<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
[_] Confidential, for Use of the Commission Only
(as Permitted by Rule 14a-6(e)(2))
International Network Services
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO OF INTERNATIONAL NETWORKS SERVICES]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1997
To the Shareholders:
Notice is hereby given that the Annual Meeting of Shareholders (the "Annual
Meeting") of International Network Services (the "Company"), a California
corporation, will be held on Thursday, October 30, 1997 at 1:00 p.m., local
time, at the Company's headquarters at 1213 Innsbruck Drive, Sunnyvale,
California 94089, for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are duly elected and qualified.
2. To ratify the appointment of Price Waterhouse LLP as independent
accountants of International Network Services for the fiscal year ending
June 30, 1998.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only holders of record of the Company's Common Stock at the close of
business on September 8, 1997 are entitled to notice of and to vote at the
Annual Meeting.
All shareholders are cordially invited to attend the Annual Meeting in
person. However, to assure your representation at the Annual Meeting, you are
urged to mark, sign, date and return the enclosed proxy card as promptly as
possible in the postage-prepaid envelope enclosed for that purpose. Any
shareholder attending the Annual Meeting may vote in person even if he or she
has returned a proxy card.
By Order of the Board of Directors
/s/ Kevin J. Laughlin
KEVIN J. LAUGHLIN
Vice President, Finance,
Chief Financial Officer and
Secretary
Sunnyvale, California
September 24, 1997
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED
TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE
PROVIDED.
<PAGE>
INTERNATIONAL NETWORK SERVICES
PROXY STATEMENT
FOR
1997 ANNUAL MEETING OF SHAREHOLDERS
PROCEDURAL MATTERS
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
International Network Services (the "Company"), a California corporation, for
use at the Company's Annual Meeting of Shareholders (the "Annual Meeting") to
be held on Thursday, October 30, 1997 at 1:00 p.m., local time, and at any
adjournment thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Shareholders. The Annual Meeting will be held at
the Company's headquarters at 1213 Innsbruck Drive, Sunnyvale, California
94089, and the telephone number at that location is (408) 542-0100.
This Proxy Statement and the enclosed proxy were mailed on or about
September 24, 1997, together with the Company's 1997 Annual Report to
Shareholders, to all shareholders entitled to vote at the Annual Meeting.
RECORD DATE
Only holders of record of the Company's common stock, no par value (the
"Common Stock"), at the close of business on September 8, 1997 (the "Record
Date") are entitled to notice of and to vote at the Annual Meeting. As of the
Record Date, 32,216,544 shares of the Company's Common Stock were outstanding
and the Company had 216 shareholders of record. For information regarding
security ownership by management and by the beneficial owners of more than 5%
of the Company's Common Stock, see "Security Ownership of Certain Beneficial
Owners and Management."
PROXIES; REVOCABILITY OF PROXIES
All shares entitled to vote and represented by properly executed proxies
received prior to the Annual Meeting, and not revoked, will be voted at the
Annual Meeting in accordance with the instructions indicated on those proxies.
If no instructions are indicated on a properly executed proxy, the shares
represented by that proxy will be voted as recommended by the Board of
Directors. If any other matters are properly presented for consideration at
the Annual Meeting, the persons named in the enclosed proxy and acting
thereunder will have discretion to vote on those matters in accordance with
their best judgment. The Company does not currently anticipate that any other
matters will be raised at the Annual Meeting.
A shareholder may revoke any proxy given pursuant to this solicitation at
any time before it is voted by delivering to the Company's Corporate Secretary
a written notice of revocation or a duly executed proxy bearing a date later
than that of the previously submitted proxy, or by attending the Annual
Meeting and voting in person.
VOTING AND SOLICITATION
Each shareholder is entitled to one vote for each share of Common Stock on
all matters presented at the Annual Meeting. Shareholders do not have the
right to cumulate their votes in the election of directors.
The cost of soliciting proxies will be borne by the Company. The Company may
reimburse brokerage firms and other persons representing beneficial owners of
shares for their reasonable expenses in forwarding solicitation materials to
such beneficial owners. Proxies may also be solicited by certain of the
Company's directors, officers, and employees, without additional compensation,
personally or by telephone, telegram, letter or facsimile.
<PAGE>
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence at the Annual Meeting, either in person or by proxy, of the
holders of a majority of the outstanding shares of Common Stock entitled to
vote shall constitute a quorum for the transaction of business. The Company
intends to include abstentions and broker non-votes as present or represented
for purposes of establishing a quorum for the transaction of business, but to
exclude broker non-votes and abstentions from the calculation of shares
entitled to vote.
PROCEDURE FOR SUBMITTING SHAREHOLDER PROPOSALS
Any proposal of a shareholder of the Company which is intended to be
presented by such shareholder at the Company's 1998 Annual Meeting of
Shareholders must be received by the Company no later than May 27, 1998 in
order for such proposal to be considered for inclusion in the Company's proxy
statement and form of proxy relating to such meeting.
The Company's Bylaws provide that shareholders intending to nominate
candidates for election as directors or to bring business before an annual
meeting of shareholders which were not included in the Company's proxy
statement must give timely notice in proper form of his or her intent to bring
such nomination or such business before such annual meeting. To be timely,
such shareholder's notice must be delivered to or mailed and received by the
Secretary of the Company not less than 90 days prior to the annual meeting.
However, the Bylaws also provide that, where less than 100 days notice or
prior public disclosure of the date of the shareholders' meeting is given,
advance notice of shareholder nominations for the election of directors or
business to be brought before the annual meeting must be received not later
than the close of business on the tenth day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. If a shareholder who has notified the Company of his or her
intention to present a proposal at an annual meeting does not appear or send a
qualified representative to present his or her proposal at such meeting, the
Company need not present the proposal for a vote at such meeting.
2
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
A board of six directors is to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's six nominees named below, all of whom are presently
directors of the Company. In the event that any nominee of the Company is
unable or declines to serve as a director at the time of the Annual Meeting,
the proxies will be voted for any nominee who shall be designated by the
present Board of Directors to fill the vacancy. It is not expected that any
nominee will be unable or will decline to serve as a director. The term of
office of each person elected as a director will continue until the next
annual meeting of shareholders or until a successor has been duly elected and
qualified. Douglas Leone, a current member of the Board of Directors who is
affiliated with a venture capital investor in the Company, is not seeking re-
election and there will be a vacancy on the board.
The name and certain information regarding each nominee are set forth below.
There are no family relationships among directors or executive officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION WITH THE COMPANY
- ---- ------ -------------------------
<S> <C> <C>
Donald K. McKinney 48 Chairman of the Board and Chief Executive Officer
John L. Drew 41 President, Chief Operating Officer and Director
Douglas C. Allred 46 Director
Vernon R. Anderson 66 Director
David Carlick 47 Director
Lawrence G. Finch 63 Director
</TABLE>
- --------
(1) As of September 8, 1997
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. Mr. McKinney is also on the Board of Directors of C-
Cube Microsystems and several privately held companies.
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.
Douglas C. Allred. Mr. Allred has served as a member of the Company's Board
of Directors since January 1997. Mr Allred has served as Senior Vice
President, Customer Advocacy World Wide Systems, Support, Services since
November 1996 at Cisco Systems, Inc. a provider of networking equipment, where
he is responsible for customer support services including technical support
services, customer service and field support for Cisco's customers and
partners worldwide. He is also responsible for Cisco's internal information
and network services. Mr. Allred held the position of Vice President, Customer
Advocacy from August 1991 to November 1996. Prior to joining Cisco, Mr. Allred
was Vice President of Oracle's worldwide support group. Earlier, he was Vice
President of Information Systems at a division of General Electric.
3
<PAGE>
Vernon R. Anderson. Mr. Anderson has served as a member of the Company's
Board of Directors since April 1992 and served 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 1981,
which merged with Poppe Tyson in 1993, and was an Executive Vice President and
Director of Poppe Tyson from 1993 to March 1997. Since April 1997, Mr. Carlick
has served as President of PowerAgent, an internet advertising agency.
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., Splash Technology Inc. and several privately held companies.
BOARD MEETINGS AND COMMITTEES
The Board of Directors held a total of 5 meetings (including regularly
scheduled and special meetings) during fiscal 1997 and also took certain
actions by written consent. No incumbent director during the last fiscal year
attended fewer than 75% of the aggregate of (i) the total number of meetings
of the Board of Directors while they served on the board, and (ii) the total
number of meetings held by all committees on which he served, except Mr.
Carlick who attended 67% of the Audit Committee meetings.
The Board of Directors of the Company has two standing committees: an Audit
Committee and a Compensation Committee. The Company has no nominating
committee or a committee performing a similar function.
The Audit Committee, which currently consists of Messrs. Anderson, Carlick
and Finch, is responsible for (i) recommending engagement of the Company's
independent accountants, (ii) approving the services performed by such
accountants, (iii) consulting with such accountants and reviewing with them
the results of their examination, (iv) reviewing and approving any material
accounting policy changes affecting the Company's operating results,
(v) reviewing the Company's control procedures and personnel, and
(vi) reviewing and evaluating the Company's accounting principles and its
system of internal accounting controls. The Audit Committee held 3 meetings
during fiscal 1997.
The Compensation Committee, which currently consists of Messrs. Anderson and
Leone, is responsible for (i) reviewing and approving the compensation and
benefits for the Company's executive officers, (ii) administering the
Company's stock plans and (iii) making recommendations to the Board of
Directors regarding such matters. The Compensation Committee held 7 meetings
during fiscal 1997 and also took certain actions by written consent.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. Directors are eligible to receive stock option
grants to purchase Common Stock under the Company's 1996 Stock Plan and in May
1997, Messrs. Anderson, Finch and Leone, non-employee directors of the
Company, each received an option to purchase 25,000 shares of Common Stock.
Mr. Carlick, also a non-employee director, received an option to purchase
15,000 shares of Common Stock. Vesting of these stock options began on the
date of grant, except for the option granted to Mr. Anderson that began
vesting on September 20, 1997. The options vest monthly over a 50 month
period.
In addition, all directors are reimbursed for expenses incurred in attending
board meetings.
4
<PAGE>
REQUIRED VOTE
The six nominees receiving the highest number of affirmative votes of the
shares present or represented and entitled to be voted for them shall be
elected as directors. Votes withheld from any director are counted for
purposes of determining the presence or absence of a quorum for the
transaction of business, but have no other legal effect under California law.
The proxies cannot be voted for a greater number of persons than six.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" RE-
ELECTION OF MESSRS. MCKINNEY, DREW, ALLRED, ANDERSON, CARLICK AND FINCH .
5
<PAGE>
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
certified public accountants, to audit the financial statements of the Company
for the fiscal year ending June 30, 1998. Price Waterhouse LLP has audited the
Company's financial statements since the Company's inception. A representative
of Price Waterhouse LLP is expected to be present at the meeting, will have
the opportunity to make a statement, and is expected to be available to
respond to appropriate questions.
REQUIRED VOTE
The Board of Directors has conditioned its appointment of the Company's
independent accountants upon the receipt of the affirmative vote of a majority
of the shares represented, in person or by proxy, and voting at the Annual
Meeting. In the event that the shareholders do not approve the selection of
Price Waterhouse LLP, the appointment of the independent accountants will be
reconsidered by the Board of Directors.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS.
6
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of September 8, 1997 for the following: (i) each person or
entity who is known by the Company to own beneficially 5% or more of the
outstanding shares of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each of the executive officers named in the Summary
Compensation Table; and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE
NAME OF BENEFICIAL OWNER OWNED (1) OF TOTAL(1)
------------------------ ------------ ----------
<S> <C> <C>
Donald K. McKinney (2) 10,580,114 32.8%
c/o International Network Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Sequoia Capital (3) 1,633,346 5.1%
Douglas Leone
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Sigma Partners (4) 999,724 3.1%
Lawrence G. Finch
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
Cisco Systems, Inc. (5) 2,581,612 8.0%
Douglas C. Allred
170 West Tasman Drive
San Jose, CA 95134
John L. Drew (6) 716,000 2.2%
Vernon R. Anderson (7) 405,942 1.3%
Kevin J. Laughlin (8) 301,396 *
David Carlick (9) 62,100 *
All directors and executive officers as a group
(8 persons) (10) 17,280,234 53.6%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
1. Based on 32,216,544 shares outstanding as of September 8, 1997. 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 September 8, 1997 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.
2. Includes 10,578,581 shares held by the McKinney Family Trust, of which
Mr. McKinney is a trustee. Of these shares, 264,000 shares were subject to
a repurchase option in favor of the Company as of September 8, 1997.
3. Includes 1,378,062 shares held by Sequoia Capital V, 67,507 shares held by
Sequoia Technology Partners V, 119,111 shares held by Sequoia XXIII,
41,506 shares held by Sequoia XXIV and 23,660 shares held by Mr. Leone.
Also includes 3,500 shares subject to options held by Mr. Leone that are
exercisable within 60 days of September 8, 1997. Mr. Leone is a partner of
Sequoia Capital and disclaims beneficial ownership of all shares held by
the partnerships except to the extent of his pecuniary interest in the
partnerships.
7
<PAGE>
4. Includes 59,340 shares held by Sigma Associates II, L.P., 767,631 shares
held by Sigma Partners II, L.P. and 169,253 shares held by Mr. Finch. Also
includes 3,500 shares subject to options held by Mr. Finch that are
exercisable within 60 days of September 8, 1997. 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. Allred, a director of the Company, is Senior Vice President, Customer
Advocacy World Wide Systems, Support, Services at Cisco. Mr. Allred
disclaims beneficial ownership of such shares.
6. Includes 310,000 shares subject to a repurchase option in favor of the
Company as of September 8, 1997.
7. Includes 404,442 shares held by the Vernon R. & Lysbeth W. Anderson Family
Trust of which Mr. Anderson is a trustee of which 1,000 shares are subject
to a repurchase option in favor of the Company as of September 8, 1997.
Also includes 1,500 shares subject to options held by Mr. Anderson that
are exercisable within 60 days of September 8, 1997.
8. Includes 73,000 shares subject to a repurchase option in favor of the
Company as of September 8, 1997.
9. Includes 5,600 shares subject to a repurchase option in favor of the
Company as of September 8, 1997. Also includes 2,100 shares subject to
options that are exercisable within 60 days of September 8, 1997.
10. Includes an aggregate of 653,600 shares subject to a repurchase option in
favor of the Company as of September 8, 1997, and 10,600 shares subject to
options that are exercisable within 60 days of September 8, 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934 ("Section 16(a)") requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's Common Stock to file initial reports of ownership on
Form 3 and changes in ownership on Form 4 or Form 5 with the SEC and the
National Association of Securities Dealers, Inc. Such executive officers,
directors and ten-percent shareholders are also required by SEC rules to
furnish the Company with copies of all such forms that they file.
Based solely on its review of the copies of such forms received by the
Company and written representations from certain reporting persons that all
required Forms 5 have been filed, the Company believes that during fiscal 1997
all Section 16(a) filing requirements applicable to its executive officers,
directors and ten-percent shareholders were complied with.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Messrs.
Anderson and Leone. No interlocking relationship exists between any member of
the Company's Board of Directors or Compensation Committee and any member of
the board of directors or compensation committee of any other company, nor has
any such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of the
Company.
8
<PAGE>
EXECUTIVE OFFICERS AND COMPENSATION
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of September 8, 1997 were Donald K.
McKinney, John L. Drew and Kevin J. Laughlin. For background information on
Mr. McKinney and Mr. Drew, please see "Election of Directors -- Nominees."
Mr. Laughlin joined the Company in August 1993 as Director of Finance and
Secretary, became Vice President of Finance in August 1994, and became 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 of Oracle Corporation and in various positions
at Ernst & Young. Mr. Laughlin is 36 years old.
SUMMARY COMPENSATION TABLE
The following table shows, as to the Chief Executive Officer and the
Company's other executive officers whose salary plus bonus exceeded $100,000
during the last fiscal year (the "Named Officers"), information concerning
compensation earned for services to the Company in all capacities during the
last two fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
FISCAL ------------------- UNDERLYING
NAME AND PRINCIPAL POSITION (1) YEAR SALARY ($) BONUS ($) OPTIONS (#)
------------------------------- ------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Donald K. McKinney 1997 $245,000 $105,000 0
Chairman of the Board and Chief 1996 200,000 60,000 600,000
Executive Officer
John L. Drew 1997 245,000 105,000 0
President, Chief Operating Officer and 1996 200,000 60,000 250,000
Director
Kevin J. Laughlin 1997 148,000 37,500 0
Vice President, Finance, Chief 1996 118,077 24,000 50,000
Financial Officer and Secretary
</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.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to the Named Officers during the fiscal
year ended June 30, 1997.
OPTION EXERCISES AND HOLDINGS
There were no stock options exercised or held by the Named Officers during
the fiscal year ended June 30, 1997. The Named Officers have exercised all
options granted to them; however, unvested shares are subject to repurchase by
the Company.
9
<PAGE>
CERTAIN TRANSACTIONS
In fiscal 1997, the Company recognized revenue of $1,663,583 from services
provided to or on behalf of Cisco, which beneficially owns more than 5% of the
Company's outstanding Common Stock. Mr. Allred, a director of the Company, is
the Senior Vice President, Customer Advocacy, Worldwide Systems, Support,
Services at Cisco.
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, 1997, the amounts outstanding for
principal and interest on these loans were $142,052 and $157,501 for Messrs.
McKinney and Drew, respectively.
In September 1996, entities affiliated with Sequoia Capital and Sigma
Partners exercised warrants which had exercise prices of $.10 per share and
acquired 80,046 and 80,047 shares of the Company's Common Stock, respectively.
Mr. McKinney, as trustee of the McKinney Family Trust, also exercised a
warrant which had an exercise price of $.10 per share and acquired 75,949
shares of the Company's Common Stock.
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 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.
10
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for reviewing the compensation and benefits for the Company's
executive officers, as well as supervising and making recommendations to the
Board on compensation matters generally. The Committee also administers the
Company's stock plans.
COMPENSATION PHILOSOPHY
The Committee's compensation philosophy is to attract and retain key
personnel through the payment of competitive base salaries and to encourage
and reward performance through incentive compensation and stock ownership. The
Compensation Committee's objectives are to:
. ensure that there is an appropriate relationship between executive
compensation and the creation of shareholder value;
. ensure that the total compensation program will motivate, retain and
attract executives of outstanding abilities; and
. ensure that current cash and equity incentive opportunities are
competitive with comparable companies.
The Company currently intends to take the necessary steps to conform its
compensation practices to comply with the $1 million compensation deduction
cap under Section 162(m) of the Internal Revenue Code.
ELEMENTS OF COMPENSATION
Compensation for executive officers includes both cash and equity elements.
Cash compensation consists of (i) base salary which is determined on the
basis of the level of responsibility, expertise and experience of the
executive officer, taking into account competitive conditions in the industry
and (ii) cash bonuses based on achievement of corporate goals including
revenue and profitability targets.
Ownership of the Company's Common Stock is a key element of executive
compensation. Executive officers and other employees of the Company are
eligible to participate in the 1996 Stock Plan (the "Option Plan") and the
1996 Employee Stock Purchase Plan (the "Purchase Plan"). The Option Plan
permits the Board of Directors or the Committee to grant stock options to
employees on such terms as the Board or the Committee may determine. The
Committee has the sole authority to grant stock options to executive officers
of the Company and is currently administering stock option grants to all
employees. In determining the size of a stock option grant to a new executive
officer or other employee, the Committee takes into account equity
participation by comparable employees within the Company, external competitive
circumstances and other relevant factors. Additional options may be granted to
current executive officers and employees to reward exceptional performance or
to provide additional unvested equity incentives. These options typically vest
over a 50-month period and thus require the employee's continuing service to
the Company. The Purchase Plan permits employees to acquire Common Stock of
the Company through payroll deductions and promotes broad-based equity
participation throughout the Company. The Committee believes that such stock
plans align the interests of the employees with the long-term interests of the
shareholders.
The Company also maintains a 401(k) Plan to provide retirement benefits
through tax deferred salary deductions for all its employees. The Company did
not contribute to the 401(k) Plan in fiscal year 1997.
FISCAL 1997 EXECUTIVE COMPENSATION
Executive compensation for fiscal 1997 included base salary and cash bonuses
based upon achievement of corporate goals and individual performance goals.
Executive officers, like other employees, were eligible for option grants
under the Option Plan and to participate in the Purchase Plan.
11
<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Donald K. McKinney founded the Company in 1991 and since then has been the
Chief Executive Officer. In fiscal year 1997, Mr. McKinney earned $245,000 in
salary and $105,000 in bonus awards. Mr. McKinney's salary and bonus were
based upon the same factors considered for each executive officer, as
previously described. The Chief Executive Officer, like other employees, is
eligible for option grants under the Option Plan; however, Mr. McKinney did
not receive any stock option grants in fiscal year 1997.
STOCK OPTION EXCHANGE
On April 25, 1997 the Board of Directors approved a plan to offer all
employees, excluding executive officers, the opportunity to exchange their
outstanding stock options for new options that would be exercisable at the
fair market value of the Company's Common Stock as of the closing of the stock
market on May 5, 1997 ($19.75). These new options were otherwise identical to
the old options. The stock option exchange was an acknowledgment of the
importance to the Company of its employees and of the incentive to employees
represented by stock options, especially in considering alternative
opportunities. The Board considered such factors as the competitive
environment for obtaining and retaining qualified employees and the overall
benefit to the shareholders from a highly motivated group of employees. No
executive officers of the Company participated in the stock option exchange.
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Vernon R. Anderson
Douglas Leone
12
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph compares the cumulative total return to shareholders on
the Company's Common Stock with the cumulative total return of the Nasdaq
Stock Market Index-U.S. and the H&Q Technology Index. The graph assumes that
$100 was invested on September 18, 1996 (the date of the Company's initial
public offering) in the Company's Common Stock, the Nasdaq Stock Market Index-
U.S. and the H&Q Technology Index, including reinvestment of dividends. No
dividends have been paid or declared on the Company's Common Stock. Note that
historic stock price performance is not necessarily indicative of future stock
price performance.
[COMPARISON OF CUMULATIVE TOTAL RETURN BETWEEN
COMPANY, H&Q TECHNOLOGY INDEX AND NASDAQ
COMPOSITE FROM SEPTEMBER 18, 1996 TO JUNE 27, 1997]
<TABLE>
<CAPTION>
9/18/96 6/27/97
<S> <C> <C>
INS $ 100.0 $ 150.0
NASDAQ COMPOSITE 100.0 119.5
H&Q TECHNOLOGY INDEX 100.0 125.0
</TABLE>
13
<PAGE>
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Company may recommend.
It is important that your shares be represented at the meeting, regardless
of the number of shares which you hold. You are, therefore, urged to execute
and return, at your earliest convenience, the accompanying proxy card in the
envelope which has been enclosed.
THE BOARD OF DIRECTORS
Sunnyvale, California
September 24, 1997
14
<PAGE>
P INTERNATIONAL NETWORK SERVICES
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
R The undersigned shareholder of International Network Services, a
California corporation, hereby acknowledges receipt of the Notice of
Annual Meeting of Shareholders and Proxy Statement, each dated September
24, 1997, and hereby appoints Donald K. McKinney and Kevin J. Laughlin,
O and each of them, proxies, with full power of substitution, to represent
the undersigned and to vote as designated on the reverse side, all
shares of Common Stock of International Network Services that the
undersigned is entitled to vote at the Annual Meeting of Shareholders of
X International Network Services to be held on October 30, 1997 at 1:00
p.m., local time, at the Company's headquarters at 1213 Innsbruck Drive,
Sunnyvale, CA 94089, or another location, and at any adjournment or
adjournments thereof.
Y
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED, IF NO
SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS PROXY WILL BE
VOTED FOR EACH OF THE PROPOSALS ON THE REVERSE SIDE HEREOF AND FOR SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AS THE PROXIES
DEEM ADVISABLE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
Please mark
votes as in
this example [X]
A vote FOR the following proposals is recommended by the Board of Directors.
FOR WITHHELD
ALL FROM ALL
1. Election of six directors: NOMINEES NOMINEES
[_] [_]
Nominees: Donald K. McKinney, John L. Drew,
Douglas C. Alfred, Vernon R. Anderson,
David Carlick and Lawrence G. Finch.
[_] For all nominees except as noted above.
2. Proposal to ratify the appointment of Price FOR AGAINST ABSTAIN
Waterhouse LLP as the Company's independent [_] [_] [_]
accountants for the fiscal year ending
June 30, 1998.
3. In their discretion, the Proxies are authorized to vote upon such other
business which may properly come before the meeting or any adjournments
thereof.
Please sign exactly as your name appears on your stock certificate. If the stock
is held by joint tenants or as community property, both should sign. Executors,
administrators, trustees, guardians, attorneys and corporate officers should
give their titles.
Signature____________________________________ Date _______________
Signature____________________________________ Date _______________
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FOLD AND DETACH HERE
