlord's sole cost and expense.
(Landlords Work). Landlords Work shall be paid for out of Landlords own funds
and shall not be applied against or funded out of the Tenant Improvements
Allowance (hereinafter defined in Paragraph 6) or the Tenant Improvements Loan
(hereinafter defined in Paragraph 7).
2. TENANT IMPROVEMENTS
In addition to Landlord's Work to be constructed by Landlord at its sole
cost and expense pursuant to Paragraph 1 above, Landlord agrees, subject to the
conditions set forth below, to construct certain Tenant Improvements in the
Premises pursuant to the terms of this Exhibit B.
3. DEFINITION
Tenant Improvements as used in the Lease and this Exhibit B shall include
only those improvements within the interior portions of the Premises which are
depicted on the Final Plans and Specifications (hereafter defined in Paragraph
4) or described hereinbelow. Tenant Improvements shall specifically not include
Landlords Work to be performed by Landlord pursuant to Paragraph 1 above or any
alterations, additions, or improvements installed or constructed by Tenant, and
any of Tenants personal property or trade fixtures.
The Tenant Improvements may include:
(a) Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and painting, millwork and similar items.
(b) Electrical wiring, lighting fixtures, outlets and switches, and other
electrical work.
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(c) Duct work, terminal boxes, diffusers and accessories required for the
completion of the heating, ventilation and air conditioning systems serving the
Premises, including the cost of meter and key control for after-hour air
conditioning.
(d) Any additional Tenant requirements including, but not limited to odor
control, special heating, ventilation and air conditioning, noise or vibration
control or other special systems.
(e) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories
installed within and serving the Premises.
(f) All plumbing, fixtures, pipes, and accessories to be installed within
and serving the Premises.
4. PLANS AND SPECIFICATIONS
Landlord shall retain the architect specified in the Basic Lease
Information ("Architect") for the preparation of preliminary and final working
architectural and engineering plans and specifications for the Tenant
Improvements ("Final Plans and Specifications"). Landlord reserves the right to
substitute for the Architect another architect of its selection. Tenant shall
cooperate diligently with the Architect and shall furnish within ten (10) days
after request therefor, all information required by the Architect for completion
of the Final Plans and Specifications, and shall provide (in writing, if
requested by Landlord), not later than three (3) business days after request
therefor, any approval or disapproval of preliminary or Final Plans and
Specifications which Tenant is permitted to give under this Exhibit B. Landlord
and Tenant shall indicate their approval of the Final Plans and Specifications
by initialing them and attaching them to the Lease as Exhibit B-1. Upon
completion of the Final Plans and Specifications and approval thereof by
Landlord and Tenant, Landlord will obtain subcontractor trade bids and furnish a
cost breakdown to Tenant. In the event the estimated Tenant Improvements Cost
(hereafter defined in Paragraph 8), based on such bids and the reasonably
anticipated costs of other items constituting the Tenant Improvements Cost,
exceeds the sum of the Tenant Improvements Allowance and the Tenant Improvements
Loan plus any amounts which Tenant desires to pay as an Excess Tenant
Improvements Cost (hereafter defined in Paragraph 9) ("Tenants T.I. Budget"), at
Tenant's request, the Final Plans and Specifications may be revised once, at
Tenant's cost and expense. Any such revisions shall be subject to Landlord's
approval, and the amended Final Plans and Specifications, as approved by
Landlord and Tenant, shall thereafter be deemed to be the Final Plans and
Specifications for the Tenant Improvements. The amended Final Plans and
Specifications shall be approved by Tenant (in writing, if requested by
Landlord) not later than three (3) days after Landlords request therefor.
Landlord shall thereafter submit such amended Final Plans and Specifications to
its contractor and subcontractor for re-bidding, and shall furnish a cost
breakdown to Tenant. If the estimated Tenant Improvements Cost, as determined by
the bids based on the amended Final Plans and Specifications and the reasonably
anticipated costs of other items
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constituting the Tenant Improvements Cost, result in an Excess Tenant
Improvements Cost, then Tenant shall pay such Excess Tenant Improvements Cost as
and when required by Paragraph 9. Tenants failure to approve or disapprove any
matters which Tenant shall be entitled to approve or disapprove pursuant to this
Paragraph 4 shall be conclusively deemed to be approval of same by Tenant.
5. LANDLORD TO CONSTRUCT IMPROVEMENTS
When the Final Plans and Specifications (as amended, if required by
Paragraph 4 above) have been approved by Landlord and Tenant, Landlord shall
submit such Final Plans and Specifications to all governmental authorities
having rights of approval over the Tenant Improvement work and shall apply for
all governmental approvals and building permits. Subject to satisfaction of all
conditions precedent and subsequent to its obligations under this Exhibit B, and
further subject to the provisions of Paragraph 9, Landlord shall thereafter
commence and proceed to complete construction of the Tenant Improvements.
6. TENANT IMPROVEMENTS ALLOWANCE
Landlord shall provide an allowance for the planning and construction of
the Tenant Improvements in the amount specified in the Basic Lease Information
("Tenant Improvements Allowance"). Subject to Paragraph 7, the Tenant
Improvements Allowance shall be the maximum contribution by Landlord for the
Tenant Improvements Cost. Should the actual cost of planning and constructing
those Tenant Improvements depicted on the Final Plans and Specifications be less
than the Tenant Improvements Allowance, the Tenant Improvements Allowance shall
be reduced to an amount equal to said actual cost.
7. TENANT IMPROVEMENTS LOAN
Landlord agrees to lend Tenant up to Ninety-three Thousand Eight Hundred
Seventy-nine Dollars ($93,879.00) for Tenant Improvements (the "Tenant
Improvements Loan") after the Tenant Improvements Allowance has been disbursed.
The Tenant Improvements Loan shall be repayable by Tenant to Landlord in
substantially equal self-amortizing installments over the Term of the Lease,
together with interest on the balance outstanding from time to time at the rate
of twelve percent (12%) per annum. Notwithstanding anything herein to the
contrary, in the event the Lease shall terminate for any reason prior to the
scheduled expiration thereof, the Tenant Improvements Loan and all accrued and
unpaid interest thereon shall immediately become due and payable in full.
8. TENANT IMPROVEMENTS COST
The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all
costs and expenses associated with the design, preparation, approval and
construction of the Tenant Improvements, including, but not limited, to the
following:
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(a) All costs incurred by Landlord or Tenant of preliminary and final
architectural and engineering plans and specifications for the Tenant
Improvements, and engineering costs associated with completion of the State of
California energy utilization calculations under Title 24 legislation;
(b) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(c) All costs of interior design and finish schedule plans and
specifications including as-built drawings;
(d) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises, including, but not limited
to, the construction fee for overhead and profit and the cost of all on-site
supervisory and administrative staff, office, equipment and temporary services
rendered by Landlords contractor in connection with construction of the Tenant
Improvements;
(e) All fees payable to the Architect and Landlords engineering firm if
they are required by Tenant to redesign any portion of the Tenant Improvements
following Tenant's approval of the Final Plans and Specifications;
(f) All construction and project management fees payable by Landlord to
Landlords property management company or any other individual or entity; and
(g) Utility connection fees.
In no event shall the Tenant Improvements Cost include any costs of
Landlords Work or any costs of procuring, constructing or installing in the
Premises any of Tenant's personal property or trade fixtures.
9. EXCESS TENANT IMPROVEMENTS COST
If the Tenant Improvements Cost is more than the sum of the Tenant
Improvements Allowance and Tenant Improvements Loan, then the difference between
the Tenant Improvements Cost and the sum of the Tenant Improvements Allowance
and Tenant Improvements Loan ("Excess Tenant Improvements Cost") shall be paid
by Tenant to Landlord in cash, within ten (10) days of delivery of statements
from Landlord to Tenant therefor. If construction of the Tenant Improvements
will result in Excess Tenant Improvements Cost, Landlord shall not be obligated
to commence construction of the Tenant Improvements if payment of the Excess
Tenant Improvements Cost by Tenant is not received within ten (10) days after
delivery by Landlord to Tenant of a statement therefor; provided, however, that
Landlord may, at its option, commence construction of the Tenant Improvements,
in which event Tenant shall pay the Excess Tenant Improvements Cost within ten
(10) days after delivery by Landlord to Tenant of the statement therefor. If
Landlord so elects to commence construction of the Tenant Improvements or has
already commenced construction of the Tenant Improvements when
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there occurs an Excess Tenant Improvements Cost, then Landlord shall be entitled
to suspend or terminate construction of the Tenant Improvements if payment by
Tenant to Landlord of the Excess Tenant Improvement Cost has not been received
within ten (10) days after delivery by Landlord to Tenant of a statement
therefor.
10. CHANGE REQUEST
When the Final Plans and Specifications have been approved by Landlord,
there shall be no changes without Landlord's prior written consent, except for
(a) necessary on-site installation variations or minor changes necessary to
comply with building codes and other governmental regulations; (b) one revision,
if requested by Tenant, to adjust the estimated Tenant Improvements Cost to
Tenants T.I. Budget therefor, as permitted by Paragraph 4 above; and (c) changes
approved in writing by both parties. Any costs related to such governmentally
required or requested and approved changes shall be added to the Tenant
Improvements Cost and, to the extent such cost results in Excess Tenant
Improvements Cost, shall be paid for by Tenant as and with any Excess Tenant
Improvements Cost as set forth in Paragraph 9. The billing for such additional
costs to Tenant shall be accompanied by evidence of the amounts billed as is
customarily used in the business. Costs related to changes shall include,
without limitation, any architectural or design fees, and Landlord's general
contractors price for effecting the change.
11. TERMINATION
If the Lease is terminated prior to completion of the Tenant Improvements
for any reason due to the Default of Tenant under the Lease, in addition to any
other damages available to Landlord, Tenant shall pay to Landlord, within five
(5) days of receipt of a statement therefor, all costs incurred by Landlord
through the date of termination in connection with the Tenant Improvements.
Landlord shall have the right to terminate the Lease, upon written notice to
Tenant, if Landlord is unable to obtain a building permit for the Tenant
Improvements within one hundred twenty (120) days from the date the Lease is
mutually executed.
12. INTEREST
Any payments required to be made by Tenant hereunder which are not paid
when due shall bear interest at the maximum rate permitted by law from the due
date therefor until paid.
13. DISCLAIMER
Landlord shall have no liability to Tenant in the event construction of the
Tenant Improvements is delayed or prevented due to any cause beyond Landlords
reasonable control; provided, however, that the foregoing clause shall not limit
Tenant's right to terminate this Lease where applicable under Section 7(d) of
the Lease. If Tenant is entitled or permitted to enter the Premises prior to
completion of the Tenant
B-5
<PAGE>
Improvements, Landlord shall not be liable to Tenant or its Agents for any loss
or damage to property, or injury to person, arising from or related to
construction of the Tenant Improvements. Tenant shall take all reasonable
precautions to protect against such loss, damage or injury during construction
of the Tenant Improvements, and shall not interfere with the conduct of the
Tenant Improvement work. Tenant shall cooperate with all reasonable directives
of Landlord and Landlords contractor in order to minimize any disruption or
delay in completion of the Tenant Improvements work.
B-6
<PAGE>
Exhibit B-1
FINAL PLANS AND SPECIFICATIONS
Reference is hereby made to that certain Lease Agreement dated May 8, 1996
by and between Aetna Life Insurance Company, a Connecticut corporation, as
landlord ("Landlord"), and International Network Services, Inc., a California
corporation, as tenant ("Tenant"), ("Lease Agreement").
The Final Plans and Specifications (as defined in Exhibit B to the Lease
Agreement) consists of the following described drawings, specifications and
other documents:
Title of Drawing, Specification or
Other Document Date
The Final Plans and Specifications have been initialed by both Landlord and
Tenant and are on file with Landlord.
Initials: Landlord _______ Tenant _______
B-1-1
<PAGE>
Exhibit C
COMMENCEMENT DATE MEMORANDUM
Landlord: Aetna Life Insurance Company
Tenant: International Network Services, Inc.
Lease Date: May 8, 1996
Premises: Located at 1213 Innsbruck Drive, Sunnyvale, California
Tenant hereby accepts the Premises as being in the condition required under
the Lease, with all Tenant Improvements completed (except for minor punchlist
items which Landlord agrees to complete).
The Commencement Date of the above referenced Lease is hereby established
as _________________, 1996.
Tenant: International Network Services, Inc.,
a California corporation
By: __________________________________________
Print Name: __________________________________
Its: _________________________________________
Approved and Agreed:
Aetna Life Insurance Company,
a Connecticut corporation
By: Aetna Realty Investors, Inc.,
a corporation,
Its Agent
By: ___________________________
Its: __________________________
C-1
<PAGE>
Ex 10.6
Imperial Bank
Member FDIC
226 Airport Parkway,
San Jose, California
June 27, 1996
Subject: Credit Terms and Conditions ("Agreement")
Borrower: International Network Services
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower") and in
consideration of any loan or loans you, in your sole discretion, may make to
Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. Existence and Rights.
Company is a corporation.
Borrower is duly organized and existing and in good standing under the
laws of the State of California and is authorized and in good standing to do
business in the State of California. Borrower has powers and adequate authority,
rights and franchises to own its property and to carry on its business as now
conducted, and is duly qualified and in good standing in each State in which the
character of the properties owned by it therein or the conduct of its business
makes such qualification necessary, and Borrower has the power and adequate
authority to make and carry out this Agreement. Borrower has no investment in
any other business entity, except as previously disclosed to Bank.
2. Agreement Authorized. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. No Conflict. The execution, delivery and performance of this
Agreement are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a
<PAGE>
party or by which it or any of its property may be bound or affected, and do not
cause any lien, charge or other encumbrance to be created or imposed upon any
such property by reason thereof.
4. Litigation. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
5. Financial Condition. The balance sheet of Borrower as of
04/30/96, and the related profit and loss statement for the 10 months ended on
that date, a copy of which has heretofore been delivered to you by Borrower, and
all other statements and data submitted in writing by Borrower to you in
connection with this request for credit are true and correct, and said balance
sheet and profit and loss statement truly present the financial condition of
Borrower as of the date thereof and the results of the operations of Borrower
for the period covered thereby, and have been prepared in accordance with
generally accepted accounting principles on a basis consistently maintained.
Since such date there have been no materially adverse changes in the financial
condition or business of Borrower. Borrower has no knowledge of any
liabilities, contingent or otherwise, at such date not reflected in said balance
sheet and Borrower has not entered into any special commitments or substantial
contracts which arc not reflected in said balance sheet, other than in the
ordinary and normal course of its business, which may have a materially adverse
effect upon its financial condition, operations or business as now conducted.
6. Title to Assets. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section C.3 hereof.
7. Tax Status. Borrower has no liability for any delinquent state, local
or federal taxes, and if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. Trademarks, Patents. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. Regulation U. The proceeds of this loan shall not be used to purchase
or carry margin stock (as defined with Regulation U of the Board of Governors of
the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, it will, unless you
shall otherwise consent in writing:
1. Rights and Facilities. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in
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<PAGE>
good order and repair; conduct its business in an orderly manner without
voluntary interruption and, if a corporation or partnership, maintain and
preserve its existence.
2. Insurance. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses.
3. Taxes and Other Liabilities. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manners as not to cause any materially adverse effect upon
its financial condition or the loss of any right of redemption from any sale
thereunder, and
(b) it shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by it adequate
with respect thereto.
4. Records and Reports. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit your representatives to have access to,
and to examine its properties, books and records at all reasonable times; and
furnish you:
(a) As soon as available, and in any event within 25 days after the
close of each month of each fiscal year of Borrower, commencing with the month
next ending, a balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous fiscal year,
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate officer of
Borrower, subject, however, to year-end audit adjustments;
(b) As soon as available, and in any event within 90 days after the
close of each fiscal year of Borrower, a report of audit of Company as of the
close of and for such fiscal year, all in reasonable detail and stating in
comparative form the figures as of the close of and for the previous fiscal
year, with the unqualified opinion of accountants satisfactory to you.
(c) Within 25 days after the close of each month of each fiscal year
of Borrower, a certificate by chief financial officer or partner of Borrower,
stating that Borrower has performed and observed each and every covenant
contained in this Letter of Inducement to be performed by it and that no event
has occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of
-3-
<PAGE>
notice and the lapse of time specified herein, or, if any such event has
occurred or any such condition exists, specifying the nature thereof;
(d) Promptly after the receipt thereof by Borrower, copies of any
detailed audit reports submitted to Borrower by independent accountants in
connection with each annual or interim audit of the accounts of Borrower made by
such accountants;
(e) Promptly after the same are available, copies of all such proxy
statements, financial statements and reports as Borrower shall send to its
stockholders, if any, and copies of all reports which Borrower may file with the
Securities and Exchange Commission or any governmental authority at any time
substituted therefor; and
(f) Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
(g) Notice of Default. Promptly notify the Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. Type of Business; Management. Make any substantial change in the
character of its business; or make any change in its executive management.
2. Outside Indebtedness. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you except obligations
now existing as shown in financial statement dated 04/30/96, excluding those
being refinanced by your bank; or sell or transfer, either with or without
recourse, any accounts or notes receivable or any moneys due to become due.
3. Liens and Encumbrances. Create, incur, or assume any mortgage, pledge
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
liens for taxes not delinquent and liens in your favor.
4. Loans & Investments, Secondary Liabilities. Make any loan or advances
to any person or other entity other than in the ordinary and normal course of
its business as now conducted or make any investment in the securities of any
person or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
5. Acquisition or Sale of Business; Merger or Consolidation. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or
-4-
<PAGE>
consolidate, or commence any proceedings therefor; or sell any assets except in
the ordinary and normal course of its business as now conducted; or sell, lease,
assign, or transfer any substantial part of its business or fixed assets, or any
property or other assets necessary for the continuance of its business as now
conducted including without limitation the selling of any property or other
asset accompanied by the leasing back of the same.
6. Dividends, Stock Payments. If a corporation, declare or pay any
dividend (other than dividends payable in common stock of Borrower) or make any
other distribution on any of its capital stock now outstanding or hereafter
issued or purchase, redeem or retire any of such stock.
D. The occurrence of any one of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived:
1. Failure to Pay Note. Failure to pay any installment of principal or
of interest on any indebtedness of Borrower to you.
2. Breach of Covenant. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
3. Breach of Warranty. Any of Borrower's representations or
warranties made herein or any statement or certificate at any time given in
writing pursuant hereto or in connection herewith shall be false or misleading
in any material respect.
4. Insolvency; Receiver or Trustee. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. Judgments, Attachments. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated unbonded or unstayed for a period of 10
days or in any event later than five days prior to the date of any proposed sale
thereunder.
6. Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. Miscellaneous Provisions.
1. Failure or Indulgence Not Waiver. No failure or delay on the part of
your Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall
-5-
<PAGE>
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. All rights and remedies existing under
this agreement or any note issued in connection with a loan that your Bank may
make hereunder, are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
See Addendum dated June 27, 1996 attached hereto and incorporated herein by this
reference for additional terms. In the event of a conflict between this
Agreement and the Addendum, the terms in the Addendum prevail.
International Network Services
By: /s/ Kevin J. Laughlin
--------------------------------------
(Authorized Signature and Title)
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<PAGE>
INTERNATIONAL NETWORK SERVICES
Addendum to Credit Terms & Conditions
Dated June 27, 1996
1. Credit Facilities
-----------------
A) A Revolving Line of Credit of $6,000,000. ("Line")
B) An Equipment Term Loan of $3,000,000. ("Term Loan")
2. Term and Repayment
------------------
A) The Line will require monthly payments of interest with full payment
of principal and interest due at maturity on June 26, 1997.
B) The Equipment Loan will consist of an interest only drawdown period
through 6/30/97, during which equipment draws during the quarters
ending 9/30/96, 12/31/96, 3/31/97 and 6/30/97 will be termed out on
the last day of the quarter in which draw was made. Each draw under
the Equipment Loan will have 36 equal monthly principal repayments,
plus interest, with a final maturity of the earlier of: (i) thirty-six
months after the calendar quarter during which the draw was disbursed
by Bank; or (ii) 6/30/2000. The equipment financed must have been
purchased after December 31, 1995.
3. Collateral
----------
Bank to have a blanket security interest in first position perfected by a
UCC filing on all assets of Borrower including all present and future
inventory, chattel paper, accounts, contract rights, unencumbered
equipment, general intangibles, and fixtures and the product thereof. All
Bank debt to be cross-collateralized and cross-defaulted.
4. Borrowing Formula
-----------------
A) Advances under the Line will be limited to 80% of the eligible
domestic accounts receivable that are less than 90 days from the
invoice date subject to standard exclusions for foreign, government,
contra, and inter-company accounts. Any account which alone exceeds
25% of the total accounts will be ineligible to the extent said
account exceeds 25% of total accounts. If 25% or more of an account
receivable is past due (greater than 90 days), the entire account will
be ineligible.
B) Advances under the Term Loan will be 100% of the cost of equipment,
excluding taxes, freight, other taxes, and other soft costs. Equipment
to include business & office machinery & equipment and other personal
property which is resalable and
<PAGE>
removable. Advances must be supported by documentation evidencing
purchase of equipment, in form and content satisfactory to the Bank.
5. Pricing
-------
Interest Rate: Line: Bank's Prime Rate + 1.00% per annum.
Term Loan: Bank's Prime Rate + 1.25% per annum.
Facility Fees:* Line: $20,000, due and payable upon execution hereof by
Borrower.
Term Loan: $15,000, due and payable upon
execution hereof by Borrower.
* Facility Fees will be adjusted for fees paid on existing facilities
calculated on a pro-rata basis for the period of time existing facilities
were in place, and for different commitment amounts.
6. Covenants
---------
A) Borrower to maintain the following on a fiscal quarterly basis,
beginning with the fiscal quarter ending 6/30/96:
1. A Minimum Quick Ratio/1/ of 1.00:1.00.
2. A Minimum Tangible Net Worth/2/ of $8,000,000.
3. A Maximum Total Liabilities to Tangible Net Worth/3/ of
1.25:1.00.
4. Minimum Quarterly Cash Flow Coverage/4/ ratio greater than 1.5 to
1:00. Cash flow test waived if cash plus Borrowing Base/5/ is
greater than $3 million.
5. Borrower to be profitable each quarter, beginning with the
quarter ending 6/30/96.
Definitions:
/1/ Defined as Cash + Accounts Receivable/Current Liabilities.
/2/ Defined as Total Tangible Assets - Total Liabilities.
/3/ Defined as Total Liabilities/Tangible Net Worth.
/4/ Defined as Net Income plus Depreciation and Amortization/(Current
Portion of Long Term Debt/4). Cash flow test waived if cash plus
Borrowing Base is greater than $3,000,000.
/5/ Defined as eligible Borrowing Formula - all outstanding loan
balances due Bank.
B) Borrower to provide:
1. Reviewed financial statements within 120 days of fiscal year end.
2. Company prepared monthly financial statements and Compliance
Certificate within 25 days after month end.
3. Monthly detailed aging of accounts receivable and accounts payable
with Borrowing Base Certificate within 25 days after month end.
-2-
<PAGE>
4. Budgets, sales projections, operating plans, or other financial
exhibits which the Bank may reasonably request.
C) Other Covenants:
1. Borrower to maintain primary banking relationships with Imperial
Bank.
2. Without Bank's prior approval, Borrower shall not:
a) Enter into any mergers or acquisitions.
b) Pay cash dividends or repurchase stock.
c) Hypothecate existing assets.
d) Loan money or guarantee loans of others.
3. Borrower to notify Bank in writing of any legal action commenced
against it which may result in damages over $50,000. Borrower shall
so notify Bank immediately upon receipt by Borrower of notice of
the commencement of said legal action.
4. Prior to closing of the Line, and Equipment Loan, Borrower to
provide Bank proof of insurance on all tangible corporate assets
and a Lender's Loss Payable Clause with Bank as loss payee.
7. OTHER CONDITIONS
----------------
A. Completion of a collateral audit by August 31, 1996 with results
satisfactory to Bank at Borrower's expense. Bank may require annual
A/R audits at Borrower's expense.
B. Prior to closing, Borrower shall execute and deliver to Bank any
and all documents required by Bank. Borrower to pay to Bank $250.00
for loan documentation preparation, due at closing.
International Network Services
By: /s/ Kevin J. Laughlin
----------------------------
Title: V.P. Finance Date: 6/27/96
------------------------- -------------
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<PAGE>
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE)
This Agreement is entered into between INTERNATIONAL NETWORK SERVICES, a
__________ corporation (herein called "Borrower") and IMPERIAL BANK (herein
called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
80.000% of Eligible Accounts and in no event more than
$6,000,000.00.
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of one percent
(1.000%) per annum in excess of the rate of interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change in such Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days during which
the principal balance of the loan account is outstanding divided by 360,
which shall for interest computation purposes be considered one year. Bank
at its option may demand payment of any or all of the amount due under the
Loan Account including accrued but unpaid interest at any time. Such notice
may be given verbally or in writing and should be effective upon receipt by
Borrower. The amount of interest payable each month by Borrower shall not
be less than a minimum monthly charge of $250.00. Bank is hereby authorized
to charge Borrower's deposit account(s) with Bank for all sums due Bank
under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
<PAGE>
B. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
C. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
90 days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts
if the account debtor or any other person liable in connection
therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so notified
Borrower. Eligible Accounts shall only include such accounts as Bank
in its sole discretion shall determine are eligible from time to time.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security
therefor, and hereby grants to Bank a continuing security interest in all
moneys in the Collateral Account referred to in Section 6 hereof, as
security for any and all obligations of Borrower to Bank, whether now owing
or hereafter incurred and whether direct, indirect, absolute or contingent.
So long as Borrower is indebted to Bank or Bank is committed to extend
credit to Borrower, Borrower will execute and deliver to Bank such
assignments, including Bank's standard forms of Specific or General
Assignment covering individual Accounts, notices, financing statements, and
other documents and papers as Bank may require in order to affirm,
effectuate or further assure the assignment to Bank of the Collateral or to
give any third party, including the account debtors obligated on the
Accounts, notice of Bank's interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower will collect with diligence all Borrower's Accounts,
provided that no legal action shall be maintained thereon or in connection
therewith without Bank's prior written consent. Any collection of Accounts
by Borrower, whether in the form of cash, checks, notes, or other
instruments for the payment of money (properly endorsed or assigned where
required to enable Bank to collect same), shall be in trust for Bank, and
Borrower shall keep all such collections separate and apart from all other
funds and property so as to be capable of identification as the property of
Bank and deliver said collections daily to Bank in the identical form
received. The proceeds of such collections when received by Bank may be
applied by Bank directly to the payment of Borrower's Loan Account or any
other obligation secured hereby. Any credit given by Bank upon receipt of
said proceeds shall be conditional credit subject to collection. Returned
items at Bank's option may be charged to Borrower's general account. All
collections of the Accounts shall be set forth on an itemized schedule,
showing the name of the account debtor, the amount of each payment and such
other information as Bank may request.
-2-
<PAGE>
7. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower may continue its present policies with respect to
returned merchandise and adjustments. However, Borrower shall immediately
notify Bank of all cases involving returns, repossessions, and loss or
damage of or to merchandise represented by the Accounts and of any credits,
adjustments or disputes arising in connection with the goods or services
represented by the Accounts and, in any of such events, Borrower will
immediately pay to Bank from its own funds (and not from the proceeds of
Accounts or inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collection thereon; (iii) Permit representatives of Bank to inspect the
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto;
-3-
<PAGE>
(vi) Notify Bank of each location and of each office of Borrower at which
records of Borrower relating to the Accounts are kept; (vii) Provide,
maintain and deliver to Bank policies insuring the Collateral against loss
or damage by such risks and in such amounts, forms and companies as Bank
may require and with loss payable solely to Bank, and, in the event Bank
takes possession of the Collateral, the insurance policy or policies and
any unearned or returned premium thereon shall at the option of Bank become
the sole property of Bank, such policies and the proceeds of any other
insurance covering or in any way relating to the Collateral, whether now in
existence or hereafter obtained, being hereby assigned to Bank; and (viii)
In the event the unpaid balance of Borrower's Loan Account shall exceed the
maximum amount of outstanding loans to which Borrower is entitled under
Section 1 hereof, Borrower shall immediately pay to Bank, from its own
funds and not from the proceeds of Collateral, for credit to Borrower's
Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors,
and Borrower does hereby make, constitute and appoint Bank its irrevocable,
true and lawful attorney with power to receive, open and dispose of all
mail addressed to Borrower, to endorse the name of Borrower upon any checks
or other evidences of payment that may come into the possession of Bank
upon the Accounts to endorse the name of the undersigned upon any document
or instrument relating to the Collateral; in its name or otherwise, to
demand, sue for, collect and give acquittance for any and all moneys due or
to become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commended by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment or debt or moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the
-4-
<PAGE>
Collateral in any manner permitted by law, or provided for herein; (e)
Sell, lease or otherwise dispose of the Collateral at public or private
sale, with or without having the Collateral at the place of sale, and upon
terms and in such manner as Bank may determine, and Bank may purchase same
at any such sale; (f) Retain the Collateral in full satisfaction of the
obligations secured thereby; (g) Exercise any remedies of a secured party
under the Uniform Commercial Code. Prior to any such disposition, Bank may,
at its option, cause any of the Collateral to be repaired or reconditioned
in such manner and to such extent as Bank may deem advisable, and any sums
expended therefor by Bank shall be repaid by Borrower and secured hereby.
Bank shall have the right to enforce one or more remedies hereunder
successively or concurrently, and any such action shall not estop or
prevent Bank from pursuing any further remedy which it may have hereunder
or by law. If a sufficient sum is not realized from any such disposition of
Collateral to pay all obligations secured by this Security Agreement,
Borrower hereby promises and agrees to pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorized Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Additional Provisions: Subject to conditions and limitations contained in
the Credit Terms and Conditions dated June 27, 1996. See "EXHIBIT A"
attached.
Executed this 27th day of June , 1996
---- ------ --
INTERNATIONAL NETWORK SERVICES
----------------------------------
(Name of Borrower)
IMPERIAL BANK BY: /s/ Kevin J. Laughlin
----------------------------------
(Authorized Signature and Title)
BY: /s/ BY:
---------------------------------- ---------------------------------
Title (Authorized Signature and Title)
-5-
<PAGE>
Attachment to Security and Loan Agreement
dtd. 6/27/96, consisting of one page
INTERNATIONAL NETWORK SERVICES
"EXHIBIT A"
If any installment payment, interest payment, principal payment or principal
balance payment due hereunder is delinquent ten or more days, Obligor agrees to
pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing in this paragraph to be construed as any
obligation on the part of the holder of this note to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
All payments shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
-1-
<PAGE>
IMPERIAL BANK
Member FDIC
NOTE
$ 3,000,000.00 San Jose, California, June 27, 1996
on June 30, 2000 and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Santa Clara Valley Regional office, the principal
---------------------------
sum of $3,000,000.00 or such sums up to the maximum if so stated, as the Bank
may now or hereafter advance to or for the benefit of the undersigned in
accordance with the terms hereof, together with interest from date of
disbursement or N/A , whichever is later, on the unpaid principal balance
----------
[_] at the rate of _______% per year [X] at the rate of 1.250% per year in
excess of the rate of interest which Bank has announced as its prime lending
rate (the "Prime Rate"), which shall vary concurrently with any change in such
Prime Rate, or $250.00 , whichever is greater. Interest shall be computed
------------
at the above rate an the basis of the actual number of days during which the
principal balance is outstanding, divided by 360, which shall, for into"
computation purposes, be considered one year.
Interest shall be payable [X] monthly [_] quarterly [_] included with principal
[X] in addition to principal , beginning July 31, 1996 and if not so paid
-----------------
shall become a part of the principal. All payments shall be applied first to
interest, and the remainder, if any, on principal. [_] (If checked), Principal
shall be payable in installments of $** , or more, each installment
--------------
on the ________ day of each ________________, beginning ________________.
Advances not to exceed any unpaid balance owing at any one time equal to the
maximum amount specified above, may be made at the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor, or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
[X] If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust security agreement or
other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
**SEE ADDENDUM ATTACHED
INTERNATIONAL NETWORK SERVICES
- ------------------------------------- -------------------------------------
/s/ Kevin J. Laughlin
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
<PAGE>
ADDENDUM TO NOTE
Advances under the Note shall be available through June 30, 1997.
On the last day of each calendar quarter, the outstanding balance of the
disbursements made under the Note during said calendar quarter, shall be
converted to an amortizing loan payable in 36 equal monthly principal payments,
plus accrued interest, thereon, with said monthly payments due and payable on
that portion of the outstanding principal balance of the Note on the last day of
each calendar month, commencing on the last day of the month following each
calendar quarter.
All principal and accrued but unpaid interest shall in any event be due and
payable on June 30, 2000.
INTERNATIONAL NETWORK SERVICES
BY /s/ Kevin J. Laughlin
-------------------------------------------
<PAGE>
EXHIBIT 11.1
INTERNATIONAL NETWORK SERVICES
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1995 1996
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding................. 8,010 8,394
Weighted average common equivalent shares from Mandatorily
Redeemable Convertible Preferred Stock and warrants,
calculated using the if-converted and the treasury stock
method.................................................... 16,530 16,793
Weighted average common equivalent shares from stock op-
tions and warrants calculated using the treasury stock
method.................................................... 2,349 2,874
Common equivalent shares from common shares issued and
stock options granted within twelve months of the initial
public offering, included pursuant to Staff Accounting
Bulletin No. 83........................................... 2,468 2,468
--------- ---------
Shares used to compute net income per share................ 29,357 30,529
========= =========
Net income................................................. $775 $2,877
========= =========
Net income per share....................................... $0.03 $0.09
========= =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 31, 1996, relating
to the financial statements of International Network Services, which appears
in such prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended June 30, 1996 listed
under item 16(b) of this registration statement when such schedule is read in
conjunction with the financial statements referred to in our report. The
audits referred to in such report also included this schedule. We also consent
to the references to us under the headings "Experts" and "Selected Financial
Data" in such Prospectus. However, it should be noted that Price Waterhouse
LLP has not prepared or certified such "Selected Financial Data."
Price Waterhouse LLP
San Jose, California
July 31, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1996
<PERIOD-START> JUL-01-1994 JUL-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1996
<CASH> 4,161 869
<SECURITIES> 0 0
<RECEIVABLES> 4,385 12,375
<ALLOWANCES> (221) (554)
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,441 13,933
<PP&E> 1,526 4,139
<DEPRECIATION> (784) (1,786)
<TOTAL-ASSETS> 9,967 18,072
<CURRENT-LIABILITIES> 2,338 7,873
<BONDS> 732 316
11,292 12,427
0 0
<COMMON> 435 2,394
<OTHER-SE> (4,830) (4,938)
<TOTAL-LIABILITY-AND-EQUITY> 9,967 18,072
<SALES> 0 0
<TOTAL-REVENUES> 15,549 44,092
<CGS> 0 0
<TOTAL-COSTS> 14,733 39,378
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17 3
<INCOME-PRETAX> 833 4,717
<INCOME-TAX> 58 1,840
<INCOME-CONTINUING> 775 2,877
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 775 2,877
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
