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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
June 30, 1998 0-21131
INTERNATIONAL NETWORK SERVICES
(Exact name of registrant as specified in its charter)
California 77-0289509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1213 Innsbruck Drive, Sunnyvale, CA 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 542-0100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 14, 1998, there were 33,010,460 shares of the Registrant's
Common Stock outstanding ,and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on September 14, 1998) was approximately
$36.50. Shares of Common Stock held by each executive officer and director and
by each entity that owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's Annual Report to Shareholders for the
year ended June 30, 1998 (the "1998 Annual Report") are incorporated by
reference in Parts II and IV of this Form 10-K to the extent stated herein.
Also, certain sections of the Registrant's definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be held on October 29, 1998 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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INTERNATIONAL NETWORK SERVICES FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
TABLE OF CONTENTS
Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for the Company's Common Stock and Related Shareholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of INS
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statements Schedule, and Reports on Form 8-K
Exhibit Index
Signatures
Financial Statement Schedule
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PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Predictions of
future events are inherently uncertain. Actual events could differ materially
from those predicted in the forward-looking statements as a result of the risks
set forth in the following discussion and, in particular, the risks discussed
below under the caption "Risk Factors that May Affect Operating Results."
International Network Services ("INS" or the "Company") is a worldwide
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"), and virtual LANSs
("VLANs"). 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
solutions to clients' complex enterprise network needs. The Company is
leveraging its expertise in complex networks to develop electronic services
which combine software and services to provide clients with solutions for
certain repetitive network management tasks, such as network monitoring and
network performance reporting. The Company's current electronic service,
EnterprisePRO/SM/, is designed to collect data, generate reports and compile
network information for use in the optimization of networks. The Company serves
its clients, many of which have multi-location enterprise networks, through its
network of 36 offices. As of June 30, 1998, the Company employed 1,353 persons,
including 1,053 network systems engineers and managers.
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, asynchronous transfer mode ("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
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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 computer systems and network equipment vendors
provide services; however, they focus on distributing their own products and
often lack the skills to implement solutions in multivendor environments.
Systems integrators and value added resellers ("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 for complex network services.
INS SOLUTION
INS is a 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. 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
solutions to clients' complex enterprise network needs. In addition to
professional services, the Company has developed electronic services which
combine software and services to provide clients with solutions for repetitive
network management tasks. 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 serves its
clients, many of which have multi-location enterprise networks, through its
network of 36 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
delivering dependable, high-quality network 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 36 offices in the United States, Canada
and the United Kingdom. The Company believes that a broad presence will
strengthen its
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competitive position within the network services market and enable it to better
service its clients and enter new markets worldwide.
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
worldwide 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
services while enabling it to expand its operations. This infrastructure
includes functions, 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 growth in its operations.
Expand Electronic Services. The Company intends to leverage its expertise in
complex networks by continuing to develop electronic services and software
license fees for certain repetitive network management tasks, such as network
monitoring and network performance reporting. In addition to the potential of
revenue from services and license fees, electronic services are designed to
build and maintain client relationships and provide opportunities for additional
professional services.
Pursue Strategic Acquisitions. The Company intends to research, and if
appropriate, pursue acquisitions some of which may include expanding within
existing markets, entering new markets, increasing the range of services, adding
industry and technical expertise, and/or acquiring technology that can be used
in electronic services.
No assurance can be given that the Company will be able to implement its
strategy or achieve its objectives. See "Risk Factors That May Affect Operating
Results."
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 1,053 network systems engineers and managers engaged in
providing services for complex enterprise networks as of June 30, 1998. 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
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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 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 generally on a time and
expenses basis; however, some projects are delivered on a fixed-price basis. The
success of the Company's business will depend on the Company's ability to
fulfill the increasingly sophisticated needs of its clients. 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. See "Risk Factors That
May Affect Operating Results -- Risks Associated with Client Concentration;
Absence of Long-Term Agreements" and "--Risks Associated With Electronic
Services."
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 Request for Proposal specifications or other make/buy criteria
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. Providing detailed component purchasing lists
Network Implementation. The network implementation phase includes high value-
added network services, such as internet protocol addressing and router
configuration, and, to a much lesser extent, traditional system integrator
functions, such as hardware installation. The Company believes it has expertise
in integrating new systems without disrupting ongoing business operations,
thereby adding 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
Network Operations. The network operations phase includes ongoing tasks
necessary to keep the client's network fully operational. The Company has
experience in delivering operations services to a range of clients, including
those with newer client/server networks running both Internet (TCP/IP) and
workgroup (Novell and Microsoft) protocols intermingled with legacy (SNA)
networks. 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
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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 TCP/IP and SNA networks, including emerging and legacy networking
disciplines that span 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 ( TCP/IP, SNA, IPX, Apple, DECnet, VINES).
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, RMON2, 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 has leveraged its expertise in complex networks to develop
electronic services which combine software and services to provide clients with
solutions for certain repetitive network management tasks, such as network
monitoring and network performance reporting. The Company's current offering,
EnterprisePRO, is designed to collect data, generate reports and compile network
information for use in the optimization of networks. The Company believes that
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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" solution for network performance
reporting and analysis. Prior to the quarter ended September 30, 1997, the
Company offered its electronic services to clients only as a service under which
the Company generally received a one-time installation fee and a monthly service
fee that varied with the size of the network being monitored. The Company
currently allows clients to separately purchase a software license, software
subscription and support services as an alternative to the service contract. 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 10,000 network 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,
ethernet Hubs device uptime, and RMON and ROMON2 statistics, including top
transmitters and protocol distribution. The INS operations center includes
additional proprietary software. EnterprisePRO support service provides an
automatic connection to the operations center by modem and download of the data.
Operations center personnel back up the data and view generated exception
reports to do daily quality checks and provide client support. The operations
center performs updates to client configurations, troubleshooting of
EnterprisePRO servers and updates EnterprisePRO service via a software push
delivery model. EnterprisePRO installation services provide installation of the
server at the client site and a connection to the INS operations center at the
Company's headquarters. EnterprisePRO software subscription provides periodic
updates of server software.
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 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. The Company has derived a significant portion of its
revenue from a limited number of large clients and expects this concentration to
continue. No one client accounted for more than 10% of revenue in fiscal 1997 or
1998. In fiscal 1996, a client accounted for approximately $7.5 million, or
17.0%, of the Company's revenue. See "Risk Factors That May Affect Operating
Results--Risks Associated with Client Concentration; Absence of Long-Term
Agreements."
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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 projects
and communicate the specific expertise 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 Systems, Inc., ("Cisco") pursuant to which
the Company has entered into direct relationships with clients as a result of
referrals from Cisco and provides services directly to Cisco, primarily 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. Cisco
develops, manufactures, markets and supports high-performance, multiprotocol
internetworking systems that link geographically dispersed LANs and WANs.
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 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.
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The Company's future success will also depend in large part on the development
of new business by the Company's account managers, who solicit new business and
manage relationships with existing clients. As a result, the Company's success
will depend on its ability to attract and retain qualified account managers who
have an understanding of the Company's business and the industry it serves.
Competition for account managers is intense and the Company has experienced, and
may in the future experience high rates of turnover among its account managers.
In addition, integration of new account managers into the Company's business can
be lengthy. Any inability of the Company to attract and retain a sufficient
number of account managers or to integrate new account managers into the
Company's operations on a timely basis, would impair the Company's ability to
obtain projects from new and existing clients which 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, 1998, the Company
employed 1,353 persons, including 1,053 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 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 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 these values.
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, which includes
national and local consultative approach workshops, collaboration workshops, new
management training and technical training. In support of its 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 the Company's value and employee retention. The
Company's compensation package consists of a combination of salary, performance-
based incentive compensation, stock options and benefit plans.
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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 key or other 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 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 has experienced, and may in the future 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. The Company has experienced, and may in the future,
experience increasing compensation costs for its network systems engineers. Any
inability of the Company to recover increases in compensation of network systems
engineers through higher billing rates or to reduce other expenses to offset
such increases, 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 industry is comprised of a large number of participants and is
subject to rapid change and intense competition. With respect to professional
services, the Company faces competition from system integrators, value added
resellers ("VARs"), local and regional network services firms,
telecommunications providers, network equipment vendors, and computer systems
vendors, many of which have significantly greater financial, technical and
marketing resources and greater name recognition, and generate greater service
revenue than does the Company. With respect to electronic services, the Company
also faces competition from software vendors. 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 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.
<PAGE>
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 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.
RISK FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors could materially and adversely affect the Company's
future operating results and could cause actual events to differ materially from
those predicted in the Company's forward-looking statements related to its
business.
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. Professional services revenue is recognized only when
network systems engineers are engaged on client projects. In addition, a
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 inability to obtain
new projects; the overestimation of resources required to complete new or
ongoing projects; and 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, an inability to hire and retain sufficient numbers of
network systems engineers and account managers, reductions in billing rates,
write-offs of billings, or services performed at no charge as a result of the
Company's failure to meet its clients' expectations, claims by the Company's
clients for the actions of the Company's employees arising from damages to
clients' business or
<PAGE>
otherwise, competition, timing of employment taxes, the development and
introduction of new services, decrease or slowdown in the growth of the
networking industry as a whole and general economic conditions. The Company's
operating results may also fluctuate based upon the ongoing market acceptance
and the timing and size of orders for electronic services (see "Risks Associated
with Electronic Services") which are difficult to forecast. If an unanticipated
order shortfall for electronic services occurs, the Company's operating results
could be materially adversely affected, particularly because margins are higher
on electronic services than professional services. In addition, the Company
plans to continue to expand its operations based on sales forecasts by hiring
additional network systems engineers, account managers 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.
Risks Associated with Client Concentration; Absence of Long-Term Agreements.
The Company has derived a significant portion of its revenue from a limited
number of large clients and expects this concentration to continue. No one
client, however, accounted for more than 10% of the Company's revenue for the
year ended June 30, 1998. There can be no assurance that revenue from 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 has, in the past, experienced declines in
revenue from clients that have accounted for significant revenue. In addition,
the Company generally does not have a long-term services contract with any of
its clients. The Company's clients are generally able to reduce or cancel their
use of the Company's professional 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.
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
significant reduction in the scope of the work performed for any 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.
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
has experienced, and may in the future 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. The Company
has experienced, and may in the future, experience increasing compensation costs
for its network systems engineers. Any inability of the Company to recover
increases in compensation of network systems engineers through higher billing
rates or to reduce other expenses to offset such increases, 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
<PAGE>
sufficient number of qualified network systems engineers in the future could
impair the Company's planned expansion of its business.
Dependence on New Business Development. The Company's future success will
also depend in large part on the development of new business by the Company's
account managers, who solicit new business and manage relationships with
existing clients. As a result, the Company's success will depend on its ability
to attract and retain qualified account managers who have an understanding of
the Company's business and the industry it serves. Competition for account
managers is intense and the Company has experienced, and may in the future
experience high rates of turnover among its account managers. In addition,
integration of new account managers into the Company's business can be lengthy.
Any inability of the Company to attract and retain a sufficient number of
account managers or to integrate new account managers into the Company's
operations on a timely basis, would impair the Company's ability to obtain
projects from new and existing clients which could have a material adverse
effect on the Company's business, operating results and financial condition.
Risks Associated with Electronic Services. The Company's long-term strategy
is to derive a significant portion of its revenue from electronic services. The
Company has expended, and expects to continue to expend, substantial amounts in
the development and marketing of its electronic services. 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.
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 in the scope of its supporting infrastructure. The Company does not
believe this rate of growth is sustainable. 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 be required to continue to hire management
personnel and improve its systems on a timely basis and in such a manner as is
necessary to accommodate any increase in the number of transactions and clients,
any increase in the size of the Company's operations and any introduction of new
products and services. 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.
Intense Competition. The network industry is comprised of a large number of
participants and is subject to rapid change and intense competition. With
respect to professional services, the Company faces competition from system
integrators, VARs, local and regional network services firms, telecommunications
providers, network equipment vendors, and computer systems vendors, many of
which have significantly greater financial, technical and marketing resources
and greater name recognition, and generate greater service revenue than does the
Company. With respect to electronic services, the Company also faces competition
from software vendors. 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.
Risks Associated With Potential Acquisitions. As part of its business
strategy, the Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies. 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
<PAGE>
associated with assimilating the personnel and operations of acquired companies,
the potential disruption of the Company's ongoing business, the distraction of
management and 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.
Risks Associated With Potential International Expansion. A component of the
Company's long-term strategy is to expand into international markets. The
Company provides professional services to certain of its United States clients
in foreign locations. The Company has opened an office in the United Kingdom to
serve its clients in Europe and an office in Toronto to serve its clients in
Canada. To date, revenue generated from international operations has not been
significant. There is no assurance that the revenue generated from international
operations will be adequate to offset the expense of establishing and
maintaining these foreign operations, and if revenue does not materialize as
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected. There can be no assurance that the
Company will be able to successfully market, sell and deliver its services in
international 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 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.
Relationship with Cisco Systems. Although the Company is a vendor
independent provider of network services, the Company has a significant
relationship with 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. Cisco develops,
manufactures, markets and supports high-performance, multiprotocol
internetworking systems that link geographically dispersed LANs and WANs. The
Company has entered into direct relationships with clients as a result of
referrals from Cisco and provides services directly to Cisco, primarily as a
subcontractor. In addition, during the quarter ended December 31, 1997, the
Company entered into a resale agreement with Cisco, whereby Cisco's sales
organization will market EnterprisePRO to its customers and INS will deliver and
administer the service. In addition, Cisco is a shareholder of the Company and
an officer of Cisco is 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 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.
Year 2000. The year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. The year 2000 issue creates risk for the
Company from unforeseen problems in its own computer systems and from third
parties. Failure of the Company's and/or third
<PAGE>
parties' computer systems could have a material adverse impact on the Company's
ability to conduct its business. The Company is currently reviewing its
products, its internal computer systems and systems of third parties on which
the Company relies for handling the year 2000. Based on information available to
date, the Company believes that it will be able to complete its year 2000
compliance review and make any necessary modifications to its products and
internal systems prior to the end of 1999. The Company further believes that
such review and modification, if any, will not require the Company to incur any
material charge to operating expenses over the next several years. The Company
is also seeking confirmation from third parties that their systems are year 2000
compliant or that plans are being developed to address the year 2000 problem.
However, there can be no assurance that such third-party systems will be year
2000 compliant or that the failure of such systems to be year 2000 compliant
would not have a material adverse effect on the Company's financial position or
results of operations. The Company believes its current electronic service
offering, EnterprisePro, is year 2000 compliant.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and service
development facilities are located in approximately 47,000 square feet in two
buildings in Sunnyvale, California pursuant to leases which expire in 2001 and
2005. In addition, the Company leases field support offices in 36 cities. The
field offices range from small executive offices to a 7,000 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. Field facilities are generally used for periodic meetings,
training and administration and by account managers. The Company has field
facilities in Atlanta, Georgia; Austin, Texas; Boston, Massachusetts;
Burlington, Massachusetts; Charlotte, North Carolina; Chicago, Illinois;
Cleveland, Ohio; Columbus, Ohio; Costa Mesa, California; Dallas, Texas; Denver,
Colorado; Detroit, Michigan; Ft. Lauderdale, Florida; Hartford, Connecticut;
Houston, Texas; Iselin, New Jersey; Jacksonville, Florida; Kansas City, Kansas;
Los Angeles, California; Minneapolis, Minnesota; New York, New York; Parsippany,
New Jersey; Philadelphia, Pennsylvania; Phoenix, Arizona; Quincy, Massachusetts;
Raleigh, North Carolina; Sacramento, California; San Antonio, Texas; San Diego,
California; San Mateo, California; San Ramon, California; Seattle, Washington;
Tampa, Florida; 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 reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the trading symbol "INSS" since the Company's initial public offering on
September 18, 1996. The following table sets forth the high and low sale prices
per share of the Company's Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
---- ---
<S> <C> <C>
First Quarter (from September 18, 1996) $39.75 $28.00
Second Quarter $51.88 $26.13
Third Quarter $39.00 $17.94
Fourth Quarter $27.75 $15.50
Fiscal 1998
First Quarter $28.75 $19.38
Second Quarter $24.00 $16.00
Third Quarter $29.88 $21.00
Fourth Quarter $40.63 $27.50
</TABLE>
As of September 14, 1998, the Company had 230 shareholders of record. The
price for the Common Stock on the close of business on September 14, 1998 was
$36.50 per share. The Company has never paid any cash dividends on its Common
Stock. The Company intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk" in the 1998 Annual
Report.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
section entitled "Financial Statement" in the 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item concerning the Company's directors
and executive officers is incorporated by reference to the information set forth
in the sections entitled "Election of Directors" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended June 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Election of Directors -- Director Compensation" and "Executive Officer
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended June 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the 1998
Annual Meeting of Shareholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended June 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's Proxy Statement
for the 1998 Annual Meeting of Shareholders to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended June 30, 1998.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of the
Company and the Report of Independent Accountants thereon are
incorporated by reference to the portions of the Company's 1998 Annual
Report filed as Exhibit 13.1 to this Form 10-K:
Consolidated Balance Sheets at June 30, 1997 and 1998
Consolidated Statements of Income for each of the three years in the
period ended June 30, 1998
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended June 30, 1998
Consolidated Statements of Cash Flows for each of the three years in the
period ended June 30, 1998
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule. The following financial statement
schedule of the Company for each of the three years in the period ended
June 30, 1998 is filed as part of this Form 10-K and should be read in
conjunction with the Financial Statements, and related notes thereto,
of the Company.
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedules not listed above have been omitted since they are
either not required, not applicable, or the information is otherwise
included.
3. Exhibits: See Item 14(c) below.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
fourth quarter ended June 30, 1998.
(c) Exhibits. The exhibits listed on the accompanying index to exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.
(d) Financial Statement Schedule. See Item 14(a)2 above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 24th day of
September, 1998.
International Network Services
By: /s/ Kevin J. Laughlin
-------------------------------------------
Kevin J. Laughlin
Vice President, Finance,
Chief Financial Officer, Secretary
POWER OF ATTORNEY
KNOW ALL THESE 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, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Donald K. McKinney Chairman of the Board (Principal Executive Officer) September 24, 1998
---------------------------- ------------------
Donald K. McKinney
/s/ Kevin J. Laughlin Vice President, Finance, Chief Financial Officer and September 24, 1998
---------------------------- ------------------
Kevin J. Laughlin Secretary (Principal Financial and Accounting Officer)
/s/ John L. Drew September 24, 1998
---------------------------- ------------------
John L. Drew President, Chief Executive Officer and Director
/s/ Douglas C. Allred September 24, 1998
---------------------------- ------------------
Douglas C. Allred Director
/s/ Vernon R. Anderson September 24, 1998
---------------------------- ------------------
Vernon R. Anderson Director
/s/ David Carlick September 24, 1998
---------------------------- ------------------
David Carlick Director
/s/ Lawrence G. Finch September 24, 1998
---------------------------- ------------------
Lawrence G. Finch Director
</TABLE>
<PAGE>
INTERNATIONAL NETWORK SERVICES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
-----------
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions End of Year
----------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts:
Year Ended June 30, 1996 $221 $ 610 $ (277) $ 554
Year Ended June 30, 1997 $554 $ 561 $ (527) $ 588
Year Ended June 30, 1998 $588 $2,690 $(1,810) $1,468
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of International Network Services
Our audits of the consolidated financial statements referred to in our report
dated July 24, 1998, except for Note 9 which is dated as of August 25,1998,
appearing in the 1998 Annual Report to Shareholders of International Network
Services (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 24, 1998
<PAGE>
EXHIBIT INDEX
Exhibit Exhibits Page
No.
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (1)
4.1 Reference is made to Exhibits 3.1, and 3.2.
4.2 Specimen Common Stock Certificate. (1)
4.3 Investors' Rights Agreement between the Registrant and the
parties named therein dated June 11, 1993, as amended. (1)
10.1* Form of Indemnification Agreement entered into between the
Registrant and each of the executive officers and directors
and certain key employees. (1)
10.2* Amended and Restated 1992 Flexible Stock Incentive Plan, as
amended, and forms of agreements thereto. (1)
10.3* 1996 Stock Plan and form of agreement thereto. (1)
10.4* 1996 Employee Stock Purchase Plan. (1)
10.5 Lease Agreement between the Registrant and Aetna Life
Insurance Company dated May 8, 1996. (1)
10.6 Lease Agreement between the Registrant and John Hancock
Mutual Life Insurance Company dated December 8, 1997.
10.7 Credit Agreement between the Registrant and Wells Fargo Bank
dated August 14, 1998
10.8 1998 Non Statutory Stock Option Plan
10.9* Form of Change of Control Agreement entered into between the
Registrant and each of the executive officers
13.1 Portions of the Annual Report to Shareholders for the fiscal
year ended June 30, 1998, expressly incorporated by reference
herein.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (see page 20).
27.1 Financial Data Schedule.
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* Indicates management compensatory plan, contract or arrangement.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-9287) declared effective on September 18, 1996.
<PAGE>
EXHIBIT 10.6
LEASE AGREEMENT
by and between
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
("Landlord")
and
INTERNATIONAL NETWORK SERVICES, INC.
("Tenant")
for the premises at 328 and 330 Gibraltar Drive, Sunnyvale, California
<PAGE>
LEASE AGREEMENT
1. PARTIES
THIS LEASE (the "Lease"), dated December 8, 1997 (the "Execution
Date"), is entered into by and between John Hancock Mutual Life Insurance
Company, a Massachusetts corporation ("Landlord") and International Network
Services, Inc., a California corporation ("Tenant").
2. PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain buildings known as 328 Gibraltar Drive and 330 Gibraltar
Drive, also known collectively as 1269 Innsbruck Drive, Sunnyvale, California,
consisting of approximately sixteen thousand two hundred thirty-two (16,232)
square feet and approximately nineteen thousand nine hundred ninety-six (19,996)
square feet, respectively (collectively, the "Premises"). The Premises are
located on that certain real property more particularly described in the
attached Exhibit A (the "Land". Landlord also grants to Tenant the non-exclusive
use of the Outside Areas (as defined in Section 3(L)), subject to the terms and
conditions of this Lease.
3. DEFINITIONS
A. Alterations. Any alterations, additions or improvements made in, on
-----------
or about the Premises after the Commencement Date, including without limitation
lighting, heating, ventilating, air conditioning, electrical, partitioning,
drapery and carpentry installations.
B. CC&R's. That Declaration of Protective Covenants for Moffett
------
Industrial Park No. 1 dated as of January 4, 1968 and recorded January 5, 1968
in Book 7985, Page 605 in the Official Records of Santa Clara County,
California, as the same may be amended from time to time. The CC&R's in effect
as of the Execution Date are attached as Exhibit B.
----------
C. Commencement Date. The Commencement Date of this Lease shall be the
-----------------
first day of the Lease Term, as determined in accordance with Section 4(B).
D. Environmental Damages. As defined in Section 37(A)(i).
---------------------
E. Environmental Laws. As defined in Section 37(A)(ii).
------------------
F. Hazardous Substances. As defined in Section 37(A)(iii).
--------------------
G. HVAC. Heating, ventilating and air conditioning.
----
H. Interest Rate. The rate of interest publicly announced from time to
-------------
time by Bank of America National Trust and Savings Association in San Francisco,
California, as its
<PAGE>
Reference Rate, plus three percentage points, but in no event to exceed the
maximum rate permitted by Law.
I. Landlord's Agents. Landlord's authorized agents, directors,
-----------------
officers and employees.
J. Laws. Any law, statute, ordinance, regulation, requirement, order,
----
decree, decision or direction of any governmental or quasi-governmental
authority now or subsequently in force.
K. Monthly Rent. The rent payable pursuant to Section 5(A), as
------------
adjusted from time to time pursuant to the terms of this Lease.
L. Outside Areas. All areas and facilities outside the Premises but
-------------
within the boundaries of the Land, including without limitation parking areas,
access and perimeter roads, sidewalks, landscaped areas, service areas, trash
disposal facilities and similar areas, improvements and facilities installed by
or with the approval of Landlord.
M. Real Property Taxes. Any form of assessment, license, fee, rent
-------------------
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 relating to the Land or the Premises, whether such tax is: (i)
determined by the area of the Premises or the Land or any part thereof or the
Rent and other sums payable by Tenant, including without limitation any gross
income or excise tax levied by any of the above authorities with respect to
receipt of such Rent or other sums due under this Lease; (ii) upon any legal or
equitable interest of Landlord in the Premises or the Land; (iii) upon this
transaction or any document to which Tenant is a party creating or transferring
any interest in the Premises; (iv) levied or assessed in lieu of, in
substitution for, or in addition to, existing or additional taxes against the
Premises or the Land whether or not now customary or within the contemplation of
the parties; or (v) surcharged against the parking area.
N. Release. As defined in Section 37(A)(iv).
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O. Rent. Monthly Rent plus the Additional Rent defined in Section 5(C)
----
P. Sublet. Any transfer, sublet, assignment of Tenant's, license or
------
hypothecation of Tenant's interest in the Lease, or in all or any portion of the
Premises.
Q. Subrent. Any consideration of any kind received, or to be received,
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by Tenant from a Subtenant if such sums are related to Tenant's interest in this
Lease or in the Premises.
R. Subtenant. The person or entity with whom a Sublet agreement is
---------
proposed to be or is made.
<PAGE>
S. Tenant Improvements. Those certain improvements to the Premises to
-------------------
be constructed pursuant to the Work Letter Agreement attached as Exhibit C.
----------
T. Tenant Improvements Allowance. The allowance provided by Landlord
-----------------------------
for the construction of the Tenant Improvements, as described in Exhibit C.
---------
U. Tenant's Personal Property. Tenant's trade fixtures, furniture,
--------------------------
equipment and other personal property in the Premises.
V. Term. The Initial Term and the Optional Term if any, of this Lease,
----
as set forth in Sections 4(A), and 4(E), respectively.
4. LEASE TERM
A. Initial Term. The initial Term ("Initial Term") of this Lease
------------
shall be a period of approximately seven years, commencing on the Commencement
Date and ending seven years from the Second Occupancy Date (defined in Section
4(D) below).
B. Commencement Date. The Commencement Date shall be the date which is
-----------------
60 days from the date that Landlord delivers possession of the Premises at 328
Gibraltar Drive to Tenant. Landlord and Tenant anticipate that the Commencement
Date will occur on or about March 1, 1998. In no event, however, will the
Commencement Date be earlier than March 1, 1998.
C. Commencement Date Memorandum. When the actual Commencement Date is
----------------------------
determined, the parties shall execute a Commencement Date Memorandum setting
forth such date in the form of the attached Exhibit D.
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D. Early Entry.
-----------
(i) Tenant shall be permitted to enter the Premises prior to the
Commencement Date, and upon delivery of possession by Landlord, for the purpose
of constructing the Tenant Improvements, installing Tenant's Personal Property
in the Premises and otherwise preparing the Premises for Tenant's occupancy.
Such early entry shall be at Tenant's sole risk and shall be subject to all the
terms and provisions of this Lease, except for the payment of Rent, which shall
commence on the Commencement Date with respect to the Premises at 328 Gibraltar
Drive and on the date (the "Second Occupancy Date") which is sixty (60) days
from the date that Landlord delivers possession of the Premises at 330 Gibraltar
Drive to Tenant with respect to such portion of the Premises. In no event,
however, will the Second Occupancy Date be earlier than April 1, 1998. Landlord
shall have the right to impose such additional conditions on Tenant's early
entry as Landlord reasonably shall deem appropriate and shall have the right to
require that Tenant execute an early entry agreement containing such conditions
prior to Tenant's early entry.
(ii) Landlord anticipates that Landlord will be able to deliver
possession of the Premises at 328 Gibraltar Drive to Tenant on or about January
1, 1998 and will be able to deliver possession of the Premises at 330 Gibraltar
Drive to Tenant on or about February 1, 1998.
<PAGE>
Tenant agrees that if Landlord, for any reason whatsoever, is unable to deliver
possession of the Premises at 328 Gibraltar Drive by January 1, 1998 or if
Landlord is unable to deliver possession of the Premises at 330 Gibraltar Drive
by February 1, 1998. Landlord shall not be liable to Tenant for any loss or
damage therefrom, nor shall this Lease be void or voidable. If, however.
Landlord is unable to deliver possession of the Premises at 328 Gibraltar Drive
to Tenant by April 1. 1998, Tenant shall have the right to terminate this Lease
with respect to the entire Premises by delivery of written notice to Landlord no
later than April 11, 1998. Furthermore, if Landlord is unable to deliver
possession of the Premises at 330 Gibraltar Drive to Tenant by March 1. 1999,
Tenant shall have the right to terminate this Lease with respect to the Premises
at 330 Gibraltar Drive by delivery of written notice to Landlord no later than
March 11, 1999. If Tenant elects to terminate this Lease with respect to the
entire Premises or the Premises at 330 Gibraltar Drive as permitted herein,
Landlord shall refund to Tenant the Security Deposit, or in the event of a
termination with respect to the Premises at 330 Gibraltar Drive only, that
portion of the Security Deposit allocable to such portion of the Premises, and
any prepaid Rent allocable to the Premises at 328 Gibraltar Drive and/or 330
Gibraltar Drive, as applicable.
(iii) If Tenant subleases all or any portion of the Premises at
330 Gibraltar Drive to ActionTec Electronics, Inc., the tenant currently
occupying 330 Gibraltar Drive, then Tenant shall be deemed to have accepted
possession of such portion of the Premises as of February 1, 1998 subject to
ActionTec's occupancy, April 1, 1998 shall be deemed to be the Second Occupancy
Date, and Tenant shall commence paying Rent for the Premises at 330 Gibraltar
Drive as of April 1, 1998.
E. Optional Tenant. Provided that Tenant is not in default hereunder,
---------------
either at the time of exercise or at the time the Optional Term commences,
Tenant shall have the option to extend the initial Term of approximately seven
years for one additional period of five years ("Optional Term ') on the same
terms, covenants and conditions provided herein, except that upon such renewal
the Monthly Rent due hereunder shall be the then fair market rental value of the
Premises, determined as provided in Section 5(E). Tenant shall exercise its
option by giving Landlord written notice ("Option Notice") at least one hundred
eighty (180) days but not more than two hundred seventy (270) days prior to the
expiration of the Initial Term of this Lease.
5. RENT
A. Payment. Commencing on the Commencement Date, Tenant shall pay to
-------
Landlord, in lawful money of the United States, for each calendar month of the
Term, net Monthly Rent in accordance with the schedule set forth in Section
5(B). Monthly Rent shall be paid in advance, on the first day of each calendar
month. Concurrently with Monthly Rent, Tenant shall pay the estimated monthly
Operating Expenses, as set forth in Section 17(B)(iii), and the monthly cost of
the insurance premiums required pursuant to Section 21(C), as adjusted from time
to time pursuant to such sections. All Rent shall be paid without abatement,
deduction, claim, offset, prior notice or demand. On the Execution Date, Tenant
shall deposit with Landlord the following amounts to be applied toward the first
month of the Term:
Monthly Rent: $52,530.60/month
<PAGE>
Operating Expenses: $3,080.00/month
Insurance Premiums: $906.00/month
Total: $56,516.60/month
B. Amount. The Monthly Rent shall be paid in accordance with the
following schedule:
Months Monthly Rent
------ ------------
I - Second Occupancy Date $23,536.40/month
Second Occupancy date - 24* $52,530.60/month
25 through 36 $55,157.13/month
37 through 48 $57,914.99/month
49 through 60 $60,810.74/month
61 through 72 $63,851.27/month
73 through 84 $67,043.84/month
* For purposes of this schedule of Monthly Rent, the references to months 24
through 84 of the Term shall mean the number of months from the Second
Occupancy Date.
C. Additional Rent. All monies required to be paid by Tenant under
---------------
this Lease, including without limitation Real Property Taxes pursuant to Section
15, Operating Expenses pursuant to Section 17, and insurance premiums pursuant
to Section 21, shall be deemed Additional Rent.
D. Prorations. If the Commencement Date or the Second Occupancy Date
----------
is not the first day of a month, or if the termination date of this Lease is not
the last day of a month, a prorated installment of Monthly Rent based on a 30
day month shall be paid for the fractional month during which the Lease
commences or terminates.
E. Optional Term Monthly Rent. The Monthly Rent for the Optional Term
--------------------------
shall be determined as follows:
(i) The parties shall have 15 days after Landlord receives the
Option Notice within which to agree on the initial Monthly Rent for the Optional
Term based upon the then fair market rental value of the Premises as defined in
Section 5(E)(ii). If the parties agree on the initial Monthly Rent for the
Optional Term within 15 days, they shall immediately execute an amendment to
this Lease stating the initial Monthly Rent for the Optional Term and the
adjustments thereto determined in accordance with Section 5(E)(iv) below. If the
parties are unable to agree on the initial Monthly Rent for the Optional Term
within 15 days, then, the initial Monthly Rent for the Optional Term shall be
the then current fair market rental value of the Premises as determined in
accordance with Section 5(E)(iii).
(ii) The "then fair market rental value of the Premises" shall be
defined to mean the fair market rental value of the Premises as of the
commencement of the Optional Term,
<PAGE>
taking into consideration the uses permitted under this Lease, the quality,
size, design and location of the Premises, and the rent for comparable buildings
located in Sunnyvale. In no event shall the fair market monthly rental value of
the Premises for the Optional Term be less than the Monthly Rent last payable
under the Lease.
(iii) Within seven days after the expiration of the 5-day period
set forth in Section 5(E)(1), each party, at its cost and by giving notice to
the other party, shall appoint a real estate appraiser with at least five years'
full-time commercial appraisal experience in the area in which the Premises are
located to appraise and set the initial Monthly Rent for the Optional Term. If a
party, does not appoint an appraiser within 10 days after the other party has
given notice of the name of its appraiser, the single appraiser appointed shall
be the sole appraiser and shall set the Monthly Rent. If the two appraisers are
appointed by the parties as stated in this Section, they shall meet promptly and
attempt to set the initial Monthly Rent. If they are unable to agree within 30
days after the second appraiser has been appointed, they shall attempt to elect
a third appraiser meeting the qualifications stated in this Section within 10
days after the last day the two appraisers are given to set the initial Monthly
Rent. If they are unable to agree on the third appraiser, either of the parties
to this Lease, by giving 10 days' notice to the other party, can apply to the
then Presiding Judge of the Santa Clara County Superior Court, for the selection
of a third appraiser who meets the qualifications stated in this paragraph. Each
of the parties shall bear one-half of the cost of appointing the third appraiser
and of paying the third appraiser's fee. The third appraiser, however selected,
shall be a person who has not previously acted in any capacity for either party.
Within 30 days after the selection of the third appraiser, a
majority of the appraisers shall set the initial Monthly Rent. If a majority of
the appraisers are unable to set the initial Monthly Rent within the stipulated
period of time, the three appraisals shall be added together and their total
divided by three; the resulting quotient shall be the initial Monthly Rent for
the Optional Term. If, however, the low appraisal and/or the high appraisal
are/is more than ten percent (10%) lower and/or higher than the middle
appraisal, the low appraisal and/or the high appraisal shall be disregarded. If
only one appraisal is disregarded, the remaining two appraisals shall be added
together and their total divided by two; the resulting quotient shall be the
initial Monthly Rent for the Optional Term. If both the low appraisal and the
high appraisal are disregarded as stated in this paragraph, then only the middle
appraisal shall be used as the result of the appraisal. After the initial
Monthly Rent has been set, the appraisers shall immediately notify the parties
and the parties shall amend this Lease to set forth such amount.
(iv) The Monthly Rent due during the Optional Term shall be
increased every 12 months during the Optional Term by amount equal to five
percent (5%) of the Monthly Rent due for the prior 12 months of the Optional
Term.
6. LATE PAYMENT CHARGES
Tenant acknowledges that late payment by Tenant to Landlord of Rent
and other charges provided for under this Lease would cause Landlord to incur
costs not contemplated by this Lease, the exact amount of such costs being
extremely difficult or impracticable to fix. Therefore, if any installment of
Rent or any other charge due from Tenant is not received by Landlord within five
(5) business days after the date such Rent or other charge is due, Tenant shall
pay to Landlord an
<PAGE>
Additional sum equal to five percent (5%) of the amount overdue as a late
charge. This late charge shall be in addition to interest on the overdue payment
charged from the date due to the date paid at the Interest Rate. The parties
agree that this late charge represents a fair and reasonable estimate of the
costs that Landlord will incur by reason of the late payment by Tenant.
Initials:
Landlord:
Tenant:
7. SECURITY DEPOSIT
Upon execution of this Lease, Tenant shall deposit with Landlord the
amount specified in the Lease Summary as Tenant's security deposit for the
faithful performance of all terms, covenants and conditions of this Lease (the
"Deposit"). Without waiving any of Landlord's other rights and remedies under
this Lease, if Tenant defaults with respect to any provision of this Lease,
Landlord may apply all or any part of the Deposit for the payment of any Rent or
other sum in default, the repair of any damage to the Premises caused by Tenant
or the payment of any other amount which Landlord may spend or become obligated
to spend by reason of Tenants default or to compensate Landlord for any other
loss or damage which Landlord may suffer by reason of Tenant's default to the
full extent permitted by law. Tenant hereby waives any restriction on the use or
application of the Security Deposit by Landlord as set forth in California Civil
Code Section 1950.7. If Landlord so applies the Deposit, Tenant shall within ten
days after demand from Landlord restore the Deposit to the full amount set forth
in the Lease Summary. Failure of Tenant to do so shall be default under this
Lease. Landlord's application of the Deposit shall in no event be construed as
in any way limiting Tenant's liability or obligation with respect to any such
default. If Tenant has kept and performed all terms, covenants and conditions of
this Lease, Landlord will, within thirty (30) days following termination of this
Lease, return the Deposit to Tenant or the last permitted assignee of Tenant's
interest hereunder. Landlord shall not be required to keep the Deposit separate
from its general funds, and Tenant shall not be entitled to interest on the
Deposit. No trust or fiduciary relationship is created by this Lease between
Landlord and Tenant with respect to the Deposit.
8. HOLDING OVER
If Tenant remains in possession of all or any part of the Premises
after the expiration of the Term, such tenancy shall be month-to-month only and
shall not constitute a renewal or extension for any further term. If Tenant
remains in possession either with or without Landlord's consent, Monthly Rent
shall be increased to an amount equal to 150% of the Monthly Rent payable during
the last month of the Term, and any other sums due under this Lease shall be
payable in the amount and at the times specified in this Lease. Such month-to-
month tenancy shall be subject to every other term, condition and covenant
contained in this Lease. If Tenant fails to surrender the Premises upon the
expiration of the Term despite demand to do so by Landlord, Tenant shall
indemnify and hold Landlord harmless from all loss or liability, including
without limitation any claim made by a succeeding tenant, resulting from
Tenant's failure to surrender. Landlord also may pursue any remedies available
to it as a result of Tenant's holdover, either under this Lease, at law or in
equity.
<PAGE>
9. TENANT IMPROVEMENTS
Tenant shall construct within the Premises the Tenant Improvements
pursuant to the terms of the Work Letter Agreement attached as Exhibit C.
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10. CONDITION OF PREMISES
Upon vacation of the Premises by any existing tenants, Landlord shall
deliver the Premises to Tenant, for the purposes of Tenant's early entry under
Section 4(D), broom clean, in reasonable repair, and with the HVAC, electrical
and plumbing in good operating, condition. Subject to the foregoing, by taking
possession of the Premises Tenant shall be deemed to have accepted the Premises
"As IS" and in good, clean and completed condition and repair and subject to all
applicable Laws. Tenant acknowledges that neither Landlord nor Landlord's Agents
have made any representations or warranties as to the suitability or fitness of
the Premises for the conduct of Tenant's business or for any other purpose, nor
have Landlord or Landlord's Agents agreed to undertake any Alterations or
construct any Tenant Improvements except as expressly provided in this Lease.
11. USE OF THE PREMISES
A. Tenant's Use. Tenant shall use the Premises solely for office,
------------
software engineering, and sales purposes and other related uses permitted by
applicable Laws. Tenant shall not use the Premises for any other purpose
without obtaining Landlord's prior written consent, which consent shall not be
unreasonably withheld. Tenant agrees that the Premises are subjects, and this
------
Lease is subordinate, to the CC&R's. Tenant acknowledges that it has read the
CC&R's and knows the contents thereof Throughout the Term, Tenant shall
faithfully and timely perform and comply with the CC&R's and any modification or
amendments thereof, including the payment by Tenant of any periodic or special
dues or assessments, and owners' association fee's against the Premises and the
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Land. Landlord represents that, to the best of its knowledge, Landlord has
received no written notice of any proposed modifications or amendments to the
CC&R's.
B. Compliance with Laws. Tenant shall not use the Premises or suffer
--------------------
or permit anything to be done in or about the Premises which will in any way
conflict with any Laws, including without limitation, all Environmental Laws,
the Americans with Disabilities Act and Title 24 of the California Code of
Regulations. Tenant shall not commit any public or private nuisance or any other
act or thing which might or would disturb the quiet enjoyment of any occupant of
nearby property. Tenant shall place no loads upon the floors, walls or ceilings
in excess of the maximum designated load determined by Landlord or which could
endanger the structure. Tenant shall not place any harmful liquids in the
drainage systems, nor dump or store waste materials or refuse or allow such to
remain outside the Premises, except in the enclosed trash areas provided. Tenant
shall not store or permit to be stored or otherwise placed any other material of
any nature whatsoever outside the Premises.
C. Insurance Requirements. Tenant shall not keep, use, sell or offer
----------------------
for sale, in. upon or about the Premises any article which may be prohibited by
the insurance policies then in effect for the Premises or the Land.
<PAGE>
12. QUIET ENJOYMENT
Landlord covenants that Tenant. Upon performing the terms conditions
and covenants of this Lease, shall have quiet and peaceful possession of the
Premises as against any person claiming the same by, through or under Landlord.
13. ALTERATIONS
After the Commencement Date, Tenant shall not make or permit any
Alterations in, on or about the Premises, except for non structural Alterations
costing less than $5,000.00 per calendar year or portion thereof, without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, and according to plans and specifications approved in writing by
Landlord. Notwithstanding the foregoing, Tenant shall not, without the prior
written consent of Landlord, make any alterations (a) to the exterior of the
Premises; (b) affecting the building systems within the Premises; (c)
penetrating the roof of the Premises-, or (d) visible from outside the Premises,
to which Landlord may withhold Landlord's consent on wholly aesthetic grounds.
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All Alterations shall be (i) installed at Tenant's sole expense (ii)
comply with all Laws and the CC&R's, (iii) constructed by a licensed contractor
reasonably acceptable to Landlord, (iv) completed in a good and workmanlike
manner, and (v) conform in quality and design with the Premises as existing on
the Commencement Date. No Alteration shall diminish the value of either the
Premises or the Land. Upon completion of any Alterations, Tenant shall provide
Landlord with as-built drawings for such Alterations. All Alterations made by
Tenant shall be and become the property of Landlord upon the expiration or
sooner termination of this Lease, provided, however, that if Landlord indicated
at the time of its consent to such Alterations that Tenant would be required to
remove such Alterations at the expiration of the Term, then Tenant shall, at
Tenant's expense, remove any such Alterations so designated by Landlord and
return the Premises to their condition as of the Commencement Date, normal wear
and tear excepted and subject to the provisions of Section 23. In addition,
Tenant shall, at Landlord's request remove any Alterations that were installed
without Landlord's consent if such consent was required hereunder.
Notwithstanding any other provision of this Lease, Tenant shall be solely
responsible for the maintenance and repair of any and all Alterations made by it
to the Premises. Tenant shall give Landlord written notice of Tenant's intention
to perform work on the Premises which might result in any claim of lien at least
20 days prior to the commencement of such work, so that Landlord may post and
record a Notice of Nonresponsibility or similar notice. If the Tenant
Improvements or any Alteration of the Premises by Tenant results, or in
Landlord's reasonable opinion may result, in labor disruptions, then all such
work shall be halted immediately by Tenant until such time as construction can
proceed without such disruption.
14. SURRENDER OF THE PREMISES
Upon the expiration or earlier termination of the Term, Tenant shall
surrender the Premises to Landlord in the condition existing as of the
Commencement Date, normal wear and tear excepted and subject to the provisions
of Section 23, with (a) all interior walls repaired if damaged, (b) all carpets
shampooed, (c) all broken or nonconforming acoustical ceiling, tiles replaced,
and (d) the plumbing and electrical systems and lighting in good order and
repair, including replacement of
<PAGE>
any burned out or broken light bulbs or ballasts, all to the reasonable
satisfaction of Landlord. Tenant shall remove from the Premises all of Tenant's
Alterations required to be removed pursuant to Section 13. and all Tenant's
Personal Property, and repair any damage and perform any restoration work caused
by such removal. Landlord shall notify Tenant of the items to be removed and/or
restored within 60 days prior to the expiration of the Term. If Tenant falls to
remove such Alterations and Tenant's Personal Property, and such failure
continues after the termination of this Lease, Landlord may retain such property
---
and all rights of Tenant, with respect to it shall cease, or Landlord may place
all or any portion of such property in public storage for Tenant's account.
Tenant shall be liable to Landlord for the costs of (i) removing, transporting
and storing any such Alterations and Tenant's Personal Property and (ii)
repairing and restoring, the Premises, together with interest at the Interest
Rate from the date of expenditure by Landlord. If the Premises are not
surrendered as required above, Tenant shall defend, indemnify and hold harmless
Landlord and Landlord's Agents from and against any and all claims, loss,
liability or expense (including attorneys' fees and costs) resulting from delay
by Tenant in so surrendering the Premises.
Normal wear and tear, for the purposes of this Lease shall be
construed to mean wear and tear caused to the Premises by a natural aging
process which occurs in spite of application of commercially reasonable
standards for maintenance, repair and janitorial practices. It is not intended,
nor shall it be construed, to include items of neglected or deferred maintenance
which would have or should have been attended to during, the Term if
commercially reasonable standards had been applied to properly maintain and keep
the Premises at all times in good condition and repair.
15. REAL PROPERTY TAXES
A. Payment by Tenant. On or before April 1 and December 1 of each
-----------------
calendar year during the Term, Tenant shall pay to Landlord, as Additional Rent,
all Real Property Taxes as set forth on the county assessor's tax statement for
the Premises and the Land. Landlord shall give Tenant at least 30 days' prior
written notice of the amount so due. Upon Landlord's receipt of the Real
Property Tax payment from Tenant, Landlord shall pay the taxes to the county.
If Tenant fails to pay the Real Property Taxes on or before April 1 and December
1, respectively, Tenant shall pay to Landlord any penalty incurred by such late
payment, as well as interest at the Interest Rate from the date such amounts are
due hereunder until the date they are paid by Tenant. Tenant shall pay any Real
Property Tax not included within the county tax assessor's tax statement within
30 days after being billed for same by Landlord. The above dates for payment are
based on the dates currently established by the county as the dates on which
Real Property Taxes become delinquent if not paid. If such delinquency dates
change, the dates on which Tenant must pay such Real. Property Taxes shall be at
least 10 days prior to the delinquency dates. Notwithstanding the above, at any
time, upon prior written notice to Tenant, Landlord shall have the right to
require that Tenant pay one-twelfth of the Real Property Taxes to Landlord
directly, on the first day of each calendar month. 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 relating to the Land and the Premises are to be included within the
definition of Real Property Taxes for purposes of this Lease. Landlord
represents to Tenant that there are no liens filed against the
<PAGE>
Premises or the Land for any Real Property Taxes that are delinquent as of the
date of this Lease and that Landlord shall pay, prior to delinquency, any Real
Property Taxes that are due prior to the Commencement Date.
B. Taxes on Tenant Improvements and Personal Property. Tenant shall
--------------------------------------------------
pay any increase in Real Property Taxes resulting from any and all Alterations
and Tenant Improvements of any kind whatsoever placed in, on or about the
Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay
prior to delinquency all taxes assessed or levied against Tenant's Personal
Property in, on or about the Premises or elsewhere. When possible, Tenant shall
cause its Personal Property to be assessed and billed separately from Landlord'
s real or personal property.
C. Proration. Tenant's liability to pay Real Property Taxes shall be
---------
prorated on the basis of a 365-day year to account for any fractional portion of
a fiscal tax year included at the commencement or expiration of the Term. With
respect to any assessments which may be levied against or upon the Premises, or
which under the Laws then in force may be evidenced by improvements or other
bonds or may be paid in annual installments, only the amount of such annual
installment (with appropriate proration for any partial year) and interest due
thereon shall be included within the computation of the annual Real Property
Taxes levied against the Premises.
16. UTILITIES AND SERVICES
Tenant shall be responsible for and shall pay promptly to the provider
thereof all charges for water, gas, electricity, computer and telephone cabling
and equipment, refuse pickup, janitorial service and all other utilities,
materials and services finished directly to or used by Tenant in, on or about
the Premises during the Term, together with any taxes thereon. Landlord shall
not be liable in damages or otherwise for any failure or interruption of any
utility service or other service furnished to the Premises, except to the extent
that such failure or interruption is caused by the gross negligence or willful
misconduct of Landlord.
17. REPAIR AND MAINTENANCE
A. Premises.
---------
(i) Landlord's Obligations. Landlord shall, at its sole cost and
----------------------
expense, keep and maintain in good order, condition and repair the foundation
and subflooring, the exterior walls (excluding the interior of all walls and the
exterior and interior of all windows, doors, plateglass, and ceiling), and the
structural components of the roof of the Premises, except that any damage to any
of the foregoing that is caused by the negligence or willful misconduct of
Tenant, its agents, employees, contractors, or invitees shall be repaired at
Tenant's expense. Landlord shall also maintain in good order, condition and
repair, subject to Tenant's obligation to reimburse Landlord for the cost
thereof as provided in Section 17(B)(ii) below, the roof membrane and the HVAC
system for the Premises. Landlord shall obtain HVAC systems preventive
maintenance contracts with bimonthly or monthly service in accordance with
manufacturer recommendations, which shall be subject to the reasonable approval
of Tenant and paid for by Tenant. Such contracts shall provide for and ' include
replacement of filters, oiling and lubricating of machinery, parts replacement,
adjustment of drive belts, oil changes
<PAGE>
and other preventive maintenance including annual maintenance of ductwork,
interior unit drains and caulking at sheet metal and recaulking of jacks and
vents. Tenant shall have the benefit of all warranties available to Landlord
regarding the equipment in such HVAC systems. It is an express condition
precedent to all obligations of Landlord to repair and maintain that Tenant
shall have notified Landlord in writing of the need for such repairs or
maintenance.
(ii) Tenant's Obligations. Subject to the provisions of Section
--------------------
23, Tenant at its sole expense shall keep sanitary and maintain in good order,
condition and repair every part of the Premises which is not within Landlord's
obligation pursuant to Section 17(A)(1). Tenant's repair and maintenance
obligations shall include all plumbing and sewage facilities within the
Premises, fixtures, interior walls, floors, ceilings, windows, store front,
doors, entrances, plateglass, showcases, skylights, all electrical facilities
and equipment, including lighting fixtures, lamps, fans and any exhaust
equipment and systems, any automatic fire extinguisher or other life safety
equipment within the Premises, plumbing and drainage systems, electrical motors
and all other appliances and equipment of every kind and nature located in, upon
or about the Premises. Tenant also shall be responsible for pest control,
janitorial and sweeping services within the Premises, and maintenance, repair
and replacement of Tenant's signs. Tenant shall maintain all non-structural
components of the roof and pay for annual roof inspections conducted by
qualified roofing contractors and provide Landlord with copies of any reports of
such inspections and evidence satisfactory to Landlord that the roof is in good
condition and all necessary repairs revealed by such inspection have been
performed promptly.
B. Outside Areas.
-------------
(i) Landlord's Obligations. Landlord shall maintain all Outside
----------------------
Areas; however, if Landlord so elects, Tenant shall operate and maintain that
portion of the Outside Areas designated by Landlord at Tenant's sole expense.
Landlord at all times shall have exclusive control of the Outside Areas and may
at any time temporarily close any part thereof, upon not less than 24 hours'
prior written notice to Tenant, so long as such closure does not materially and
adversely impair Tenant's access to the parking, area and/or the Premises.
Landlord may exclude and restrain anyone from any part of the Outside Areas,
except for the bona fide employees, agents and invitees of Tenant who use the
Outside Areas in accordance with the CC&R's and all reasonable rules and
regulations promulgated by Landlord from time to time. Landlord may change the
configuration, location or other elements of the Outside Areas, but Landlord may
not reduce the number of parking spaces available to the Premises below the
number required by applicable Laws to permit use of the Premises for the
purposes set forth in this Lease, nor shall Landlord voluntarily reduce the
number of parking spaces available to the Premises below the number of parking
spaces available to the Premises as of the Commencement Date. In exercising any
of the above rights, Landlord shall make a reasonable effort to minimize any
disruption of Tenant's business. Tenant waives the provisions of Sections 1941
and 1942 of the California Civil Code and any similar or successor law regarding
Tenant's right to make repairs and deduct the expenses of such repairs from the
Rent due under this Lease.
(ii) Tenant to Pay Operating Expenses. Tenant shall pay, as
--------------------------------
Additional Rent, all reasonable out-of-pocket costs and expenses paid or
incurred by Landlord in maintaining, repairing and replacing the roof membrane
and the HVAC system, and managing, maintaining, and repairing the Outside Areas
(the "Operating Expenses") during the Term. The Operating Expenses shall
<PAGE>
Include, without limitation, the cost of any policies of insurance covering the
Outside Areas, management fees paid to third parties or to management companies
owned by, or management divisions of Landlord, and the cost of labor, materials,
supplies and services used or consumed in maintaining, operating and repairing
the roof membrane, the HVAC system and the Outside Areas, including maintaining,
repairing and replacing, as needed, the roof membrane, the HVAC system and its
components, landscaping and sprinkler systems, and maintaining, restriping,
resurfacing, and repairing concrete walkways and paved parking areas.
(iii) Monthly Payments. From and after the Commencement Date,
----------------
Tenant shall pay to Landlord on the first day of each calendar month of the Term
an amount estimated by Landlord to be the monthly Operating Expenses. The
estimated monthly charge may be adjusted by Landlord at the end of any calendar
month on the basis of Landlord's experience and reasonably anticipated costs.
Any such adjustment shall be effective as of the calendar month next succeeding
receipt by Tenant of written notice of such adjustment. Within 120 days
following the end of each calendar year Landlord shall furnish Tenant a
statement of the actual Operating Expenses for the calendar Year and the
payments made by Tenant with respect to such period. If Tenant's payments for
the Operating Expenses are less than the amount of the actual Operating
Expenses, Tenant shall pay Landlord the deficiency within 30 days after receipt
of such statement. If Tenant's payments exceed the actual Operating Expenses,
Landlord shall either offset the excess against the Operating Expenses next
thereafter to become due to Landlord, or shall refund the amount of the
overpayments to Tenant, in cash, as Landlord shall elect. There shall be
appropriate prorations of the Operating Expenses as of the Commencement Date and
expiration of the Term.
(iv) Tenant's Right to Audit. Within six months after delivery to
-----------------------
Tenant of any statement of actual Operating Expenses, Tenant shall have the
right, by written notice to Landlord, to dispute any Operating Expenses
reflected in such statement. If such dispute is not settled within 60 days after
such notice has been delivered to Landlord, the dispute shall be resolved
pursuant to an audit to be conducted by a firm of certified public accountants
(an "Audit Professional") mutually acceptable to Landlord and Tenant. If
Landlord and Tenant cannot agree on an Audit Professional within 30 days, then
Landlord and Tenant shall each, within 15 days, select an Audit Professional and
the two Audit Professionals so selected shall select a third Audit Professional
which shall be the Audit Professional to resolve the dispute. The Audit
Professional selected (the "Selected Auditor") shall be entitled to review all
books and records relating to the disputed Operating Expenses. Such review shall
be conducted during normal business hours at the office of Landlord's property
manager. If the Selected Auditor's determination shows that the aggregate
Operating Expenses in the disputed statement exceed the actual Operating
Expenses for the period, covered by such statement by an amount greater than
five percent (5%), the cost of the audit shall be paid by Landlord; otherwise,
the cost of the audit shall be paid by Tenant, if such determination reflects an
underpayment of Operating Expenses by Tenant, then Tenant shall pay the
deficiency to Landlord within 30 days thereafter, If such determination reflects
an overpayment of Operating Expenses by Tenant, then such amount shall be
credited against the next monthly installment(s) of Operating Expenses that are
due hereunder. Landlord shall maintain all books and records supporting any
statement of Operating Expenses for a period of not less than three years
following the preparation of such statement. The rights and obligations of
Tenant and Landlord under this Section 17.B.(iv) shall survive the expiration or
sooner termination of this Lease.
<PAGE>
C. Compliance with Laws. Tenant at its sole cost shall promptly comply
--------------------
with all Laws in effect from time to time during the Term that relate to the use
or occupancy of the Premises or privileges appurtenant to or in connection with
the enjoyment of the Premises. If such Laws require any Alterations to the Land
and/or the Premises, the Alterations shall be governed by Section 13 of this
Lease. If, however, the Land and/or the Premises are not in compliance with all
Laws applicable to the Land and/or the Premises on the date that Landlord
delivers possession of the Premises to Tenant, then Landlord shall be
responsible, at its sole cost and expense, for bringing the same into
compliance; provided, however, that the foregoing shall not apply to, and Tenant
shall remain solely responsible for, any compliance with Laws obligations that
are triggered by the construction of the Tenant Improvements or the permitting
for the same, including any upgrades to the Premises which may be required to
comply with such Laws.
D. Capital Costs. If Landlord's accountants reasonably determine,
-------------
based on Generally Accepted Accounting Principles, that any amounts for which
Tenant is responsible under this Section 17 must be capitalized rather than
expensed, then each year during the Term Tenant shall pay only the properly
chargeable portion of capitalized costs during such year based on Landlord's
reasonable determination of the useful life of the applicable capital
improvement, together with interest on the amortized balance at the Interest
Rate.
E. Tenant's Right to Perform Landlord's Obligations. If Landlord fails
------------------------------------------------
to perform any of its repair and maintenance obligations under Sections 17(A)(i)
or 17(B)(i), and such failure continues for more than thirty (30) days after
written notice from Tenant. Tenant shall have the right, but not the
obligation, to perform such repairs and/or maintenance. In the event of an
emergency involving an immediate threat of personal injury or property damage,
Tenant shall have the right to perform such repairs if Landlord fails to do so
within twenty-four (24) hours after notice from Tenant. In either such event,
Landlord shall reimburse Tenant for the reasonable costs incurred by Tenant to
complete such repairs and/or maintenance within thirty (30) days after receipt
of Tenant's written demand therefor, together with copies of paid invoices
evidencing the costs incurred by Tenant. If Landlord fails to reimburse Tenant
for such costs within such thirty (30) day period, such amount shall accrue
interest at the Interest Rate from the date of expenditure by Tenant until
reimbursed by Landlord. Any repairs and/or maintenance permitted herein shall be
performed in a good and workmanlike manner by licensed and bonded contractors.
If Landlord objects to the repairs and/or maintenance performed by Tenant or the
expenses incurred by Tenant in performing such work, Landlord shall deliver
written notice of Landlord's objection to Tenant within thirty (30) days after
Landlords receipt of Tenant's invoice evidencing the expenses incurred by
Tenant. Landlord's notice shall set forth in reasonable detail Landlord's
reasons for its claim that such repairs and/or maintenance were not required or
were not Landlord's obligation under the terms of this Lease, and/or the reasons
for Landlord's dispute of the expenses incurred by Tenant in performing such
work. If Landlord and Tenant fail to resolve any such dispute within thirty (30)
days after Landlord has notified Tenant of Landlord's objections, the matter
shall be resolved by binding arbitration in accordance with the provisions of
California Code of Civil Procedure Sections 1280 et seq.
<PAGE>
18. LIENS
Tenant shall keep the Premises free from any liens arising out of any
work performed, materials furnished or obligations incurred by or on behalf of
Tenant. Tenant hereby defends, indemnifies and holds harmless Landlord and
Landlord's Agents from any and all claims, liability, cost and expense
(including reasonable attorneys' fees and costs) in connection with or arising
out of any such lien or claim of lien. Tenant shall cause any such lien imposed
to be released of record by payment or posting of a proper bond reasonably
acceptable to Landlord within 30 days after written request by Landlord. Tenant
shall give Landlord written notice of Tenant's intention to perform work on the
Premises which might result in any claim of lien at least 20 days prior to the
commencement of such work, so that Landlord may post and record a Notice of
Nonresponsibility or similar notice. If Tenant fails to so remove any such lien
within the prescribed 30 day period, then Landlord may do so at Tenant's
expense and Tenant shall reimburse Landlord for such amounts upon demand. Such
reimbursement shall include all costs incurred by Landlord including Landlord's
reasonable attorneys' fees, with interest from the date of expenditure at the
Interest Rate.
19. RIGHT TO ENTER THE PREMISES
Tenant shall permit Landlord and Landlord's Agents to enter the
Premises at all reasonable times with at least 24 hours' prior written notice,
except for emergencies in which case no notice shall be required, to inspect the
same, to post Notices of Nonresponsibility and similar notices and "For Sale"
signs (in form and content reasonably acceptable to Tenant), to show the
Premises to interested parties such as prospective lenders and purchasers, to
make necessary repairs, to discharge Tenant's obligations under this Lease when
Tenant has failed to do so after expiration of any cure period provided in this
Lease, and at any reasonable time within six months prior to the expiration of
the Term, to place upon the Premises ordinary "For Lease" signs and to show the
Premises to prospective tenants. The above rights are subject to Tenant's
reasonable security regulations. In exercising any such rights, Landlord shall
make a reasonable effort to minimize any disruption of Tenant's business.
20. SIGNS
Tenant may install building and monument identification signage,
subject to all Laws, the CC&R's and Landlord's prior written approval as to
location, size, design, color and other physical aspects, which approval shall
not be unreasonably withheld. Tenant shall not install any other sign, display
or advertising material that is visible from the exterior of the Premises,
except that Tenant may display, on a temporary basis only, such advertising or
promotional material as is approved by the City of Sunnyvale. Tenant shall be
solely responsible for the cost of any signs, as well as their installation,
maintenance and removal. If Tenant fails to maintain its signs, or if Tenant
fails to remove its signs upon termination of this Lease, Landlord may do so at
Tenant's expense, which Tenant shall pay upon demand with interest from the date
of expenditure at the Interest Rate.
<PAGE>
21. INSURANCE
A. Indemnification. Subject to the provisions of Section 22, Tenant
---------------
shall defend, indemnify and hold harmless Landlord and Landlord's Agents from
and against any and all claims, loss, liability or expense (including reasonable
attorneys' fees and costs) arising out of the use or occupancy of the Premises
or the Land or any part thereof by Tenant, or the acts or omissions of Tenant,
its employees, agents, contractors or invitees. The foregoing indemnity shall
not, however, apply to any claims, loss, liability or expense to the extent that
any of the same arise from the gross negligence or willful misconduct of
Landlord or Landlord's Agents or from the breach of any of Landlord's
obligations or representations under this Lease. Subject to the provisions of
Section 22, Landlord shall defend, indemnify and hold harmless Tenant and
Tenant's officers, directors, employees and agents from and against any and all
claims, loss, liability or expense (including reasonable attorneys' fees and
costs) arising out of the gross negligence or willful misconduct of Landlord or
Landlord's Agents. The obligations of Landlord and Tenant under this Section
21.A. shall survive this Lease.
B. Tenant's Insurance. For the protection of Tenant and Landlord, as
------------------
their interests may appear, Tenant at its sole cost shall maintain in full force
and effect at all times during the Term, as well as during any period of early
entry, policies of insurance issued by a responsible carrier or carriers
reasonably acceptable to Landlord which afford the following coverages:
(i) Commercial general liability insurance in an amount not less
than $5,000,000.00 combined single limit for both bodily injury and property
damage on a per occurrence basis which includes blanket contractual liability
broad form property damage, personal injury, completed operations, products
liability, and fire damage legal (in an amount not less than $25,000.00), naming
Landlord and Landlord's Agents as additional insureds.
(ii) "All Risk" or "causes of loss - special form" property
insurance (including, without limitation, vandalism, malicious mischief,
inflation endorsement, and sprinkler leakage endorsement) on Tenant's Personal
Property located on or in the Premises. Such insurance shall be in the full
amount of the replacement cost, as the same may, from time to time increase as a
result of inflation or otherwise, and shall be in a form providing coverage
comparable to the coverage provided in the standard ISO All-Risk form. As long,
as this Lease is in effect, the proceeds of such policy shall be used for the
repair or replacement of the items so insured. Landlord shall have no interest
in the insurance upon Tenant's Personal Property.
(iii) Boiler and machinery insurance, including but not limited
to, steam pipes, pressure pipes, condensation return pipes and other pressure
vessels and HVAC equipment, including miscellaneous electrical apparatus, in an
amount satisfactory to Landlord.
(iv) Worker's Compensation Insurance, as required by applicable
Laws.
C. Premises Insurance. During the Term, as well as during any period
------------------
of early entry, Landlord shall maintain "All Risk" or "causes of loss - special
form" property insurance (including without limitation vandalism, malicious
mischief, inflation endorsement, sprinkler leakage
<PAGE>
endorsement, and. at Landlord's option, earthquake and flood coverage) on the
Premises in the full amount of the replacement cost, as the same may from time
to time increase as a result of inflation or otherwise and shall be in a form
providing coverage comparable to coverage in the standard ISO All-Risk form.
Such insurance shall exclude coverage of all Tenant's Personal Property on or in
the Premises, but shall include the Tenant Improvements. Notwithstanding the
above, during the period of early entry, Landlord may elect to carry course of
construction insurance providing similar coverage. The property insurance shall
also include insurance against loss of rents on an "All Risk" basis, including
earthquake and flood, in an amount equal to the Rent, and any other sums payable
under the Lease, for a period not to exceed 12 months from the date of loss.
Such insurance shall name Landlord and Landlord's Agents as named insureds and
include a lender's loss payable endorsement in favor of Landlord's lender (Form
438 BFU Endorsement). Tenant shall reimburse Landlord for the costs of such
policy, monthly, or upon such other periodic basis as Landlord shall elect. If
the insurance premiums are increased, Tenant shall pay such increase within 10
days of notice of such increase. If, however, Landlord elects to maintain
earthquake insurance coverage for the Premises as permitted herein. Tenant shall
be required to pay only such portion of the premium for such insurance coverage
as is then considered to be a commercially reasonable rate for such insurance
for properties similar to the Premises, but in no event shall Tenant be required
to pay more than $45,000.00 per year for earthquake insurance premiums.
D. Increased Coverage. Upon demand, Tenant shall provide Landlord, at
------------------
Tenant's expense, with such increased amount of existing insurance, and such
other insurance as Landlord or Landlord's lender may reasonably require to
afford Landlord and Landlord's lender adequate protection.
E. Co-Insurer. If, because Tenant fails to comply with the above
----------
provisions, Landlord is adjudged a co-insurer by its insurance carrier, then any
loss or damage Landlord shall sustain by reason thereof, including reasonable
attorneys' fees and costs, shall be borne by Tenant and shall be paid by Tenant
upon receipt of a bill therefor and evidence of such loss.
F. Insurance Requirements. All such insurance shall (i) be in a form
----------------------
satisfactory to Landlord, (ii) be carried with companies that have a general
policy holder's rating of not less than "A" and a financial rating of not less
than Class "X" in the most current edition of Best's Insurance Reports, (iii)
-------------------------
provide that such policies shall not be subject to material alteration or
cancellation except after at least 30 days' prior written notice to Landlord;
and (iv) be primary as to Landlord. The policy, or policies, or duly executed
certificates for them, together with satisfactory evidence of payment of the
premium thereon shall be deposited with Landlord prior to Tenant entering, onto
the Premises, and upon renewal of such policies, not less than 30 days prior to
the expiration of the term of such coverage. If Tenant fails to procure and
maintain the insurance required under this Lease, Landlord may, but shall not be
required to, order such insurance at Tenant's expense and Tenant shall reimburse
Landlord therefor upon demand. Such reimbursement shall include all costs
incurred by Landlord, including Landlord's reasonable attorneys' fees, with
interest thereon from the date of expenditure at the Interest Rate.
G. Landlord's Disclaimer. Landlord and Landlord's Agents shall not be
---------------------
liable for any loss or damage to persons or property resulting from fire,
explosion, falling plaster, glass, tile or
<PAGE>
sheetrock, steam, gas, electricity, water or rain which may leak from any part
of the Premises, or from the pipes, appliances or plumbing works therein or from
the roof, street or subsurface or whatsoever, unless caused by or due to the
gross negligence or willful acts of Landlord or Landlord's Agents. Landlord and
Landlord's Agents shall not be liable for any latent defect in the Premises,
except for Landlord's obligation to maintain and repair the structural portions
of the Premises as described in Section 17.A. (i). Tenant shall give prompt
written notice to Landlord in case of a casualty, accident or repair needed in
the Premises. In no event shall Landlord or Landlord's Agents be liable for
Tenant's lost profits, consequential or exemplary damages, no matter how caused.
Without limiting the above, Landlord shall not be required to provide, and
Tenant expressly waives, any security services with respect to the Premises or
the Land. Landlord shall have no liability for injury or losses due to theft or
burglary or caused by unauthorized persons in the Premises or on the Land.
22. WAIVER OF SUBROGATION
Landlord and Tenant each hereby release and waive all rights of
recovery against the other and their respective agents, and employees on account
of loss or damage occasioned to such waiving party for its property or the
property of others under its control to the extent that such loss or damage
would be insured against under any insurance policies required by this Lease or
is otherwise insured against under any other policies which may be in force at
the time of such loss or damage, without regard to the negligence of the party
so released. Tenant and Landlord each shall cause the insurance policies
obtained by it under this Lease to provide that the insurance company waives all
right of recovery by way of subrogation against either Landlord or Tenant in
connection with any damage covered by such policy.
23. DAMAGE OR DESTRUCTION
A. Landlord's Obligation to Rebuild. If the Premises are damaged or
--------------------------------
destroyed, Landlord shall promptly and diligently repair the Premises unless it
has the right to terminate this Lease as provided below and it elects to so
terminate.
B. Right to Terminate. Landlord shall have the right to terminate this
------------------
Lease if any of the following events occurs:
(i) Insurance proceeds will not be available to pay the cost of
such repair, excluding any deductible for which Tenant is responsible;
(ii) The Premises cannot, with reasonable diligence, be fully rep
aired by Landlord within 90 days after the date of the damage or destruction; or
(iii) The Premises cannot be safely repaired because of the
presence of hazardous factors, including without limitation earthquake faults,
radiation, chemical waste and other similar dangers.
If Landlord elects to terminate this Lease, Landlord shall give Tenant
written notice of its election to terminate and the basis for such termination
within 30 days after such damage or destruction,
<PAGE>
and this Lease shall terminate 15 days after the date Tenant receives such
notice. If Landlord elects not to terminate this Lease, subject to Tenants
termination right set forth below. Landlord shall promptly commence the process
of obtaining necessary permits and approvals and repair of the Premises as soon
as practicable, and this Lease will continue in full force and effect. All
insurance proceeds from insurance under Section 22, excluding proceeds for
Tenant's Personal Property, shall be disbursed and paid to Landlord. Tenant
shall be required to pay to Landlord the amount of any deductibles payable in
connection with any insured casualties, except to the extent the casualty was
caused by Landlord's negligence or willful misconduct.
Tenant shall have the right to terminate this Lease, if the Premises
cannot, with reasonable diligence, be fully repaired within 180 days from the
date of damage or destruction. The determination of the estimated repair period
shall be made by Landlord in its good faith business judgment within 30 days
after such damage or destruction. Landlord shall deliver written notice of the
repair period to Tenant after such determination has been made and Tenant shall
exercise its right to terminate this Lease, if at all, by written notice to
Landlord delivered within 30 days after delivery of Landlord's notice.
C. Limited Obligation to Repair. Landlord's obligation, should it
-----------------------------
elect or be obligated to repair or rebuild, shall be limited to the Premises,
Tenant Improvements and Outside Areas.
D. Abatement of Rent. Rent shall be temporarily abated
-----------------
proportionately, but only to the extent of any proceeds received by Landlord
from rental abatement insurance described in Section 21 (C), during any period
when, by reason of such damage or destruction, Landlord reasonably determines
that there is substantial interference with Tenant's use of the Premises, having
regard to the extent to which Tenant may be required to discontinue Tenant's use
of the Premises. Such abatement shall commence upon the damage or destruction
and end upon substantial completion by Landlord of the repair or reconstruction
which Landlord is obligated or undertakes to do. Tenant shall not be entitled to
any compensation or damages from Landlord for loss of the use of the Premises,
damage to Tenant's Personal Property or any inconvenience occasioned by such
damage, repair or restoration. Tenant hereby waives the provisions of Section
1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil
Code, and the provisions of any similar law subsequently enacted.
E. Damage Near End of Term. Anything in this Lease to the contrary
-----------------------
notwithstanding, if the Premises are destroyed or damaged during the last 12
months of the Term, then either Landlord or Tenant may cancel and terminate this
Lease as of the date of the occurrence of such damage if the Premises cannot be
restored within 60 days from the date of such damage. If neither Landlord nor
Tenant elects to so terminate this Lease, the repair of such damage shall be
governed by this Section 23.
24. CONDEMNATION
If title to all of the Premises (or to a portion of the Premises such
that, in Tenant's reasonable opinion, the remaining part is not reasonably
suitable for Tenant's continued occupancy for the
<PAGE>
uses permitted by this Lease) is taken for any public or quasi-public use under
any statute or by right of eminent domain, then this Lease shall terminate as of
the date that possession of the Premises or part thereof is taken. A sale by
Landlord to any authority having the power of eminent domain, either under
threat of condemnation or while condemnation proceedings are pending shall be
deemed a taking under the power of eminent domain for all purposes of this
Section.
If any part of the Premises is taken and the remaining part, in
Tenant's reasonable opinion, is reasonably suitable for Tenant's continued
occupancy for the uses permitted by this Lease, then this Lease shall, as to the
part so taken, terminate as of the date that possession of such part of the
Premises is taken and the Rent and other sums payable under this Lease shall be
reduced in the same proportion that Tenant's use of the Premises is reduced.
Each party hereby waives the provisions of Section 1265.130 of the California
Code of Civil Procedure allowing either party to petition the Superior Court to
terminate this Lease in the event of a partial taking of the Premises.
No award for any partial or entire taking shall be apportioned. Tenant
assigns to Landlord its interest in any award which may be made in such taking
or condemnation, together with any and all rights of Tenant arising in or to the
same or any part thereof-, provided that, Tenant shall not be required to assign
to Landlord any separate award made to Tenant for the (a) taking of Tenant's
Personal Property, (b) interruption of Tenant's business or (c) Tenant's
relocation costs.
25. ASSIGNMENT AND SUBLETTING
A. Landlord's Consent. Tenant shall not enter into a Sublet without
------------------
Landlord's prior written consent. Landlord's consent shall not be unreasonably
withheld provided that: (i) Tenant has requested in writing Landlord's prior
consent; (ii) the proposed Subtenant is a reputable party of reasonable
financial worth in light of the responsibilities involved and Tenant shall have
provided Landlord with reasonable proof thereof, including without limitation
such financial information as Landlord may reasonably request; (iii) Tenant is
not in default at the time it requests such consent; and (iv) no alteration of
the Premises will be required unless approved in writing by Landlord pursuant to
Section 13 of this Lease. Tenant's request for consent shall include information
reasonably sufficient to evaluate the above criteria, as well as a copy of the
assignment or sublease to be signed by the proposed Subtenant, including a
detailed description of the premises to be Sublet and a detailed statement of
all terms and conditions of the proposed Sublet. Landlord may request additional
information for evaluation if Landlord reasonably deems the information
submitted by Tenant to be insufficient. Landlord shall have 15 days after
receipt of Tenant's written request and all required information in which to
review and respond to the request. Consent by Landlord to any one Sublet shall
not be construed as relieving Tenant from obtaining Landlord's express written
consent to any further Sublet. Landlord's consent to any requested Sublet shall
not waive Landlord's right to refuse to consent to any other such request or to
terminate this Lease if such request is made, all as provided in this Lease.
Each Subtenant shall agree in writing, for the benefit of Landlord, to assume,
to be bound by, and to perform the terms, conditions and covenants of this Lease
to be performed by Tenant. Notwithstanding anything contained in this Lease,
Tenant shall not be released from personal liability for the performance of each
term, condition and covenant of this Lease by reason of Landlord's consent to a
Sublet, unless Landlord specifically grants such release in writing.
<PAGE>
B. Landlord's Right to Terminate. Notwithstanding anything in this
-----------------------------
Section 25 to the contrary, in the event Tenant requests Landlord's consent to
Sublet all or any part of the Premises or all or any part of its interest in
this Lease. Landlord shall have the right to: (i) consent to such Sublet; (ii)
refuse to grant such consent, with such consent not to be unreasonably withheld
(but subject to the conditions set forth in this Section 25); or (iii) elect to
terminate this Lease as to the portion of the Premises proposed to be Sublet if
such Sublet is for the then remaining, Term of this Lease; provided that, if
Landlord refuses to grant such consent and elects to terminate the Lease as to
such portion of the Premises, Tenant shall have the right within 10 days after
notice of Landlord's exercise of its right to terminate to withdraw Tenant's
request for such consent and remain in possession of the Premises under the
terms and conditions of this Lease. In the event the Lease is terminated as set
forth above, such termination shall be effective as of the date set forth in a
written notice from Landlord to Tenant, which date shall in no event be less
than 30 days, nor more than 60 days, following such notice.
If Landlord consents to the Sublet, Tenant may thereafter enter into a
valid Sublet of the Premises or portion thereof, upon the terms and conditions
and with the proposed Subtenant set forth in the information furnished by Tenant
to Landlord pursuant to Section 25(A), subject, however, at Landlord's election,
to the condition that 50% of any excess of the Subrent over the Rent (less
reasonable attorneys' fees and leasing commissions paid by Tenant on the
Sublease) shall be paid to Landlord. Any such Subrent shall be payable to
Landlord concurrent with the Monthly Rent under Section 5(A).
C. Proration. If a portion of the Premises is Sublet, the prorata
---------
share of the Rent attributable to such partial area of the Premises shall be
determined by Landlord by dividing the Rent payable by Tenant under this Lease
by the total leasable square footage of the Premises and multiplying the
resulting quotient (the per square foot rent) by the number of square feet of
the Premises which are Sublet.
D. Permitted Transfers. So long as International Network Services is
-------------------
the Tenant in possession of the Premises and is not in default, Tenant shall
have the right, subject to the following terms and conditions and without the
consent of Landlord, to Sublet its interest in the Lease (i) to any corporation
which is a successor to Tenant either by merger or consolidation or (ii) to a
purchaser of all or substantially all of Tenant's assets (provided such
purchaser shall also have assumed substantially all of Tenant's liabilities), or
(iii) to a corporation or other entity which shall control, be under the control
of, or be under common control with International Network Services, (the term
"control" shall be deemed to mean ownership of more than 50% of the outstanding
voting stock of a corporation, or other majority equity and control interest if
Tenant is not a corporation; any such entity is a "Related Entity"), upon the
conditions that (1) the principal purpose of such Sublet is not the acquisition
of Tenant is interest in this Lease (except if the Sublet is made to a Related
Entity and is made for a valid intracorporate business purpose and is not made
to circumvent the provisions of this Section 25), and (2) any such Subtenant
shall have a net worth and annual income and cash flow, determined in accordance
with generally accepted accounting principles, consistently applied, after
giving effect to such Sublet, equal to or greater that Tenant's as of the
Execution Date, as determined by Landlord in its sole discretion, exercised in
good faith. Within ten days after execution thereof, Tenant shall deliver to
Landlord (x) a duplicate original of the instrument evidencing the Subrent, (y)
<PAGE>
if applicable, evidence reasonably satisfactory to Landlord establishing
compliance by the Subtenant with the net worth, income and cash flow
requirements of clause (2) above, and (z) an instrument in form and substance
reasonably satisfactory to Landlord, duly executed by the Subtenant, in which
the Subtenant assumes and agrees to be bound by the terms, conditions and
covenants of this Lease.
E. Landlord's Review Costs. All documents utilized by Tenant to
-----------------------
evidence any Sublet shall be subject to prior approval of Landlord or its
counsel. and in the event any alterations to the Premises are proposed,
Landlord's architect and engineers. Tenant shall pay promptly upon billing any
and all reasonable fees of attorneys and other consultants and other costs
reasonably incurred by Landlord for the review or preparation of any documents
in connection with a proposed Sublet, up to a maximum of $3,000.00 per Sublet.
26. DEFAULT
A. Tenant's Default. A default under this Lease by Tenant shall exist
------------------
if any of the following, occurs:
(i) If Tenant fails to pay Rent or any other sum required to be
paid under this Lease within five business days after the date such Rent or
other sum is due; or
(ii) If Tenant fails to perform any term, covenant or condition of
this Lease except those requiring the payment of money, and Tenant fails to cure
such breach within 20 days after written notice from Landlord where such breach
could reasonably be cured within such 20 day period; provided that, where such
failure could not reasonably be cured within the 20 day period, Tenant shall not
be in default if it commences such, performance within the 20 day period and
diligently prosecutes the same to completion; or
(iii) The making by Tenant of any general assignment for the
benefit of creditors; the filing, by or against Tenant of a petition to have
Tenant adjudged a bankrupt or of a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed with 60 days after such filing); the
appointment of a trustee or receiver to take possession of all or substantially
all of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant with 60 days after such
appointment; the attachment, execution or other judicial seizure of all or
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within 60 days
thereafter; or if Tenant is generally not paying its debts as they become due.
B. Remedies. Upon a default, Landlord shall have the following
--------
remedies, in addition to all other rights and remedies provided by this Lease,
at law or in equity, to which Landlord may resort cumulatively or in the
alternative:
(i) Landlord may continue this Lease in full force and effect, and
this Lease shall continue in full force and effect as long as Landlord does not
terminate this Lease, and Landlord shall have the right to collect Rent when
due.
<PAGE>
(ii) Landlord may terminate Tenant's right to possession of the
Premises at any time by giving written notice to that effect, and relet the
Premises or any part thereof. Tenant shall be liable immediately to Landlord for
all costs Landlord incurs in reletting the Premises or any part thereof,
including without limitation broker's commissions, attorneys' fees and costs,
expenses of cleaning and redecorating the Premises required by the reletting and
like costs. Reletting may be for a period shorter or longer than the remaining
Term. No act by Landlord other than giving written notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord has the right to remove all Tenant's
Personal Property and store the same at Tenant's cost and to recover from Tenant
as damages:
(1) The worth at the time of award of unpaid Rent and other
sums due and payable which had been earned at the time of termination; plus
(2) The worth at the time of award of the amount by which
the unpaid Rent and other sums due and payable which would have been payable
after termination until the time of award exceeds the amount of such Rent loss
that 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 other sums due and payable for the balance or the Term after
the time of award exceeds the amount of such Rent loss that Tenant proves could
be reasonably avoided; plus
(4) Any other amount necessary to compensate Landlord for
all the detriment approximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which, in the ordinary course of things, would
be likely to result therefrom, including without limitation any costs incurred
by Landlord: (w) in retaking possession of the Premises; (x) 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; (y) for leasing commissions; or (z) for
any other costs necessary or appropriate to relet the Premises; plus
(5) At Landlord's election, such other amounts in addition
to or in lieu of the above as may be permitted from time to time by the laws of
the State of California.
The "worth at the time of award" of the amounts referred to in
Sections 25(B)(ii)(1) and 25(B)(ii)(2) is computed by allowing interest at the
Interest Rate on the unpaid Rent and other stuns due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in Section 25(B)(ii)(3) is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus 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 under this Lease.
(iii) Upon termination of this Lease, Landlord may re-enter the
Premises and remove all persons and property from the Premises. Such property
may be removed, transported and stored
<PAGE>
in a public warehouse or elsewhere at the cost of and for the account of Tenant.
No re-entry or taking possession of the Premises by Landlord pursuant to this
Section shall be construed as an election to terminate this Lease unless a
written notice of such intention is given to Tenant.
C. Landlord's Default. Landlord shall not be deemed to be in default
------------------
in the performance of any obligation required to be performed by it under this
Lease unless and until it has failed to perform such obligation within the time
provided herein or, if none is provided, within 20 days after receipt of written
notice by Tenant to Landlord specifying Landlord's default. If the nature of
Landlord's obligation is such that more than 20 days are required for its
performance, then Landlord shall not be in default if it commences such
performance within the 20 day period and diligently prosecutes the same to
completion.
27. SUBORDINATION
A. Documentation. This Lease is subject and subordinate to all ground
-------------
and underlying leases, mortgages and deeds of trust (collectively
"ENCUMBRANCES") which now affect the Premises, to all documents of record and to
the CC&R's and all renewals, modifications, consolidations, replacements and
extensions thereof-, provided that, if the holder or holders of any such
Encumbrance ("HOLDER") shall require that this Lease be prior and superior
thereto, within 10 days after written request from Landlord to Tenant, Tenant
shall execute, have acknowledged and deliver any and all documents which
Landlord or Holder reasonably deems necessary for such purposes. Landlord shall
have the right to cause this Lease to be and become and remain subject and
subordinate to any and all Encumbrances which are now or may subsequently be
executed covering the Premises or the Land, as well as any renewals,
modifications, consolidations, replacements or extensions thereof. Landlord
represents to Tenant that, as of the date of this Lease, there are no
Encumbrances which affect the Premises. As to any Encumbrances entered into
subsequent to the Execution Date, it shall be a condition to the subordination
of this Lease that Landlord shall concurrently obtain from the Holder a covenant
in writing that, in the event of foreclosure of any such Encumbrance (or deed in
lieu or other arrangement in lieu thereof), so long as Tenant is not in default,
Holder and its designees and successors shall recognize Tenant's rights under
this Lease. Subject to the foregoing within 10 days after Landlord's written
request, Tenant shall execute any and all documents reasonably required by
Landlord or the Holder to make this Lease subordinate to any Encumbrance. If
Tenant fails to do so, it shall be deemed that this Lease is subordinated.
Notwithstanding anything to the contrary in this Section 27, Tenant
hereby attorns and agrees to attorn to any entity purchasing or otherwise
acquiring the Premises and the Land at any sale or other proceeding of pursuant
to the exercise of any other rights, powers or remedies under any Encumbrance.
28. NOTICES
All notices, demands, statements or communications (collectively,
"Notices") given or required to be given by either party to the other under this
Lease shall be in writing and be sent by electronically confirmed telecopy,
nationally recognized overnight courier service, or United States certified or
registered mail, postage prepaid, return receipt requested, or delivered
personally (a) to
<PAGE>
Tenant at the Premises, or prior to Tenant's taking possession of the Premises,
to the address set forth in the Lease Summary, or to such other place as Tenant
may from time to time designate in a Notice to Landlord; or (b) to Landlord at
John Hancock Mutual Life Insurance Company, Attention Investment Officer, Real
Estate Investment Group, 200 Clarendon Street. Floor T-53, Boston, MA 02116
(delivery address) or P.O. Box 111, Floor T-53, Boston. 02117 (mailing address)
with a copy to Landlord at the address specified in the Lease Summary, or to
such other firm or to such other place as Landlord may from time to time
designate in a Notice to Tenant. Any Notice will be deemed given upon the date
delivered if delivered personally, on the same day if given before 5:00 PM
(recipient's time) on any work day (or on the next work day if given after 5:00
PM or on other than a work day) by electronically confirmed telecopy, the next
business day if sent by nationally recognized courier service, or upon receipt
or refusal of receipt if sent by United States mail, as provided above.
29. ATTORNEYS' FEES
If either party brings any action or legal proceeding for damages for
an alleged breach of any provision of this Lease, to recover rent or other sums
due, to terminate the tenancy of the Premises or to enforce or establish any
term, condition or covenant of this Lease or right of either party, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs in such action or proceedings (or in a separate action brought for that
purpose).
30. ESTOPPEL CERTIFICATES
Tenant shall within 10 days following written request by Landlord:
A. Execute and deliver to Landlord estoppel certificates, in the form
prepared by Landlord (i) certifying that this Lease is unmodified and in full
force an effect or, if modified, stating the nature of such modification and
certifying that this Lease," as so modified, is in full force and effect and the
date to which the Rent and other charges are paid in advance, if any, (ii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord, or, if there are uncured defaults on the part of Landlord,
stating the nature of such uncured defaults, and (iii) certifying as to any
other information concerning the Lease as may be reasonably requested by
Landlord, the Holder or prospective Holder of any Encumbrance, or a prospective
purchaser of the Land and the Premises. Tenant's failure to deliver an estoppel
certificate 10 days after delivery of Landlord's written request therefor shall
be conclusive upon Tenant that (1) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (2) there are now
no uncured defaults in Landlord's performance and (3) no Rent has been paid in
advance.
B. Deliver to Landlord the current financial statements of Tenant, and
financial statements for the two years prior to the current financial
statements, with an opinion of a certified public accountant, 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.
<PAGE>
31. TRANSFER OF THE PREMISES BY LANDLORD
In the event of any conveyance of the Premises and the Land and
assignment by Landlord of this Lease, Landlord shall be and is hereby entirely
released from all liability under any and all of its covenants and obligations
contained in or derived from this Lease accruing after the date of such
conveyance and assignment provided that the transferee assumes all of Landlord's
obligations under this Lease and, subject to the provisions of Section 27,
Tenant agrees to attorn to such transferee.
32. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS
If Tenant is in default under this Lease, Landlord may, but shall not
be obligated to and without waiving or releasing Tenant from any obligation of
Tenant under this Lease, cure such default to the extent Landlord may deem
desirable, and in connection with the same, pay expenses and employ counsel. All
sums so paid by Landlord and all penalties, interest and costs in connection
with the same shall be due and payable by Tenant on the next day after any such
payment by Landlord, together with interest thereon from the date of
expenditure, at the Interest Rate plus collection costs and attorneys' fees.
Landlord shall have the same rights and remedies for the nonpayment thereof as
in the case of default in the payment of Rent.
33. NO PERSONAL LIABILITY OF LANDLORD
Tenant shall look solely to the Landlord's then equity interest in the
Premises and the Land for recovery of any judgment from Landlord. Neither
Landlord nor any of Landlord s Agents nor any successor in interest to Landlord
or Landlord's Agents shall ever be personally liable for any such judgment, or
for the payment of any monetary obligation to Tenant. The covenants of Landlord
contained in this Lease shall be binding, upon Landlord and Landlord's
successors only with respect to breaches occurring during Landlord's and
Landlord's successors' respective periods of ownership of the Premises and the
Land.
34. HOLDER PROTECTION
If Landlord defaults under this Lease, Tenant shall notify any Holder
of an Encumbrance, and offer such Holder a reasonable opportunity to cure the
default, including time to obtain possession of the Premises and Land by power
of sale or a judicial foreclosure, if such should prove necessary to effect a
cure. Landlord shall notify Tenant of the identity and address of any Holder for
purpose of such notice.
35. BROKERS
Landlord and Tenant hereby warrant to each other that they have had no
dealings with any real estate broker, agent or finder in connection with the
negotiation of this Lease, excepting only the real estate brokers or agents
specified in the Lease Summary, and that they know of no other real estate
broker, agent, finder or other party who is entitled to a commission in
connection with this Lease. Each party shall defend, indemnify and hold the
other party harmless from and against and all
<PAGE>
claims, loss, liability or expense (including attorneys' fees and costs) with
respect to any leasing commission or equivalent compensation alleged to be owing
on account of the indemnifying party's dealings with any real estate broker,
agent, finder or other party, except for those specified in the Lease Summary.
36. ACCEPTANCE
This Lease shall only become effective and binding upon full execution
and delivery. Neither party shall record this Lease nor a short form memorandum
of it.
37. ENVIRONMENTAL PROVISIONS
The provisions below dealing with environmental matters are in
addition to Tenant's obligations and Landlord's rights set forth elsewhere in
this Lease.
A. Definitions. For purposes of this Lease, the following terms have
-----------
the definitions ascribed below:
(i) "Environmental Damages" shall mean all claims, suits,
judgments, damages, losses, penalties, fines, liabilities, encumbrances, liens,
costs and expenses of whatever kind or nature, contingent or otherwise, matured
or unmatured, foreseeable or unforeseeable, and including without limitation:
(1) damages for personal injury, or injury to property or natural resources
occurring on or off the Premises or Land, including without limitation lost
profits, consequential damages, the cost of demolition and rebuilding, interest
and penalties and claims brought by or on behalf of employees of Tenant with
respect to which Tenant waives any immunity to which it may be entitled under
any industrial or workers' compensation laws; (2) fees incurred for the services
of attorneys, consultants, contractors, experts, laboratories, the preparation
of any feasibility studies or reports or the performance of any investigation,
remediation, removal, abatement, containment, closure, restoration or monitoring
work required by any federal state or local governmental agency or political
subdivision; (3) liability to any third person or governmental agency to
indemnify such person or agency for costs expended or liabilities incurred in
connection with the items referenced in clauses (1) and (2) above; and (4)
diminution of the value of the Premises and Land and damages for loss of
business, restrictions on use or adverse impacts on marketing rentable or usable
space, or of any amenity, of the Premises or Land.
(ii) "Environmental Laws" shall mean all present and future
federal, state and local laws, statutes, ordinances, rules, regulations,
standards, directives, interpretations and conditions of approval, all
administrative or judicial orders or decrees and all guidelines, permits,
licenses, approvals or other entitlements, or rules of common law, pertaining to
the protection of the environment or human or animal health or safety;
(iii) "Hazardous Substances" shall mean any chemical, substance,
medical or other waste, living organism or combination thereof which is or may
be hazardous to the environment or human or animal health or safety due to its
radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, mutagenicity, phytotoxicity, infectiousness or other harmful or
<PAGE>
potentially harmful proper-ties or effects. "Hazardous Substances" shall include
without limitation petroleum hydrocarbons, including crude oil or any fraction
thereof, asbestos, radon, polychlorinated biphenyls (PCBs), methane and all
substances which now or in the future may be defined as "hazardous substances,"
"hazardous wastes," "extremely hazardous wastes," "hazardous materials" or
"toxic substances," or which are otherwise listed, defined or regulated in any
manner pursuant to any Environmental Law;
(iv) "Release" shall mean any accidental or intentional spilling,
leaking, pumping, pouring, emitting, discharging, injecting, escaping, leaching,
migrating, dumping or disposing into the air, land, surface water, or ground
water or the environment (including without limitation the abandonment or
discarding of receptacles containing any Hazardous Substances).
B. Permitted Conditions and Substances/Compliance with Law. Tenant
-------------------------------------------------------
shall not generate, use, store, treat, process, handle or Release any Hazardous
Substances on or about the Premises or the Land, except to the extent commonly
used for the purposes permitted in this Lease or customarily used in conjunction
with the cleaning, repair and maintenance of the Premises, and then only in the
minimum quantities required and strictly in compliance with this Lease, the
CC&R's and all Environmental Laws. Tenant shall inform Landlord in writing of
any Hazardous Substances Tenant causes to be located on the Premises or the Land
prior to the time such Substances are located on the Premises or the Land.
Tenant at its sole cost shall comply with all Environmental Laws applicable to
the operation of its business, including without limitation procuring and
maintaining in effect any permits or licenses required for Tenant's operations
on or about the Premises.
C. Waste Disposal. Tenant shall dispose of all waste generated by
--------------
Tenant, its agents, employees or contractors that is or may be a Hazardous
Substance at offsite locations in accordance with applicable Environmental Laws,
and shall provide Landlord with a copy of any hazardous waste manifests. No
waste that is or may be a Hazardous Substance shall be disposed of in, on, under
or about the Premises or the Land. If Landlord reasonably suspects any waste
present at the Premises or the Land to be a Hazardous Substance, Tenant shall
sample and analyze such waste in accordance with applicable Environmental Laws.
Tenant promptly shall submit a copy of the results of such tests to Landlord.
D. Notifications. Tenant shall keep Landlord fully informed at all
-------------
times regarding all environmental-related matters affecting the Premises or the
Land or Tenant's operations thereon. Tenant shall promptly give Landlord copies
of any operating, emergency, contingency, closure or other plans, procedures or
documents with respect to the Premises and/or the Land which are required
pursuant to any Environmental Laws. Tenant shall give Landlord immediate written
notice of (i) any investigation, enforcement, remediation or other regulatory
action or order taken, issued or threatened in writing in connection with the
presence, Release or threatened Release of any Hazardous Substances on or about
the Premises or the Land or otherwise resulting from the occupancy, use or
activities of Tenant on or about the Premises, (ii) any claims made or
threatened in writing by any third party against Tenant or any report, notice or
complaint, to Tenant's actual knowledge, filed or threatened in writing to be
filed with any government agency, in connection with the presence, Release or
threatened Release of any Hazardous Substance on or about the Premises or the
Land or otherwise resulting from the occupancy, use or activities of Tenant on
or about the Premises; (iii) any
<PAGE>
Release of Hazardous Substances on or about the Premises or the Land, or other
property in the vicinity of the Premises actually known to or suspected by
Tenant, or Tenant's discovery of any environmental condition which could subject
Landlord or the Premises or the Land to any restrictions on ownership,
occupancy, transferability or use of the Premises or the Land: and (iv) all
incidents or matters as to which Tenant is required to give notice to any
governmental or quasi-governmental entity pursuant to any Environmental Law.
Tenant shall promptly provide Landlord with copies of all claims, complaints,
warnings, materials, reports, technical data, notices, correspondence and other
information or documents relating to any environmental-related incidents or
matters which are the subject of any notice required under this Section 37(D).
E. Remediation.
-----------
(i) Environmental Condition. The generation, presence, use,
-----------------------
storage, treatment, disposal, handling or Release of any Hazardous Substance by
Tenant or its subtenants. Or their respective, agents, employees, contractors or
invitees in violation of this Lease which first occurs on or after the
respective dates that Landlord delivers possession of the Premises at 328
Gibraltar Drive and 330 Gibraltar Drive to Tenant is referred to as an
"Environmental Condition." If an Environmental Condition exists on or about the
Premises or the Land, Tenant shall promptly undertake and diligently complete,
at its sole cost, and in strict compliance with this Lease and all applicable
Environmental Laws, all investigative, corrective and remedial measures required
to respond to the Environmental Condition. Such measures shall include, without
limitation, removal and proper disposal of the Hazardous Substance and
restoration of all land, improvements and other affected areas so that upon
completion of the investigation, corrective or remedial measures, the Premises,
Land and any other areas affected by the Environmental Condition shall be in
compliance with all Environmental Laws.
(ii) Landlord's Approval. Unless an emergency situation exists
-------------------
that requires immediate action, Tenant shall obtain Landlord's prior written
approval of all contemplated investigation, corrective or remedial measures.
Such approval shall -not be unreasonably withheld. Examples of measures subject
to Landlord's prior approval include the selection of any environmental
consultant or contractor, determination of the scope of work and sampling
activities to be performed by the consultant or any contractor and the form and
substances of all draft reports prepared by any consultant (before such reports
are finalized). Tenant shall provide Landlord with at least three business days'
advance notice of any proposed sampling and, if Landlord requests, Tenant shall
split samples with Landlord. Tenant also shall promptly provide Landlord with
the results of any test, investigation or inquiry conducted by or on behalf of
Tenant in connection with the presence or suspected presence of Hazardous
Substances on or about the Premises or the Land. Tenant shall provide Landlord
with reasonable advance notice, and Landlord shall have the right, but not the
obligation, to participate in all oral or written communications with
(government entities concerning Environmental Conditions on or about the
Premises or the Land.
(iii) Landlord's Right to Act. If Tenant fails to comply with this
-----------------------
Section, and such failure continues for more than 48 hours after delivery Of
written notice from Landlord or a government agency, Landlord shall have the
right (but not the obligation), in its sole discretion and without limiting any
other remedy which may be available to Landlord under this Lease, at law or in
<PAGE>
equity, to respond to the Environmental Condition in any manner it may deem
appropriate, pursuant to Section 37(G).
F. Condition on Expiration or Termination. Tenant shall remove and
--------------------------------------
properly dispose of any Hazardous Substances brought on or about the Premises
and the Land by Tenant or its subtenants or their respective agents, employees,
contractors or invitees on or after the respective dates that Landlord delivers
possession of the Premises at 328 Gibraltar Drive and 330 Gibraltar Drive to
Tenant, and restore the Premises, the Land and other affected areas so that the
same are in compliance with all Environmental Laws. In addition, Tenant shall
repair any damage to the Premises and/or the Land caused by the removal of any
such Hazardous Substances including, without limitation. Patching and repaving
of parking areas as necessary. At least five months before the expiration of the
Term Tenant at its sole cost shall retain a duly licensed environmental
consultant acceptable to Landlord to perform a Phase I environmental assessment
of the Premises and the Land if Landlord reasonably suspects that any Hazardous
Substances are present in. on or under the Premises or the Land and that the
presence of such Hazardous Substances is a result of the activities of Tenant or
its subtenants or their respective agents, employees, contractors or invitees on
or after the respective dates that Landlord delivers possession of the Premises
at 328 Gibraltar Drive and 330 Gibraltar Drive to Tenant. Based on that
assessment, Tenant shall formulate a plan for any further testing and for
removal and proper disposal of any Hazardous Substances generated, used, stored,
treated, processed, handled or Released on or about the Premises and the Land by
Tenant or its subtenants or their respective agents, employees, contractors or
invitees on or after the respective dates that Landlord delivers possession of
the Premises at 328 Gibraltar Drive and 330 Gibraltar Drive to Tenant, and
restoration of all land, improvements and other affected areas in compliance
with all Environmental Laws, together with a schedule for completing such plan
before the end of the Term. Tenant shall submit the plan to Landlord at least
three months before expiration of the Term and, upon approval by Landlord,
Tenant at its sole cost shall implement the approved plan. The completion of the
plan shall be confirmed in writing by the environmental consultant. If Tenant
fails to do any of the above Landlord shall have the right (but not the
obligation) to do so, in accordance with Section 37(G). Tenant also shall take
all steps reasonably necessary to terminate, close or transfer all environmental
permits, licenses, entitlements and other approvals in accordance with all
Environmental Laws, and shall provide Landlord with satisfactory written
evidence that each such termination, closure or transfer has been completed.
G. Landlord's Approval. If Tenant is in default of any of its
-------------------
obligations under this Section 37, Landlord shall have the right (but not the
obligation) to perform such obligations, in its sole discretion and without
limiting any other remedy which may be available to Landlord under this Lease,
at law or in equity. In that event, Landlord shall have sole discretion in
connection with the mariner and timing of such performance, and shall have no
responsibility to minimize the cost or legal exposure of Tenant or the
inconvenience or other impacts to Tenant resulting therefrom. If Landlord so
performs the remediation, Tenant shall pay Landlord, within 10 days after
delivery of Landlord's invoice, for any amount incurred or expended by Landlord
in connection with such remediation (including consultants', experts' and
attorneys' fees and costs), together with interest from the date of expenditure
at the Interest Rate.
<PAGE>
H. Tenant's Release and Indemnification of Landlord. Prior to
------------------------------------------------
execution and delivery of this Lease, Tenant has made such inspections and
investigations of environmental conditions in and around the Premises and Land
as Tenant desires and deems appropriate. Tenant, in entering into this Lease, is
leasing the Premises "AS IS" in reliance solely on its own inspections and
investigations and not on any representations, warranties, statements or other
information from Landlord or Landlord's Agents, whether express or implied.
Landlord represents to Tenant that, to the best of its actual, current
knowledge, Landlord has not received any written notice that the Premises and/or
the Land are in violation of any Environmental Laws. For the purposes of this
Section 37.H., "to the best of Landlord's actual, current knowledge" shall mean
to actual, current knowledge of George Kovach or Alan Webber.
In addition to, and without limiting the scope of, all other
indemnities provided by Tenant to Landlord under this Lease or Environmental
Laws, Tenant shall defend, indemnify and hold harmless Landlord and Landlord's
Agent's against and from all Environmental Damages, directly or indirectly, in
whole or in part, arising out of or in connection with (i) Tenant's non-
compliance with this Lease, the CC&R's or any Environmental Laws, or (ii) the
Release of any Hazardous; Substances by Tenant or its subtenants or their
respective agents. Employees, contractors, or invitees in, on, under or about
the Premises or the Land and from the Premises or the Land on to the surrounding
lands, air and water which occurs on or after the respective dates that Landlord
delivers possession of the Premises at ' 328 Gibraltar Drive and 330 Gibraltar
Drive to Tenant.
I. No Shift of Liability. Landlord's exercise or failure to exercise
---------------------
the rights Granted in this Section 37 shall not in any way shift responsibility
for Hazardous Substances or compliance with Environmental Laws from Tenant to
Landlord, nor impose any liability on Landlord.
J. Survival. The obligations of Tenant under this Section 3 7 shall
--------
survive expiration or earlier termination of this Lease, and any conveyance by
Landlord of its interest in the Premises or the Land, and shall continue in full
force and effect.
38. MODIFICATIONS FOR HOLDER
If, in connection with obtaining financing for the Premises, the Land,
or any portion thereof, any Holder shall request reasonable modifications to
this Lease as a condition to such financing, Tenant shall not unreasonably
withhold, delay or defer its consent thereto, provided such modifications do not
materially adversely affect Tenant's rights under this Lease or materially
increase Tenant's obligations under this Lease.
39. SATELLITE DISHES
Subject to Tenant's receipt of all necessary approvals from the City
of Sunnyvale and any other governmental agency with jurisdiction, and any
approvals required under the CC&R's, Tenant shall have the right to use the roof
areas of the Premises, or such other location on the Land as may be approved by
Landlord. for the installation. operation, maintenance, security, repair and
replacement of one or more satellite dishes and/or antennas serving the Premises
and related cable connections (the "Telecommunications Equipment"). Prior to
installing any Telecommunications
<PAGE>
equipment on the Premises and/or the Land. Tenant shall submit to Landlord for
Landlord's review and approval reasonably detailed plans and specifications
describing such equipment and tenant's proposed method of installation,
accompanied by a certified structural engineer's report demonstrating that the
roof can support the proposed telecommunication's Equipment or, if applicable.
recommending any structural modifications to the Premises which are necessary to
support the Telecommunications Equipment. Tenant shall install any
Telecommunications Equipment in a good and workmanlike manner, in compliance
with all applicable Laws. and in conformance with the plans and specifications
approved by Landlord. Tenant's use of the Premises with respect to the
Telecommunications Equipment shall be subject to such reasonable rules as
Landlord may from time to time designate. Tenant shall be solely responsible for
the installation. maintenance. repair. operation and replacement of the
Telecommunications Equipment and for the repair of any damage to the roof caused
by the installation, maintenance, repair, operation and/or replacement of the
Telecommunications Equipment. Tenant shall remove the Telecommunications
Equipment from the Premises and/or the Land as soon as reasonably possible
following the expiration or sooner termination of this Lease, but in no event
later than 30 days thereafter, and shall restore the Premises and/or the Land to
substantially the same condition they were in prior to the installation of the
Telecommunications Equipment.
40. GENERAL
A. Captions. The captions and headings used in this Lease are for the
--------
purpose of convenience only and shall not be construed to limit or extend the
meaning, of any part of this Lease.
B. Counterparts. This Lease may be executed in counterparts, each of
------------
which shall be deemed an original but all of which shall constitute one
document.
C. Time. Time is of the essence for the performance of each term,
----
condition and covenant of this Lease.
D. Interpretation. If any provision of this Lease or the application
--------------
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, it shall be adjusted, if possible, rather than voided, in order to
achieve the intent of the parties. In any event, the remainder of this Lease and
the application of such provision to the other persons or circumstances shall
not be affected thereby and shall be enforced to the greatest extent permitted
by Law. This Lease shall be construed as though the covenants herein between
Landlord and Tenant are independent. Tenant hereby expressly waives the benefit
of any statute to the contrary and agrees that if Landlord fails to perform its
obligations set forth herein, Tenant shall not be entitled to make any repairs
or perform any acts at Landlord's expense (except as expressly set forth in
Section 17(E)) or to any set-off of the rent or other amounts owing, against
Landlord- provided that, the above shall in no way impair the right of Tenant to
commence a separate action against Landlord for any violation by Landlord of the
provisions of this Lease so long as the requirements of Section 26(C) are met.
E. Choice of Law. This Lease shall be construed and enforced in
--------------
accordance with the intemal laws of the State of California
<PAGE>
F. Gender: Singular. Plural. When the context of this Lease requires.
------------------------
the neuter gender includes the masculine, the feminine. a partnership or
corporation or joint venture. and the singular includes the plural.
G. Binding, Effect. The covenants and agreement contained in this
---------------
Lease shall be binding on the parties hereto and on their respective successors
and assigns to the extent this Lease is assignable.
H. No Waiver. The waiver by Landlord of any breach of any term.
---------
condition or covenant of this Lease shall not be deemed to be a waiver of such
provision or any subsequent breach of the same or any other term. condition or
covenant of this Lease. The subsequent acceptance of Rent by Landlord shall not
be deemed to be a waiver of any preceding breach at the time of acceptance of
such payment. No term, condition or covenant of this Lease shall be deemed to
have been waived by Landlord unless such waiver is in writing signed by
Landlord. No act done by Landlord or Landlord's Agents during the Term,
including without limitation. any agreement to accept surrender of the Premises
or to amend or modify this Lease, shall be deemed to be binding on Landlord,
unless such act or thing shall be evidenced by a written instrument signed by an
officer of Landlord, or a party designated in writing by Landlord to Tenant as
so authorized to act. The delivery of keys to Landlord or Landlord's Agents
shall not operate as a termination of this Lease or a surrender of the Premises.
No payment by Tenant or receipt by Landlord of a lesser amount than the Rent,
and all other amounts owing, shall be deemed to be other than on account of the
earliest stipulated Rent or other amounts nor shall any endorsement or statement
on any check or any letter accompanying any check or payment as rent be deemed
an accord and satisfaction; Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such Rent or pursue any
other remedy available to Landlord under this Lease, at law or in equity.
I. Entire Agreement. This Lease is the entire agreement between the
----------------
parties, and there are no agreements or representations between the parties
except as expressed in this Lease. No subsequent change or addition to this
Lease shall be binding unless in writing and signed by Landlord and Tenant.
J. Authority. Each individual executing this Lease on behalf of Tenant
---------
warrants that he or she is duly authorized to execute and deliver this Lease on
behalf of Tenant in accordance with its governing documents and that this Lease
is binding upon Tenant in accordance with its terms. Landlord, at its option,
may require a copy of such written authorization to enter into this Lease.
K. Exhibits. All exhibits, amendments. riders and addendums attached
--------
to this Lease are hereby incorporated in and made a part of it.
L. Standard of Reason. Whenever the consent or approval of Landlord or
------------------
Tenant is called for in this Lease with respect to any matter, or Landlord has
discretion as to the satisfaction or acceptability of any matter. such consent
or approval shall not be unreasonably withheld and such discretion must be
exercised reasonably, except as otherwise expressly permitted herein.
<PAGE>
M. No Personal Liability. The obligations of Tenant under this Lease
---------------------
do not constitute personal obligations of the individual directors, officers or
shareholders of Tenant, and Landlord shall not seek recourse against any of the
same or any of their respective personal assets for satisfaction of any
liability in respect to this Lease.
N. Lease Summary. The Lease Summary attached to this Lease is intended
-------------
to provide general information only. In the event of any inconsistency between
the Lease Summary and the specific provisions of this Lease, the specific
provisions of this Lease shall prevail.
THIS LEASE is effective as of the date the last signatory necessary to
execute the Lease shall have executed this Lease.
LANDLORD: JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY, a Massachusetts corporation
By:
--------------------------------
Its:
-------------------------------
TENANT: INTERNATIONAL NETWORK SERVICES, INC.,
a California corporation
By:
--------------------------------
(Signature)
By:
--------------------------------
(Name Printed)
Its:
-------------------------------
(Title)
Date:
------------------------------
<PAGE>
EXHIBIT 10.7
August 14, 1998
Kevin J. Laughlin
Chief Financial Officer
International Network Services
328 Gibraltar Drive
Sunnyvale, CA 94089
Dear Mr. Laughlin:
This letter is to confirm that Wells Fargo Bank, National Association
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available to International Network Services ("Borrower") the following
described credit accommodations (each, a "Credit" and collectively, the
"Credits"):
1. A commitment under which Bank will make advances to Borrower from time
to time up to and including February 14, 2000, not to exceed the aggregate
principal amount of Ten Million Dollars ($10,000,000.00) ("Term Commitment"),
the proceeds of which shall be used for working capital requirements and to
purchase capital equipment, and which shall be converted on February 14, 2000,
to a term loan, as described more fully below.
2. A facility under which Bank will enter into foreign exchange contracts
for the account of Borrower from time to time up to and including February 14,
2000, not to exceed at any time the maximum principal amount of Ten Million
United States Dollars (US$10,000,000.00) ("Foreign Exchange Facility").
I. CREDIT TERMS:
1. TERM COMMITMENT:
(a) Term Commitment Note. Borrower's obligation to repay advances under
--------------------
the Term Commitment shall be evidenced by a promissory note substantially in the
form of Exhibit A attached hereto ("Term Commitment Note"), all terms of which
are incorporated herein by this reference.
(b) Limitation on Borrowings. Notwithstanding any other provision of this
------------------------
letter, at no time during the Term-Out Period (as defined in the Term Commitment
Note) shall the aggregate
<PAGE>
International Network Services
August 14, 1998
Page 2
amount of all outstanding borrowings under the Term Commitment for equipment
purchases exceed a maximum of one hundred percent (100%) of the cost of each
item of equipment purchased with the proceeds thereof, as evidenced by the
seller's invoice. Upon request by Bank, Borrower shall provide to Bank copies of
all invoices showing Borrower's cost (after all rebates and discounts)of all
equipment purchased with proceeds of the Term Commitment.
(c) Borrowing and Repayment. Borrower may from time to time during the
-----------------------
period in which Bank will make advances under the Term Commitment borrow and
partially or wholly repay its outstanding borrowings, and reborrow, subject to
all the limitations, terms and conditions contained herein; provided however,
that the total outstanding borrowings under the Term Commitment shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above. The principal amount of the Term Commitment shall be repaid in
accordance with the provisions of the Term Commitment Note.
(d) Prepayment. Borrower may prepay principal on the Term Commitment
----------
solely in accordance with the provisions of the Term Commitment Note.
2. FOREIGN EXCHANGE FACILITY:
(a) Foreign Exchange Facility. Bank will enter into foreign exchange
-------------------------
contracts for the account of Borrower under the Foreign Exchange Facility for
the purchase and/or sale by Borrower in United States dollars of foreign
currencies designated by Borrower; provided however, that the aggregate of all
outstanding foreign exchange contracts shall not at any time exceed the maximum
principal amount available under the Foreign Exchange Facility, as set forth
above. No foreign exchange contract shall be executed which extends beyond
February 14, 2000. Borrower shall have a "Delivery Limit" under the Foreign
Exchange Facility not to exceed at any time the aggregate principal amount of
Two Million United States Dollars (US$2,000,000.00), which Delivery Limit
reflects the maximum principal amount of Borrower's foreign exchange contracts
which may mature during any one (1) day period. All foreign exchange
transactions shall be subject to the additional terms of a Foreign Exchange
Agreement, substantially in the form of Exhibit B attached hereto ("Foreign
Exchange Agreement"), all terms of which are incorporated herein by this
reference.
(b) Settlement. Each foreign exchange contract under the Foreign Exchange
----------
Facility shall be settled on its maturity date
<PAGE>
International Network Services
August 14, 1998
Page 3
by Bank's debit to any demand deposit account maintained by Borrower with Bank.
3. COLLATERAL:
As security for all indebtedness of Borrower to Bank under the Term
Commitment, Borrower shall grant to Bank security interests of first priority in
all Borrower's accounts receivable and other rights to payment, general
intangibles, inventory, equipment, and fixtures upon the conversion of the
outstanding principal balance to a fully amortizing term loan.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.
II. INTEREST/FEES:
1. Interest. The outstanding principal balance of the Term Commitment
--------
shall bear interest at the rate of interest set forth in the Term Commitment
Note.
2. Computation and Payment. Interest shall be computed on the basis of a
-----------------------
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Term Commitment Note.
3. Collection of Payments. Borrower authorizes Bank to collect all
----------------------
principal and interest due under each Credit by charging Borrower's demand
deposit account number 4038-141768 with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay all such
sums when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this letter and
shall continue in full force and
<PAGE>
International Network Services
August 14, 1998
Page 4
effect until the full and final payment, and satisfaction and discharge, of all
obligations of Borrower to Bank subject to this letter.
1. Legal Status. Borrower is a corporation, duly organized and existing
------------
and in good standing under the laws of the state of California, and is qualified
or licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
2. Authorization and Validity. This letter, the Term Commitment Note,
--------------------------
Foreign Exchange Agreement, and each other document, contract or instrument
deemed necessary by Bank to evidence any extension of credit to Borrower
pursuant to the terms and conditions hereof, or now or at any time hereafter
required by or delivered to Bank in connection with this letter (collectively,
the "Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.
3. No Violation. The execution, delivery and performance by Borrower of
------------
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of the Articles of Incorporation or By-
Laws of Borrower, or result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Borrower is a party
or by which Borrower may be bound.
4. Litigation. There are no pending, or to the best of Borrower's
----------
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower other than those disclosed by Borrower to Bank in writing
prior to the date hereof.
5. Correctness of Financial Statement. The financial statement of
----------------------------------
Borrower dated June 30, 1998, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in
<PAGE>
International Network Services
August 14, 1998
Page 5
accordance with generally accepted accounting principles consistently applied.
Since the date of such financial statement there has been no material adverse
change in the condition or operation of Borrower, nor has Borrower mortgaged,
pledged, granted a security interest in or otherwise encumbered any of its
assets or properties except in favor of Bank or as otherwise permitted by Bank
in writing.
6. Income Tax Returns. Borrower has no knowledge of any pending
------------------
assessments or adjustments of its income tax payable with respect to any year.
7. No Subordination. There is no agreement, indenture, contract or
----------------
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.
8. Permits, Franchises. Borrower possesses, and will hereafter possess,
-------------------
all permits, consents, approvals, franchises and licenses required and all
rights to trademarks, trade names, patents and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
9. ERISA. Borrower is in compliance in all material respects with all
-----
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended or recodified from time to time ("ERISA"); Borrower has not violated any
provision of any defined employee pension benefit plan (as defined in ERISA)
maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event,
as defined in ERISA, has occurred and is continuing with respect to any Plan
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
10. Other Obligations. Borrower is not in default on any obligation for
-----------------
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
11. Environmental Matters. Except as disclosed by Borrower to Bank in
---------------------
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto,
<PAGE>
International Network Services
August 14, 1998
Page 6
which govern or affect any of Borrower's operations and/or properties, including
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986,
the Federal Resource Conservation and Recovery Act of 1976, and the Federal
Toxic Substances Control Act, as any of the same may be amended, modified or
supplemented from time to time. None of the operations of Borrower is the
subject of any federal or state investigation evaluating whether any remedial
action involving a material expenditure is needed to respond to a release of any
toxic or hazardous waste or substance into the environment. Borrower has no
material contingent liability in connection with any release of any toxic or
hazardous waste or substance into the environment.
IV. CONDITIONS:
1. Conditions of Initial Extension of Credit. The obligation of Bank to
-----------------------------------------
grant any of the Credits is subject to fulfillment to Bank's satisfaction of all
of the following conditions:
(a) Documentation. Bank shall have received each of the Loan Documents,
-------------
duly executed and in form and substance satisfactory to Bank.
(b) Financial Condition. There shall have been no material adverse change,
-------------------
as determined by Bank, in the financial condition or business of Borrower, nor
any material decline, as determined by Bank, in the market value of any
collateral required hereunder or a substantial or material portion of the assets
of Borrower.
(c) Insurance. Borrower shall have delivered to Bank evidence of insurance
---------
coverage on all Borrower's property, in form, substance, amounts, covering risks
and issued by companies satisfactory to Bank, and where required by Bank, with
loss payable endorsements in favor of Bank.
2. Conditions of Each Extension of Credit. The obligation of Bank to make
--------------------------------------
each extension of credit requested by Borrower hereunder shall be subject to the
fulfillment to Bank's satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein and in
----------
each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
<PAGE>
International Network Services
August 14, 1998
Page 7
warranties had been made on and as of each such date, and on each such date, no
default hereunder, and no condition, event or act which with the giving of
notice or the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which
-------------
may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long Bank remains committed to extend credit to
Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
1. Punctual Payment. Punctually pay all principal, interest, fees or
----------------
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein.
2. Accounting Records. Maintain adequate books and records in accordance
------------------
with generally accepted accounting principles consistently applied, and permit
any representative of Bank, at any reasonable time, to inspect, audit and
examine such books and records, to make copies of the same and inspect the
properties of Borrower.
3. Financial Statements. Provide to Bank all of the following, in form
--------------------
and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year, an
audited financial statement of Borrower, prepared by a certified public
accountant acceptable to Bank, to include balance sheet, income statement, and
Borrower's filed 10K;
(b) not later than 45 days after and as of the end of each fiscal quarter,
a financial statement of Borrower, prepared by Borrower, to include balance
sheet, income statement, and Borrower's 10Q for each such fiscal quarter; and
(c) from time to time such other information as Bank may reasonably
request.
<PAGE>
International Network Services
August 14, 1998
Page 8
4. Compliance. Preserve and maintain all licenses, permits, governmental
----------
approvals, rights, privileges and franchises necessary for the conduct of its
business; and comply with the provisions of all documents pursuant to which
Borrower is organized and/or which govern Borrower's continued existence and
with the requirements of all laws, rules, regulations and orders of a
governmental agency applicable to Borrower and/or its business.
5. Insurance. Maintain and keep in force insurance of the types and in
---------
amounts customarily carried in lines of business similar to that of Borrower,
including but not limited to fire, extended coverage, public liability, flood,
property damage and workers' compensation, with all such insurance carried with
companies and in amounts satisfactory to Bank, and deliver to Bank from time to
time at Bank's request schedules setting forth all insurance then in effect.
6. Facilities. Keep all properties useful or necessary to Borrower's
----------
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
7. Taxes and Other Liabilities. Pay and discharge when due any and all
---------------------------
indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except (a) such as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
8. Financial Condition. Maintain Borrower's financial condition as
-------------------
follows using generally accepted accounting principles consistently applied and
used consistently with prior practices (except to the extent modified by the
definitions herein):
(a) Tangible Net Worth measured as of the end of each fiscal quarter not at
any time less than $85,000,000.00 plus seventy-five percent (75%) of current
quarterly positive net income, commencing June 30, 1998 with no provision for
net losses, with "Tangible Net Worth" defined as the aggregate of total
stockholders' equity plus subordinated debt less any intangible assets.
<PAGE>
International Network Services
August 14, 1998
Page 9
(b) Total Liabilities divided by Tangible Net Worth not at any time greater
than 1.0 to 1.0, with "Total Liabilities" defined as the aggregate of current
liabilities and non-current liabilities less subordinated debt, and with
"Tangible Net Worth" as defined above.
(c) Quick Ratio not at any time less than 1.25 to 1.0, with "Quick Ratio"
defined as the aggregate of unrestricted cash, unrestricted marketable
securities and receivables convertible into cash divided by total current
liabilities.
(d) Net income after taxes not less than $1.00 on a trailing four quarter
basis with no more than two consecutive quarters of loss, determined as of each
fiscal quarter.
(e) During the Term-Out Period (as defined in the Term Commitment Note),
EBITDA Coverage Ratio not less than 2.0 to 1.0 as of each fiscal year end, with
"EBITDA" defined as net profit before tax plus interest expense (net of
capitalized interest expense), depreciation expense and amortization expense,
and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of
total interest expense plus the prior period current maturity of long-term debt
and the prior period current maturity of subordinated debt.
12. Other Indebtedness. Not create, incur, assume or permit to exist any
------------------
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except leases.
13. Dividends, Distributions. Not declare or pay any dividend or
------------------------
distribution in cash exceeding twenty-five percent (25%) of Borrower's earnings
for said fiscal year.
14. Year 2000 Compliance. Perform all acts reasonably necessary to ensure
--------------------
that (a) Borrower and any business in which Borrower holds a substantial
interest, and (b) all customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all of Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems.
As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial
<PAGE>
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August 14, 1998
Page 10
condition of such entity, will properly perform date sensitive functions before,
during and after the year 2000. Borrower shall, immediately upon request,
provide to Bank such certifications or other evidence of Borrower's compliance
with the terms hereof as Bank may from time to time require.
15. Other Accounts. On or before December 31, 1998, Borrower shall
--------------
establish, and at all times thereafter during the term of this Agreement,
Borrower shall maintain its primary banking services relationship with Bank,
including cash management and foreign exchange services required by Borrower.
Borrower acknowledges and agrees that the establishment and maintenance of such
banking relationship is an essential element in Bank providing the Term
Commitment on the terms set out in this letter and in the Term Commitment Note.
VI. DEFAULT, REMEDIES:
1. Default, Remedies. Upon the violation of any term or condition of any
-----------------
of the Loan Documents, or upon the occurrence of any default or defined event of
default under any of the Loan Documents: (a) all indebtedness of Borrower under
each of the Loan Documents, any term thereof to the contrary notwithstanding,
shall at Bank's option and without notice become immediately due and payable
without presentment, demand, protest or notice of dishonor, all of which are
expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any
further credit under any of the Loan Documents shall immediately cease and
terminate; and (c) Bank shall have all rights, powers and remedies available
under each of the Loan Documents, or accorded by law, including without
limitation the right to resort to any or all security for any of the Credits and
to exercise any or all of the rights of a beneficiary or secured party pursuant
to applicable law. All rights, powers and remedies of Bank may be exercised at
any time by Bank and from time to time after the occurrence of any such breach
or default, are cumulative and not exclusive, and shall be in addition to any
other rights, powers or remedies provided by law or equity.
2. No Waiver. No delay, failure or discontinuance of Bank in exercising
---------
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind by Bank of
any breach of or default under
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Page 11
any of the Loan Documents must be in writing and shall be effective only to the
extent set forth in such writing.
VII. MISCELLANEOUS:
1. Notices. All notices, requests and demands which any party is required
-------
or may desire to give to any other party under any provision of this letter must
be in writing delivered to each party at its address first set forth above, or
to such other address as any party may designate by written notice to all other
parties. Each such notice, request and demand shall be deemed given or made as
follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon
the earlier of the date of receipt or three (3) days after deposit in the U.S.
mail, first class and postage prepaid; and (c) if sent by telecopy, upon
receipt.
2. Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank
-----------------------------------
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
letter and the other Loan Documents, Bank's continued administration hereof and
thereof, and the preparation of amendments and waivers hereto and thereto, (b)
the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower
or any other person or entity.
3. Successors, Assignment. This letter shall be binding upon and inure to
----------------------
the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Bank's rights and
benefits under each of the Loan Documents. In connection therewith Bank may
disclose all
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Page 12
documents and information which Bank now has or hereafter may acquire relating
to any of the Credits, Borrower or its business, [any guarantor hereunder or the
business of such guarantor,] or any collateral required hereunder.
4. Entire Agreement; Amendment. This letter and the other Loan Documents
---------------------------
constitute the entire agreement between Borrower and Bank with respect to the
Credits and supersede all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof. This letter may be amended
or modified only in writing signed by each party hereto.
5. No Third Party Beneficiaries. This letter is made and entered into for
----------------------------
the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.
6. Severability of Provisions. If any provision of this letter shall be
--------------------------
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.
7. Governing Law. This letter shall be governed by and construed in
-------------
accordance with the laws of the State of California.
8. Arbitration.
-----------
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this letter. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
<PAGE>
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August 14, 1998
Page 13
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
---------------
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute
shall apply to any arbitration proceeding. All discovery activities shall be
expressly limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. (S)91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
----------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (I) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award
<PAGE>
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August 14, 1998
Page 14
recovery of all costs and fees, to impose sanctions and to take such other
actions as they deem necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the California Rules of Civil Procedure or
other applicable law. Any Dispute in which the amount in controversy is
$5,000,000 or less shall be decided by a single arbitrator who shall not render
an award of greater than $5,000,000 (including damages, costs, fees and
expenses). By submission to a single arbitrator, each party expressly waives any
right or claim to recover more than $5,000,000. Any Dispute in which the amount
in controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary, in
---------------
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (I) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding anything
--------------------------------------------
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (I) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
<PAGE>
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August 14, 1998
Page 15
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
<PAGE>
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August 14, 1998
Page 16
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on September 1,
1998, unless this letter is acknowledged by Borrower and returned to Bank on or
before that date.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Sherill Swan
-----------------------
Sherrill Swan
Vice President
Acknowledged and accepted as of _______________:
INTERNATIONAL NETWORK SERVICES
By: /s/ Kevin J. Laughlin
---------------------------
Kevin J. Laughlin
Chief Financial Officer
<PAGE>
International Network Services
August 14, 1998
Page 17
TERM COMMITMENT NOTE
$10,000,000.00 Palo Alto, California
August 14, 1998
FOR VALUE RECEIVED, the undersigned INTERNATIONAL NETWORK SERVICES
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 400 Hamilton Avenue, P.O. Box 150, Palo
Alto, California or at such other place as the holder hereof may designate, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Ten Million Dollars ($10,000,000.00), or so much thereof as
may be advanced and be outstanding, with interest thereon during the Revolving
Period (defined below), to be computed on each advance from the date of its
disbursement (computed on the basis of a 360-day year, actual days elapsed)
either (i) at a fluctuating rate per annum one-half of one percent (0.50%) below
the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum
determined by Bank to be one and one-half percent (1.50%) above Bank's LIBOR in
effect on the first day of the applicable Fixed Rate Term. When interest is
determined in relation to the Prime Rate, each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is announced
within Bank. With respect to each LIBOR option selected hereunder, Bank is
hereby authorized to note the date, principal amount, interest rate and Fixed
Rate Term applicable thereto and any payments made thereon on Bank's books and
records (either manually or by electronic entry) and/or on any schedule attached
to this Note, which notations shall be prima facie evidence of the accuracy of
the information noted.
A. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each:
1. "Business Day" means any day except a Saturday, Sunday or any other day
designated as a holiday under Federal or California statute or regulation.
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August 14, 1998
Page 18
2. "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2), or three (3) months, as designated by Borrower,
during which the outstanding principal balance of this Note bears interest
determined in relation to Bank's LIBOR ; provided however, that no Fixed Rate
Term commencing during the Revolving Period shall extend beyond February 14,
2000, and no Fixed Rate Term commencing during the Term Out Period shall extend
beyond February 14, 2003. If any Fixed Rate Term would end on a day which is
not a Business Day, then such Fixed Rate Term shall be extended to the next
succeeding Business Day.
3. "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
-------------------------------
100% - LIBOR Reserve Percentage
(a) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of
the Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as Bank in its discretion deems appropriate including,
but not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.
(b) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
5. "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office in San Francisco as its Prime
Rate, with the understanding that the
<PAGE>
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August 14, 1998
Page 19
Prime Rate is one of Bank's base rates and serves as the basis upon which
effective rates of interest are calculated for those loans making reference
thereto, and is evidenced by the recording thereof after its announcement in
such internal publication or publications as Bank may designate.
6. "Revolving Period" shall mean the period commencing on the date of this
Note and ending on the earlier of February 14, 2000 or the date Bank's
obligation to make advances on this Note terminates.
7. "Term-Out Period" means the period commencing February 15, 2000 and
ending February 14, 2003.
B. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the first day of each month, commencing September 1, 1998.
2. Selection of Interest Rate Options. At any time any portion of the
----------------------------------
outstanding principal balance of this Note bears interest determined in relation
to Bank's LIBOR , it may be continued by Borrower at the end of the Fixed Rate
Term applicable thereto so that it bears interest determined in relation to the
Prime Rate or in relation to Bank's LIBOR for a new Fixed Rate Term designated
by Borrower. At any time any portion of the outstanding principal balance of
this Note bears interest determined in relation to the Prime Rate, Borrower may
convert all or a portion thereof so that it bears interest determined in
relation to Bank's LIBOR for a Fixed Rate Term designated by Borrower. At the
time Borrower wishes to select the LIBOR option for the outstanding principal
balance hereof at the end of each Fixed Rate Term, Borrower shall give Bank
notice specifying (a) the interest rate option selected by Borrower and (b) if
the LIBOR option is selected, the length of the applicable Fixed Rate Term.
Any such notice may be given by telephone so long as, with respect to each LIBOR
option selected by Borrower, (i) Bank receives written confirmation from
Borrower not later than three (3) Business Days after such telephone notice is
given, and (ii) such notice is given to Bank prior to 10:00 a.m., California
time, on the first day of the Fixed Rate Term. For each LIBOR option requested
hereunder, Bank will quote the applicable fixed rate to
<PAGE>
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August 14, 1998
Page 20
Borrower at approximately 10:00 a.m., California time, on the first day of the
Fixed Rate Term. If Borrower does not immediately accept the rate quoted by
Bank, any subsequent acceptance by Borrower shall be subject to a
redetermination by Bank of the applicable fixed rate; provided however, that if
Borrower fails to accept any such rate by 11:00 a.m., California time, on the
Business Day such quotation is given, then the quoted rate shall expire and Bank
shall have no obligation to permit a LIBOR option to be selected on such day. If
no specific designation of interest is made at the time any advance is requested
hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have
made a Prime Rate interest selection for such advance or the principal amount to
which such Fixed Rate Term applied. Notwithstanding the foregoing, during the
Term-Out Period, selection of interest rate by Borrower must apply to the entire
outstanding principal balance.
3. Additional LIBOR Provisions.
---------------------------
(a) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining Bank's LIBOR , then Bank
shall promptly give notice thereof to Borrower. If such notice is given and
until such notice has been withdrawn by Bank, than (i) no new LIBOR option may
be selected by Borrower, and (ii) any portion of the outstanding principal
balance hereof which bears interest determined in relation to Bank's LIBOR ,
subsequent to the end of the Fixed Rate Term applicable thereto, shall bear
interest determined in relation to the Prime Rate.
(b) If any law, treaty, rule, regulation or determination of a court
or governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(i) to make LIBOR options available hereunder, or (ii) to maintain interest
rates based on Bank's LIBOR , then in the former event, any obligation of Bank
to make available such unlawful LIBOR options shall immediately be canceled,
and in the latter event, any such unlawful LIBOR -based interest rates then
outstanding shall be converted, at Bank's option, so that interest on the
portion of the outstanding principal balance subject thereto is determined in
relation to the Prime Rate; provided however, that if any such Change in Law
shall permit any LIBOR -based interest rates to remain in effect until the
expiration of the Fixed Rate Term applicable thereto, then such
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August 14, 1998
Page 21
permitted LIBOR-based interest rates shall continue in effect until the
expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing
events, Borrower shall pay to Bank immediately upon demand such amounts as may
be necessary to compensate Bank for any fines, fees, charges, penalties or other
costs incurred or payable by Bank as a result thereof and which are attributable
to any LIBOR options made available to Borrower hereunder, and any reasonable
allocation made by Bank among its operations shall be conclusive and binding
upon Borrower.
(c) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(i) subject Bank to any tax, duty or other charge with respect
to any LIBOR options, or change the basis of taxation of
payments to Bank of principal, interest, fees or any other
amount payable hereunder (except for changes in the rate of
tax on the overall net income of Bank);
(ii) impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against
assets held by, deposits or other liabilities in or for the
account of, advances or loans by, or any other acquisition
of funds by any office of Bank; or
(iii) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available
to Borrower hereunder, any
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August 14, 1998
Page 22
reasonable allocation made by Bank among its operations shall be conclusive and
binding upon Borrower.
4. Default Interest. From and after the maturity date of this Note, or such
----------------
earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to three percent (3%) above
the higher of (i) the Prime Rate or (ii) the rate of interest then in effect
applicable to this Note.
C. BORROWING, REPAYMENT, AND PREPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
-----------------------
Revolving Period borrow and partially or wholly repay its outstanding borrowings
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided that the total borrowings under this Note shall not exceed the
principal amount stated above. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for any Borrower, which
balance may be endorsed hereon from time to time by the holder.
(b) Required Principal Payments during Term-Out Period. Provided Borrower
--------------------------------------------------
is not in default under the terms of this Note, the Letter Agreement, or any
other document or instrument entered in connection with this Note, and at
Borrower's option, the outstanding principal balance of this Note on February
14, 2000 shall be amortized over three (3) years, and thereafter principal shall
be payable on the first day of each month in equal successive installments over
said amortization term, commencing March 1, 2000, and continuing up to and
including February 1, 2003, with a final installment consisting of all remaining
unpaid principal due and payable in full on February 14, 2003.
(c) Advances. Advances hereunder, to the total amount of the principal sum
--------
stated above, may be made by the holder at the oral or written request of
(i)_____________________________________________________________, or (ii)
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August 14, 1998
Page 23
any person, with respect to advances deposited to the credit of any account of
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by Borrower.
2. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
Bank's LIBOR , with such payments applied to the oldest Fixed Rate Term first.
3. Prepayment.
----------
(a) Prime Rate. Borrower may prepay principal on any portion of this
----------
Note which bears interest determined in relation to the Prime Rate at any time,
in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
-----
which bears interest determined in relation to Bank's LIBOR at any time and in
the minimum amount of One Hundred Thousand Dollars ($100,000); provided
however, that if the outstanding principal balance of such portion of this Note
is less than said amount, the minimum prepayment amount shall be the entire
outstanding principal balance thereof. In consideration of Bank providing this
prepayment option to Borrower, or if any such portion of this Note shall become
due and payable at any time prior to the last day of the Fixed Rate Term
applicable thereto by acceleration or otherwise, Borrower shall pay to Bank
immediately upon demand a fee which is the sum of the discounted monthly
differences for each month from the month of prepayment through the month in
which such Fixed Rate Term matures, calculated as follows for each such month:
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August 14, 1998
Page 24
(i) Determine the amount of interest which would have accrued
---------
each month on the amount prepaid at the interest rate
applicable to such amount had it remained outstanding until
the last day of the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount
--------
of interest which would have accrued for the same month on
the amount prepaid for the remaining term of such Fixed Rate
Term at Bank's LIBOR , as applicable, in effect on the date
of prepayment for new loans made for such term and in a
principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than
zero, discount that difference by Bank's LIBOR used in (ii)
above.
Borrower acknowledges that prepayment of such amount will result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum four percent (4%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed).
D. EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges when
due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against Borrower, any guarantor of this
Note or any general partner or joint venturer in
<PAGE>
International Network Services
August 14, 1998
Page 25
any Borrower which is a partnership or a joint venture (with each such
guarantor, general partner and/or joint venturer referred to herein as a "Third
Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of
the United States Code, as amended or recodified from time to time, or under any
similar or other law relating to bankruptcy, insolvency, reorganization or other
relief for debtors; the appointment of a receiver, trustee, custodian or
liquidator of or for any part of the assets or property of Borrower or any Third
Party Obligor; Borrower or any Third Party Obligor becomes insolvent, makes a
general assignment for the benefit of creditors or is generally not paying its
debts as they become due; or any attachment or like levy on any property of
Borrower or any Third Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which Borrower or any Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by Borrower or any Third Party Obligor
to Bank proves to be incorrect, false or misleading in any material respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of Borrower or any Third Party Obligor other than in the ordinary course
of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
(h) Borrower shall fail to maintain the loan to collateral Ratio applicable
to the collateral for this Note, as required in
<PAGE>
International Network Services
August 14, 1998
Page 26
the Letter Agreement dated August 14, 1998 (the "Letter Agreement") and all
replacements, modifications or amendments thereof, and shall fail to comply with
the collateral requirements of the Letter Agreement within ten (10) days after
written notice by Bank of such noncompliance.
E. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are expressly
waived by Borrower, and the obligation, if any, of the holder to extend any
further credit hereunder shall immediately cease and terminate. Borrower shall
pay to the holder immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of the holder's in-house
counsel), incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, and including any of the foregoing incurred in connection with any
bankruptcy proceeding relating to Borrower.
2. Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
3. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note on the date
first written above.
<PAGE>
International Network Services
August 14, 1998
Page 27
INTERNATIONAL NETWORK SERVICES
by:___________________________
Title:________________________
<PAGE>
EXHIBIT 10.8
INTERNATIONAL NETWORK SERVICES
1998 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option
--------------------
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 will be Nonstatutory Stock Options.
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 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 to such entity.
(i) "Director" means a member of the Board.
--------
-1-
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers, 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. 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) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option grant. The Notice of Grant
is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant to the
------
Plan, that is not intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code and the regulations promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
-2-
<PAGE>
(r) "Option Exchange Program" means a program whereby outstanding
-----------------------
options are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(t) "Optionee" means the holder of an outstanding Option granted under
--------
the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1998 Nonstatutory Stock Option Plan.
----
(w) "Service Provider" means an Employee including an Officer,
----------------
Consultant or Director.
(x) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option 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).
4. Administration of the Plan.
--------------------------
(a) Administration. The Plan shall be administered by (i) the Board
--------------
or (ii) 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 of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
-3-
<PAGE>
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options 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 the shares of Common
Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(x) 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;
(xi) to modify or amend each Option (subject to Section 14(b)
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;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xiii) to determine the terms and restrictions applicable to
Options;
(xiv) 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 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; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
-4-
<PAGE>
(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.
5. Eligibility. Options may be granted to Service Providers; provided,
-----------
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers and Directors.
6. Limitation. Neither the Plan nor any Option 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.
7. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for ten (10) years, unless sooner terminated
under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated 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.
(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. 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 cashless
exercise program implemented by the Company in connection with the Plan;
-5-
<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) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator and
set forth in the Option Agreement. 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 12 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, but only within
such period of time as is specified in the Option Agreement, and only to the
extent that the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the
Option Agreement). In the absence of a specified time in the Option Agreement,
the Option shall remain exercisable for three (3) months following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
-6-
<PAGE>
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash 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. Non-Transferability of Options. Unless determined otherwise by the
-------------------------------
Administrator, an Option 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
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. 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 the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, 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
-7-
<PAGE>
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option.
(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 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 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 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, the
Optionee shall fully vest in and have the right to exercise the Option as to
all of the Optioned Stock, including Shares as to which it would not otherwise
be vested or exercisable. If an Option 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 shall be fully vested and exercisable for a period of fifteen (15)
days from the date of such notice, and the Option shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option
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, 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, for each Share of Optioned Stock to
be solely common stock of the successor corporation or its Parent equal in
fair market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is
-8-
<PAGE>
determined by the Administrator. Notice of the determination shall be provided
to each Optionee within a reasonable time after the date of such grant.
-9-
<PAGE>
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-10-
<PAGE>
EXHIBIT 10.9
INTERNATIONAL NETWORK SERVICES
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered into
by and between _______________________________________ (the "Employee") and
International Network Services (the "Company"), effective as of
___________________________________, 1998 (the "Effective Date").
R E C I T A L S
---------------
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to Employee and can cause Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide Employee with an incentive to continue his
employment and to motivate Employee to maximize the value of the Company upon a
Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provides Employee with enhanced financial security and
provides incentive and encouragement to Employee to remain with the Company
notwithstanding the possibility of a Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the date that
-----------------
all obligations of the parties hereto with respect to this Agreement have been
satisfied.
2. At-Will Employment. The Company and Employee acknowledge that
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If Employee's employment terminates for any reason, including
(without limitation) any termination prior to a Change of Control, Employee
shall not be entitled to any payments, benefits, damages, awards or compensation
other than as provided by this Agreement, or as may otherwise be available in
<PAGE>
accordance with the Company's established employee plans and practices or
pursuant to other agreements with the Company.
3. Change of Control. In the event of a Change of Control (as defined in
-----------------
Section 6(c) below), the unvested portion of any stock option(s) and/or shares
of restricted stock held by Employee under any Company plan ("Unvested Awards")
shall vest and become exercisable as follows: (i) Unvested Awards that are
scheduled to vest in full within twelve (12) months of the Change of Control
shall vest in full as of such Change of Control; (ii) Unvested Awards that are
scheduled to vest in full more than twelve (12) months after the Change of
Control shall accelerate and become vested as to all but the last twelve (12)
months thereof, which shall vest over the twelve (12)-month period beginning on
the date of the Change of Control, subject to Employee's continued employment
with the Company, except as otherwise provided herein.
4. Severance Benefits.
------------------
(a) Involuntary Termination Other than for Cause; Voluntary
-------------------------------------------------------
Termination for Good Reason; Death; Permanent and Total Disability. If, within
- ------------------------------------------------------------------
twelve (12) months following a Change of Control, Employee's employment is (i)
involuntarily terminated by the Company other than for Cause (as defined herein)
or (ii) voluntarily terminated by Employee for Good Reason (as defined herein),
then Employee shall receive the following severance benefits from the Company:
(1) Lump-Sum Severance Payment. A cash payment in an amount equal
--------------------------
to one hundred percent (100%) of Employee's Annual Compensation (as defined
herein);
(2) Continued Employee Benefits. One hundred percent (100%)
---------------------------
Company-paid health, dental and vision insurance coverage at the same level of
coverage as was provided to such employee immediately prior to the Change of
Control (the "Company-Paid Coverage"). If such coverage included Employee's
dependents immediately prior to the Change of Control, such dependents shall
also be covered at Company expense. Company-Paid Coverage shall continue until
the earlier of (i) twelve (12) months from the date of termination, or (ii) the
date upon which Employee and his dependents become covered under another
employer's group health, dental, vision, long-term disability or life insurance
plans that provide Employee and his dependents with comparable benefits and
levels of coverage. For purposes of Title X of the Consolidated Budget
Reconciliation Act of 1985 ("COBRA"), the date of the "qualifying event" for
Employee and his or her dependents shall be the date of the Employee's
termination.
(3) Option and Restricted Stock Accelerated Vesting. One hundred
-----------------------------------------------
percent (100%) of the unvested portion of any stock option or restricted stock
held by Employee granted to Employee under any Company plan prior to the Change
of Control shall automatically be accelerated in full so as to become completely
vested.
(b) Timing of Severance Payments. Any severance payment to which
----------------------------
Employee is entitled under Section 4(a)(1) shall be paid by the Company to
Employee in cash and in full, not later than thirty (30) calendar days following
the Termination Date.
<PAGE>
(c) Voluntary Resignation other than for Good Reason; Termination
-------------------------------------------------------------
For Cause; Death; Permanent and Total Disability. If Employee's employment
- ------------------------------------------------
terminates (i) by reason of Employee's voluntary resignation other than for Good
Reason, (ii) by the Company for Cause, or (iii) due to Employee's death or
"permanent and total disability" (as such term is defined under Internal Revenue
Code Section 22(e)(3) or any successor provision), then Employee shall not be
entitled to receive severance or other benefits except for those (if any) as may
then be established under the Company's then existing severance and benefits
plans and practices or pursuant to other agreements with the Company.
(d) Termination Apart from Change of Control. In the event Employee's
----------------------------------------
employment is terminated for any reason, either prior to the occurrence of a
Change of Control or after the eighteen (18)-month period following a Change of
Control, then Employee shall be entitled to receive severance and any other
benefits only as may then be established under the Company's existing severance
and benefits plans and practices or pursuant to other agreements with the
Company.
-3-
<PAGE>
5. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Annual Compensation. "Annual Compensation" means an amount equal
-------------------
to the sum of Employee's (i) annual Company salary at the highest rate in effect
in the twelve months immediately preceding Employee's Termination Date, and (ii)
100% of Employee's annual target bonus as in effect immediately prior to the
Change of Control or, if greater, 100% of Employee's annual target bonus as of
the Termination Date.
(b) Cause. "Cause" shall mean either (i) any act of personal
-----
dishonesty taken by Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of Employee,
(ii) Employee's conviction of or entry of a plea of nolo contendere to a felony
or a crime causing material harm to the Company, (iii) a willful act by Employee
which constitutes gross misconduct and which is injurious to the Company, or
(iv) following delivery to Employee of a written demand for performance from
the Company which describes the basis for the Company's belief that Employee has
not substantially performed his duties, continued substantial violations by
Employee of Employee's obligations to the Company which are demonstrably willful
and deliberate on Employee's part.
(c) Change of Control. "Change of Control" means the occurrence of
-----------------
any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act) ("Beneficial
Owner"), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the total voting power represented by the Company's
then outstanding voting securities;
(ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative vote of at least a
majority of the Incumbent Directors at the time of such election or nomination;
(iii) The consummation of a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or the entity that
controls the Company or controls such surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity or the entity that controls the Company or
controls such surviving entity outstanding immediately after such merger or
consolidation; or
-4-
<PAGE>
(iv) The consummation of the sale or disposition by the Company at
least seventy-five percent (75%) of the Company's assets.
(d) Good Reason. "Good Reason" shall mean (i) without Employee's
-----------
express written consent, a material reduction of Employee's duties, title,
authority or responsibilities, relative to Employee's duties, title, authority
or responsibilities as in effect immediately prior to such reduction, or the
assignment to Employee of such reduced duties, title, authority or
responsibilities; provided, however, that a reduction in duties, title,
authority or responsibilities solely by virtue of the Company being acquired and
made part of a larger entity (as, for example, when the Chief Financial Officer
of International Network Services remains as such following a Change of Control
and is not made the Chief Financial Officer of the acquiring corporation) shall
not constitute "Good Reason"; (ii) without Employee's express written consent, a
material reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to Employee
immediately prior to such reduction; (iii) a reduction by the Company in the
base salary of Employee as in effect immediately prior to such reduction; (iv) a
material reduction by the Company in the kind or level of employee benefits,
including bonuses, to which Employee was entitled immediately prior to such
reduction with the result that Employee's overall benefits package is materially
reduced; (v) the relocation of Employee to a facility or a location more than
thirty-five (35) miles from Employee's then present location, without Employee's
express written consent; (vi) any purported termination of Employee by the
Company which is not effected for total and permanent disability or for Cause,
or any purported termination for which the grounds relied upon are not valid; or
(vii) the failure of the Company to obtain the assumption of this agreement by
any successors contemplated in Section 7(a) below.
(e) Termination Date. "Termination Date" shall mean (i) if this
----------------
Agreement is terminated by the Company for total and permanent disability,
thirty (30) days after notice of termination is given to Employee (provided that
Employee shall not have returned to the performance of Employee's duties on a
full-time basis during such thirty (30)-day period), (ii) if Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives Employee notice of termination, Employee notifies the Company
that a dispute exists concerning the termination or the benefits due pursuant to
this Agreement, then the Termination Date shall be the date on which such
dispute is finally determined, either by mutual written agreement of the
parties, or a by final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected), or (iii) if the Agreement is terminated by Employee, the date
on which Employee delivers the notice of termination to the Company.
6. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner
-5-
<PAGE>
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this Section 7(a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of Employee hereunder shall inure to the benefit of, and be enforceable by,
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
7. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of Employee hereunder or preclude Employee from
asserting such fact or circumstance in enforcing his rights hereunder.
8. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. Employee shall not be required to mitigate
-------------------
the amount of any payment contemplated by this Agreement, nor shall any such
payment be reduced by any earnings that Employee may receive from any other
source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by Employee and by an authorized officer of the Company
(other than Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
-6-
<PAGE>
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement represents the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Withholding. All payments made pursuant to this Agreement will be
-----------
subject to withholding of applicable income and employment taxes to the extent
required by law.
(g) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year set forth below.
COMPANY INTERNATIONAL NETWORK SERVICES
By:
---------------------------------------------
Title:
------------------------------------------
EMPLOYEE
------------------------------------------------
------------------------------------------------
-7-
<PAGE>
EXHBIIT 13.1
Selected Financial Data
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations"
appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year Ended June 30,
STATEMENT OF OPERATIONS DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $169,678 $99,275 $44,092 $15,549 $ 7,565
Operating expenses:
Professional personnel 75,659 44,826 19,892 6,654 3,319
Sales and marketing 23,479 14,440 7,990 3,843 2,774
General and administrative 19,106 13,435 5,049 1,890 1,588
Other costs 26,504 14,711 6,447 2,346 1,248
---------------------------------------------
Total operating expenses 144,748 87,412 39,378 14,733 8,929
---------------------------------------------
Income (loss) from operations 24,930 11,863 4,714 816 (1,364)
Interest and other, net 1,909 1,059 3 17 (30)
---------------------------------------------
Income (loss) before income taxes 26,839 12,922 4,717 833 (1,394)
Provision for income taxes 10,729 5,040 1,840 58 --
---------------------------------------------
Net income (loss) 16,110 7,882 2,877 775 (1,394)
Accretion of Mandatorily Redeemable Convertible Preferred Stock -- 270 1,135 883 403
---------------------------------------------
Net income (loss) attributable to Common Stock $ 16,110 $ 7,612 $ 1,742 $ (108) $(1,797)
=============================================
Net income (loss) attributable to Common Stock per share:
Basic $0.51 $0.30 $0.21 $(0.02) $(0.26)
Diluted $0.47 $0.23 $0.06 $(0.02) $(0.26)
Shares used to compute net income (loss) attributable to Common Stock
per share(1):
Basic 31,457 25,477 8,469 7,053 6,793
Diluted 34,323 32,923 28,974 7,053 6,793
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used to compute net income (loss) per share.
<PAGE>
Selected Financial Data
(continued)
The following table sets forth, for the periods indicated, certain financial
data as a percent of revenue:
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional personnel 44.6 45.2 45.1 42.8 43.9
Sales and marketing 13.8 14.6 18.1 24.7 36.6
General and administrative 11.3 13.5 11.5 12.1 21.0
Other costs 15.6 14.8 14.6 15.1 16.5
------------------------------------------------
Total operating expenses 85.3 88.1 89.3 94.7 118.0
------------------------------------------------
Income (loss) from operations 14.7 11.9 10.7 5.3 (18.0)
Interest and other, net 1.1 1.1 -- 0.1 (0.4)
------------------------------------------------
Income (loss) before income taxes 15.8 13.0 10.7 5.4 (18.4)
Provision for income taxes 6.3 5.1 4.2 0.4 --
------------------------------------------------
Net income (loss) 9.5 7.9 6.5 5.0 (18.4)
Accretion of Mandatory Redeemable
Convertible Preferred Stock -- 0.2 2.5 5.7 5.3
------------------------------------------------
Net income (loss) attributable
to Common Stock 9.5% 7.7% 4.0% (0.7)% (23.7)%
================================================
<CAPTION>
(in thousands) June 30,
BALANCE SHEET DATA 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and investments $ 68,729 $40,770 $ 869 $4,161 $ 2,414
Working capital 70,626 48,122 6,060 6,103 2,850
Total assets 129,587 77,736 18,072 9,967 5,112
Notes payable, less current portion -- -- 316 732 447
Shareholders' equity(2) 97,937 66,238 9,883 6,897 3,117
</TABLE>
(2) Includes Mandatorily Redeemable Convertible Preferred Stock which converted
to Common Stock upon the consummation of the Company's initial public
offering on September 18, 1996.
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion 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 below in "Future Results Subject to Risks"
and under "Risk Factors" in the Company's Annual Report on Form 10-K.
ANNUAL RESULTS OF OPERATIONS
Revenue
Substantially all of the Company's revenue is derived from fees for professional
services. The Company also derives revenue from electronic services; however,
such revenue has not been significant to date. Revenue was $44.1 million, $99.3
million and $169.7 million in fiscal 1996, 1997 and 1998, respectively,
representing increases over the prior fiscal year of 183.6%, 125.2% and 70.9%,
respectively. Revenue increased primarily due to an increase in the number and
size of professional services projects and secondarily due to an increase in
average billing rates per hour. One client accounted for approximately 17.0% of
revenue in fiscal 1996. No one client accounted for more than 10% of revenue in
fiscal 1997 or 1998.
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 $19.9 million, $44.8 million and $75.7 million in fiscal 1996, 1997 and
1998, respectively, representing increases over the prior fiscal year of 198.9%,
125.3% and 68.8%, respectively. These increases were attributable primarily to
an increase in the number of network systems engineers. The number of network
systems engineers included in professional personnel was 344, 651 and 1,053 at
the end of fiscal 1996, 1997 and 1998, respectively. Professional personnel
expenses were 45.1%, 45.2% and 44.6% of revenue in fiscal 1996, 1997 and 1998,
respectively. Professional personnel expenses were lower as a percent of revenue
in fiscal 1998 than fiscal 1996 and 1997 due primarily to an increase in billing
rates for professional services, and to a lesser extent, an increase in
electronic services revenue as a percent of sales.
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 $8.0 million, $14.4 million and $23.5 million in fiscal 1996, 1997 and
1998, respectively, representing increases over the prior fiscal year of 107.9%,
80.7% and 62.6%, respectively. The increase in each year was due primarily to
the growth in the number of sales and marketing employees and to commissions
resulting from increased revenue. Sales and marketing expenses were 18.1%, 14.6%
and 13.8% of revenue in fiscal 1996, 1997 and 1998, respectively. The decreases,
on a percentage basis, were due primarily to leverage of the field management
organization and changes in compensation plans.
General and Administrative General and administrative expenses consist of
expenses associated with executive staff, finance, corporate facilities,
information systems and human resources. General and administrative expenses
were $5.0 million, $13.4 million and $19.1 million in fiscal 1996, 1997 and
1998,
<PAGE>
respectively, representing increases over the prior fiscal year of 167.1%,
166.1% and 42.2%, respectively. The increase in each year was due primarily to
the growth in the number of personnel necessary to support the Company's growth
in operations. General and administrative expenses were 11.5%, 13.5%, and 11.3%
of revenue in fiscal 1996, 1997 and 1998, respectively. The increase from fiscal
1996 to fiscal 1997 on a percentage basis was due primarily to expanding the
Company's infrastructure to support the growth in operations. The decrease from
fiscal 1997 to fiscal 1998 on a percentage basis was due primarily to the
leverage of infrastructure.
Other Costs Other costs consist primarily of travel and entertainment,
certain recruiting and professional development expenses, field facilities,
depreciation, expensed equipment and supplies related to the delivery of
professional services and electronic services. Other costs also include research
and development expenses related to electronic services. Other costs were $6.4
million, $14.7 million and $26.5 million in fiscal 1996, 1997 and 1998,
respectively, representing increases over the prior fiscal year of 174.8%,
128.2% and 80.2%, respectively. Other costs increased each year due primarily to
increases in the number of professional personnel employed, and to a lesser
extent, to the costs of field offices. Other costs were 14.6%, 14.8%, and 15.6%
of revenue in fiscal 1996, 1997 and 1998, respectively. Other costs, as a
percent of revenue, increased primarily due to increases in recruiting,
professional development and travel and entertainment expenses. Research and
development expenses were $879,000, $1.4 million, and $1.7 million in fiscal
1996, 1997 and 1998, respectively. Research and development expenses were 2.0%,
1.4%, and 1.0% of revenue in fiscal 1996, 1997 and 1998, respectively. These
increases in absolute dollars were a result of the development of, and
enhancements to, the Company's electronic services.
Interest and Other, Net
Interest and other, net consists of interest income and expense. Interest income
consists primarily of interest on cash, cash equivalents, investments and notes
receivable from shareholders. Interest expense consists of interest associated
with bank borrowings. Interest expense was $108,000 and $85,000, in fiscal 1996
and 1997, respectively. Interest and other, net were $3,000, $1.1 million, and
$1.9 million in fiscal 1996, 1997 and 1998, respectively. The increase in fiscal
1997 to $1.1 million or 1.1% of revenue compared to $3,000 or less than 0.1% of
revenue in fiscal 1996 was due primarily to increases in funds available for
investment and the pay-off of all outstanding debt as a result of the Company
completing its initial public offering in September 1996. The increase in fiscal
1998 to $1.9 million was due primarily to an increase in funds available for
investment.
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 effective tax rates for fiscal 1996, 1997 and 1998 were
39%, 39% and 40%, respectively. The Company's effective tax rates approximated
the combined federal and state statutory rates, net of federal benefits.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through a
combination of cash generated from operations, the sale of equity and debt
securities and bank borrowings. In September 1996, the Company completed its
initial public offering of 2,875,000 shares of Common Stock at $16 per share,
which resulted in net proceeds to the Company of approximately $41.7 million. At
June 30, 1998, the Company had $68.7 million in cash, cash equivalents and
investments. The Company had a revolving line of credit with a bank that
provided for borrowings up to $10 million which expired in August 1998. Advances
under the revolving line of credit bore interest at the bank's prime rate. As of
June 30, 1998, there were no borrowings under
<PAGE>
the revolving line of credit, and the Company was in compliance with all
covenants and restrictions. In August 1998, the Company entered into an
unsecured revolving line of credit agreement with another bank which provides
for borrowings up to $10 million. Borrowings under the revolving line of credit
bear interest at the bank's prime rate less 1/2%. The credit facility expires in
February 2000 and contains customary covenants and restrictions.
Net cash provided by operations was $347,000, $4.5 million and $25.2 million in
fiscal 1996, 1997 and 1998, respectively. The increase in cash provided by
operations each year 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 effect on the Company's business, operating results and financial
condition. In fiscal 1998, cash provided by operations also resulted from
prepayments for services resulting in an increase in deferred revenue of $11.3
million. Net cash used in investing activities was $4.4 million, $29.1 million
and $27.9 million in fiscal 1996, 1997 and 1998, respectively. Cash used in
investing activities in fiscal 1997 and 1998 primarily reflected net investment
activity and, to a lesser extent, purchases of computer equipment and software.
Cash used in fiscal 1996 reflected purchases of equipment and software. Net cash
provided by financing activities in fiscal 1996 of $760,000 primarily reflected
borrowings under the Company's credit facility, which were principally offset by
repayments on long-term debt. Net cash provided by financing activities in
fiscal 1997 and 1998 of $43.2 million and $11.6 million, respectively, primarily
resulted from the issuance of Common Stock and a warrant to purchase Common
Stock.
The Company believes that existing cash and investment balances combined with
cash generated from operations and amounts available under the credit facility,
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. 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.
FUTURE RESULTS SUBJECT TO RISKS
Since professional services 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 would 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 inability to obtain new projects; the overestimation
of resources required to complete new or ongoing projects; and the timing and
extent of training, weather related shut-downs, vacation days and holidays. The
Company's clients are generally able to reduce or cancel their use of the
Company's professional services without penalty and with little or no notice.
The Company generally provides services to clients without a long-term
commitment. 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, an
inability to hire and retain sufficient numbers of network systems engineers and
account managers, reductions in billing rates, write-offs of billings, or
services performed at no charge as a result of the Company's failure to meet
it's client's expectations, competition, the development and introduction of new
services, decrease or slowdown in the growth of the networking industry as a
whole and general economic conditions. The Company's operating results may also
fluctuate based upon the ongoing market acceptance and the timing and size of
orders for electronic
<PAGE>
services which are difficult to forecast. If an unanticipated order shortfall
for electronic services occurs, the Company's operating results could be
materially adversely affected, particularly because margins are higher on
electronic services than professional services. In addition, the Company plans
to continue to expand its operations based on sales forecasts by hiring
additional network systems engineers, account managers 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 may 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.
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 has experienced, and may in the future 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. The Company has experienced, and may in the future
experience increasing compensation costs for its network systems engineers. Any
inability of the Company to offset such increases in compensation of network
systems engineers through higher billing rates or reduction of other expenses to
offset such increases, 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.
The Company's future success will also depend in large part on the development
of new business by the Company's account managers, who solicit new business and
manage relationships with existing clients. As a result, the Company's success
will depend on its ability to attract and retain qualified account managers who
have an understanding of the Company's business and the industry it serves.
Competition for account managers is intense and the Company has experienced, and
may in the future experience, high rates of turnover among its account managers.
In addition, integration of new account managers into the Company's business can
be lengthy. Any inability of the Company to attract and retain a sufficient
number of account managers or to integrate new account managers into the
Company's operations on a timely basis, would impair the Company's ability to
obtain projects from new and existing clients which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Furthermore, the network services industry is comprised of a large number of
participants and is subject to rapid change and intense competition. With
respect to professional services, the Company faces competition from system
integrators, value added resellers ("VARs"), local and regional network services
firms, telecommunications providers, network equipment vendors, software vendors
and computer systems vendors, many of which have significantly greater
financial, technical and marketing resources and greater name recognition, and
generate greater service revenue than does the Company. With respect to
electronic services, the Company faces competition primarily from software
vendors. The Company has faced, and
<PAGE>
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, the Company has a significant relationship with Cisco Systems
("Cisco") and believes that maintaining and enhancing this relationship is
important to the Company's business. 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.
Year 2000
The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties. Failure
of the Company's and/or third parties' computer systems could have a material
adverse impact on the Company's ability to conduct its business. The Company is
currently reviewing its products, its internal computer systems and systems of
third parties on which the Company relies for handling the year 2000. Based on
information available to date, the Company believes that it will be able to
complete its year 2000 compliance review and make any necessary modifications to
its products and internal systems prior to the end of 1999. The Company further
believes that such review and modification, if any, will not require the Company
to incur any material charge to operating expenses over the next several years.
The Company is also seeking confirmation from third parties that their systems
are year 2000 compliant or that plans are being developed to address the year
2000 problem. However, there can be no assurance that such third-party systems
will be year 2000 compliant or that the failure of such systems to be year 2000
compliant would not have a material adverse effect on the Company's financial
position or results of operations. The Company believes its current electronic
service offering, EnterprisePro, is year 2000 compliant.
Market Risk
The Company invests in marketable securities in accordance with its investment
policy. The primary objectives of the Company's investment policy are to
preserve principal, maintain proper liquidity to meet operating needs and
maximize yields. The Company's investment policy specifies credit quality
standards for the Company's investments and limits the amount of credit exposure
to any single issue, issuer or type of investment. The maximum allowable
maturity of a single issue is two years and the maximum allowable average
maturity of the portfolio is one year.
At the end of fiscal 1998, the Company had an investment portfolio of fixed
income securities totaling $40.5 million, excluding those classified as cash and
cash equivalents. The Company's investments consist primarily of money market
funds and various municipal obligations. These securities are classified as
available for sale and are recorded on the balance sheet at fair market value
with unrealized gains or losses reported as a separate component of
shareholders' equity. Unrealized losses are charged against income when a
decline in fair market value is determined to be other than temporary. The
specific identification method is used to determine the cost of securities sold.
Gains and losses on marketable securities are included in net interest income
when realized.
<PAGE>
The investment portfolio is subject to interest rate risk and will fall in value
in the event market interest rates increase. If market interest rates were to
increase immediately and uniformly by 50 basis points (approximately 10% of
current rates in the portfolio) from levels as of June 30, 1998, the fair market
value of the portfolio would decline by approximately $200,000. However, the
Company has the ability to hold its fixed income securities to maturity and may
avoid recognizing a decline in income or cash flows.
To date, revenue from foreign sources and operations in foreign locations have
not been material. In addition, substantially all of the revenue has been
received in U.S. dollars. As such, the current foreign exchange rate risk is
considered minimal, and the Company believes that sudden significant changes in
foreign currency exchange rates would not have a material impact on its
operating results or financial position. However, a component of the Company's
long-term strategy is to expand into international markets. As a result,
fluctuations in currency exchange rates in the future could have a material
adverse effect on the Company's business, operating results and financial
condition.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except share data) June 30,
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,262 $19,455
Short-term investments 25,319 12,075
Accounts receivable, net 42,717 23,949
Deferred income taxes 2,172 1,150
Prepaid expenses and other assets 3,806 2,991
-------- -------
Total current assets 102,276 59,620
-------- -------
Property and equipment, net 11,092 8,073
Deferred income taxes 1,071 803
Investments 15,148 9,240
-------- -------
$129,587 $77,736
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,564 $ 3,208
Accrued compensation and employee benefits 12,195 6,935
Accrued liabilities 4,009 801
Deferred revenue 11,882 554
-------- -------
Total current liabilities 31,650 11,498
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, no par value, 75,000,000 shares
authorized; 32,919,060 and 32,076,600 shares issued
and outstanding 75,259 60,897
Notes receivable from shareholders (675) (1,937)
Cumulative translation adjustments (35) --
Retained earnings 23,388 7,278
-------- -------
Total shareholders' equity 97,937 66,238
-------- -------
$129,587 $77,736
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended June 30,
(in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
Revenue $169,678 $99,275 $44,092
Operating expenses:
Professional personnel 75,659 44,826 19,892
Sales and marketing 23,479 14,440 7,990
General and administrative 19,106 13,435 5,049
Other costs 26,504 14,711 6,447
-------- ------- -------
Total operating expenses 144,748 87,412 39,378
-------- ------- -------
Income from operations 24,930 11,863 4,714
Interest and other, net 1,909 1,059 3
-------- ------- -------
Income before income taxes 26,839 12,922 4,717
Provision for income taxes 10,729 5,040 1,840
-------- ------- -------
Net income 16,110 7,882 2,877
Accretion of Mandatorily Redeemable
Convertible Preferred Stock -- 270 1,135
-------- ------- -------
Net income attributable to
Common Stock $ 16,110 $ 7,612 $ 1,742
-------- ------- -------
Net income attributable to
Common Stock per share:
Basic $0.51 $0.30 $0.21
Diluted $0.47 $0.23 $0.06
--------------------------
Shares used to compute net income
attributable to Common Stock
per share:
Basic 31,457 25,477 8,469
Diluted 34,323 32,923 28,974
--------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accretion
Notes of Mandatorily
Receivable Redeemable Cumulative Retained
Common Stock From Convertible Translation Earnings/
(in thousands, except share data) Shares Amount Shareholders Preferred Stock Adjustments (Deficit) Total
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
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, net 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)
Accretion of Mandatorily Redeemable
Convertible
Preferred Stock -- -- -- (270) -- -- (270)
Issuance of Common Stock in public
offering, net of
issuance costs 2,875,000 41,709 -- -- -- -- 41,709
Conversion of Mandatorily Redeemable
Convertible
Preferred Stock in connection with
IPO 16,734,889 9,973 -- 2,724 -- -- 12,697
Issuance of Common Stock upon
exercise of stock
options and warrants, net 824,479 244 (57) -- -- -- 187
Issuance of Common Stock under
employee stock
purchase plan 215,357 2,983 -- -- -- -- 2,983
Income tax benefit related to stock
option exercises -- 3,594 -- -- -- -- 3,594
Net income -- -- -- -- -- 7,882 7,882
--------------------------------------------------------------------------------------------
Balance at June 30, 1997 32,076,600 60,897 (1,937) -- -- 7,278 66,238
Issuance of Common Stock upon
exercise of stock
options and warrants, net 423,093 1,079 -- -- -- -- 1,079
Issuance of Common Stock under
employee stock
purchase plan 419,367 6,047 -- -- -- -- 6,047
Repayment of Shareholders' Notes -- -- 1,262 -- -- -- 1,262
Issuance of Warrant -- 3,188 -- -- -- -- 3,188
Translation adjustments -- -- -- -- (35) -- (35)
Income tax benefit related to stock
option exercises -- 4,048 -- -- -- -- 4,048
Net income -- -- -- -- -- 16,110 16,110
--------------------------------------------------------------------------------------------
Balance at June 30, 1998 32,919,060 $75,259 $ (675) $ -- $(35) $23,388 $97,937
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,110 $ 7,882 $ 2,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,776 3,821 1,786
Deferred income taxes (1,290) (1,096) (857)
Tax benefit from employee stock plans 4,048 3,594 --
Changes in assets and liabilities:
Accounts receivable (18,768) (12,128) (7,657)
Prepaid expenses and other assets (815) (2,605) (270)
Accounts payable 356 1,300 1,256
Accrued liabilities 8,468 3,782 2,942
Deferred revenue 11,328 (58) 270
--------------------------------------
Net cash provided by operating activities 25,213 4,492 347
--------------------------------------
Cash flows from investing activities:
Purchases of property and equipment, net (8,795) (7,755) (4,399)
Purchases of investments (38,884) (25,414) --
Sales of investments 19,732 4,099 --
--------------------------------------
Net cash used for investing activities (27,947) (29,070) (4,399)
--------------------------------------
Cash flows from financing activities:
Borrowings (payments) under line of credit -- (1,000) 1,000
Payments on notes payable -- (715) (349)
Proceeds from issuance of Common Stock, net 10,314 44,879 109
Repayment of shareholder notes receivable 1,262 -- --
--------------------------------------
Net cash provided by financing activities 11,576 43,164 760
--------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (35) -- --
--------------------------------------
Increase (decrease) in cash and cash equivalents 8,807 18,586 (3,292)
Cash and cash equivalents at beginning of period 19,455 869 4,161
--------------------------------------
Cash and cash equivalents at end of period $ 28,262 $19,455 $ 869
======================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ 97 $ 103
Cash paid for income taxes $ 8,177 $ 7,599 $ 2,470
Non-cash transactions:
Issuance of Common Stock in exchange for notes
receivable from shareholders $ -- $ 57 $ 1,850
Conversion of Mandatorily Redeemable Convertible
Preferred Stock to Common Stock $ -- $ 9,973 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
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 the full life cycle of a
network and maintains expertise in the most complex network technologies and
multivendor environments. The Company operates in one industry segment. To date,
the Company has provided limited professional services to certain of its United
States based clients in foreign locations.
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.
Principles of consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries in the United Kingdom
and Canada. All intercompany accounts and transactions have been eliminated.
Foreign currency translation The functional currency of the Company's wholly-
owned foreign subsidiaries are the local currencies. Assets and liabilities of
these subsidiaries are translated into U.S. dollars at exchange rates in effect
at the balance sheet date. Income and expense items are translated at average
exchange rates for the period. Accumulated net translation adjustments are
recorded in shareholders' equity. Foreign exchange transaction gains and losses
were not material in all periods presented and are included in the results of
operations.
Cash equivalents and marketable securities Cash equivalents consist of highly
liquid investments with original maturities of three months or less. The
company's marketable securities are classified as available-for-sale and, at the
balance sheet date, are reported at fair market value which approximates cost.
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. Prior to the quarter ended September 30, 1997, the Company
offered its electronic services to clients only as a service which resulted in
revenue recognition over the contract term. The Company currently allows clients
to separately purchase a software license, software subscription and support
services as an alternative to the service contract. When the client purchases
electronic services in components, the Company recognizes service and software
subscription revenue over the term of the contract, installation revenue when
installation is complete and software license revenue when software is shipped,
there are no significant obligations remaining, and collection is probable.
<PAGE>
Operating expenses
Professional personnel Professional personnel expenses consist primarily of
compensation and benefits of the Company's employees engaged in the delivery of
professional and electronic services.
Other costs Other costs consist primarily of travel and entertainment,
certain recruiting and professional development expenses, field facilities,
depreciation, expensed equipment and supplies related to the delivery of
professional services and electronic services. Other costs also include research
and development expenses related to electronic services. Research and
development expenses were $1.7 million, $1.4 million, and $879,000 for fiscal
years 1998, 1997 and 1996, respectively. All research and development expenses,
including software development costs, are charged to expense as incurred.
Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
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 based 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 financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, cash equivalents, short-term and long-term
investments, and accounts receivable. The Company's investments consist of
investment grade securities managed by qualified professional investment
managers. The investment policy limits the Company's exposure to concentration
of credit risk. The Company's accounts receivable is derived from revenue earned
from customers primarily located in the United States. The Company maintains an
allowance for potential credit losses based upon the expected collectibility of
all accounts receivable; historically, such losses have been immaterial. In
fiscal 1998 and 1997, no one customer accounted for more than 10% of revenues.
In fiscal 1996, one customer accounted for 17% of revenue.
Net income per share
Basic net income per share is computed by dividing net income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net income per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
income per share, the average stock price for the period is used in determining
the number of shares to be purchased from the exercise of stock options. All
prior period net income per share data presented has been restated in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share."
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the years ended
June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
Net Per Net Per Net Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available for
common shareholders $16,110 31,457 $0.51 $7,612 25,477 $0.30 $1,742 8,469 $0.21
Effects of dilutive
securities:
Common stock equivalents -- 1,947 -- -- 2,023 -- -- 1,873 --
Common stock subject to
repurchase -- 919 -- -- 1,937 -- -- 1,897 --
Preferred stock -- -- -- -- 3,486 -- -- 16,735 --
Diluted EPS:
Net income available for
common shareholders
----------------------------------------------------------------------------------------------------
assuming dilution $16,110 34,323 $0.47 $7,612 32,923 $0.23 $1,742 28,974 $0.06
====================================================================================================
</TABLE>
Antidilutive Options Options to purchase 380,883, 151,141 and 30,593 shares
of common stock were outstanding during fiscal 1998, 1997 and 1996,
respectively, but were not included in the computations of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares.
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company's policy is to grant options with an exercise price
equal to the quoted market price of the Company's stock on the grant date.
Accordingly, no compensation cost has been recognized in the Company's
consolidated statements of income. The Company has provided additional pro forma
disclosures as required under Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation" (see Note 6).
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.
Recently issued accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose statements. The
disclosure requirements of SFAS 130 are first expected to be reflected in the
Company's first quarter of fiscal 1999 interim statements. In June 1997, the
FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. SFAS 131 will be first reflected in the Company's fiscal
1999 Annual Report. Adoption of SFAS 130 and SFAS 131 will not impact the
Company's consolidated financial position, results of operations or cash flows.
<PAGE>
In October 1997 and March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition" and 98-4, "Deferral of Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition," which the Company is required to adopt for
transactions entered into in the fiscal year beginning July 1, 1998. SOP 97-2
and SOP 98-4 provide guidance on recognizing revenue on software transactions
and supercede SOP 91-1. The Company believes that the adoption of SOP 97-2 and
SOP 98-4 will not have a significant impact on its current licensing or revenue
recognition practices.
In April 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on accounting
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. It also provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use. The Company is required to adopt SOP 98-1 by July 1,
2000 and does not expect it to have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
<TABLE>
<CAPTION>
2. BALANCE SHEET COMPONENTS
June 30,
(in thousands) 1998 1997
<S> <C> <C>
Accounts receivable:
Trade $44,185 $24,537
Less: allowance for doubtful accounts (1,468) (588)
-----------------
$42,717 $23,949
-----------------
Property and equipment:
Computer equipment and software $15,616 $12,389
Furniture, fixtures, and other 5,394 2,489
-----------------
21,010 14,878
Less: accumulated depreciation (9,918) (6,805)
-----------------
$11,092 $ 8,073
=================
</TABLE>
<PAGE>
3. INVESTMENTS
The carrying value of the Company's investment portfolio approximated fair value
at June 30, 1998. Cash equivalents and investments consist of the following:
<TABLE>
<CAPTION>
June 30,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Money market fund $ 10,284 $ 850
Municipal bonds 56,677 33,386
--------- --------
Total available-for-sale securities 66,961 34,236
Less amounts classified as cash equivalents (26,494) (12,921)
--------- --------
Total Investments $ 40,467 $ 21,315
--------- --------
</TABLE>
The contractual maturities of marketable securities at June 30, 1998, regardless
of their balance sheet classification, was as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Due in 1 year or less $25,319
Due in 1-2 years 15,148
-------
Total investments $40,467
=======
</TABLE>
Gross realized gains and losses from the sale of securities classified as
available-for-sale were not material for the years ended June 30, 1998, 1997 and
1996. For the purpose of determining gross realized gains and losses, the cost
of securities is based upon specific identification.
At June 30, 1998, marketable securities totaling $26.5 million were classified
as cash equivalents and included money market funds of $10.3 million and
municipal bonds of $16.2 million. At June 30, 1997, marketable securities
totaling $12.9 million were classified as cash equivalents and included money
market funds of $.9 million and municipal bonds of $12.0 million.
<PAGE>
4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Prior to the initial public offering in September 1996, the Company had
authorized 17,000,000 shares of Mandatorily Redeemable Convertible Preferred
Stock ("Preferred Stock"), of which 2,848,000, 6,849,000 and 7,037,967 shares
were designated as Series A, B and C, respectively. The Preferred Stock was
mandatorily redeemable anytime after May 19, 1998, at a per share price equal to
the original issue price plus a 10% accretion per year, compounded annually.
Accretion of Preferred Stock was $270,000 and $1.1 million in fiscal 1997 and
1996, respectively. All issued and outstanding shares of Preferred Stock were
converted into 16,734,889 shares of Common Stock upon the closing of the public
offering.
5. COMMON STOCK
Certain Common Stock option holders (see Note 6) have the right to exercise
unvested options, subject to a repurchase right held by the Company. At June 30,
1998, 549,992 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.
In September 1996, the Company completed its initial public offering of
2,875,000 shares of Common Stock at $16 per share, which resulted in net
proceeds to the Company of approximately $41.7 million.
During 1998, in conjunction with a services agreement with a client, the Company
received aggregate proceeds of approximately $3.2 million from the client for a
warrant to purchase up to 263,000 shares of Common Stock at $29.59 per share.
The warrant, which is exercisable immediately, expires on May 1, 2005. The
warrant was issued at fair market value.
At June 30, 1998, the Company had reserved 263,000, 565,276, and 9,895,802
shares of Common Stock for future issuance under a warrant purchase agreement,
its stock purchase plan and its stock option plans, respectively.
Notes receivable from shareholders
In exchange for the issuance of Common Stock upon exercise of options, the
Company has from time to time 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'
equity.
6. EMPLOYEE BENEFIT PLANS
Stock option plan
On July 18, 1996, the Company's Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan") as a successor to its 1992 Stock Option Plan (the "1992
Plan"). In addition to the 8,000,000 shares of Common Stock authorized for
issuance under the 1992 Plan, the Board of Directors authorized an additional
5,500,000 shares for issuance under the 1996 Plan. As of July 18, 1996, no
further option grants or stock issuances were made under the 1992 Plan, and all
option grants and stock issuances made during the remainder of fiscal 1997 were
made under the 1996 Plan. All outstanding options under the 1992 Plan were
incorporated into the 1996 Plan. The 1996 Plan provides for granting to
employees (including officers and directors) incentive stock options and for the
granting to employees, directors (including non-employee directors) and
consultants nonstatutory stock options and stock purchase rights.
On April 24, 1998, the Company's Board of Directors adopted the 1998
Nonstatutory Stock Option Plan (the "1998 Plan") and authorized 2,000,000 shares
for issuance under this plan. The 1998 Plan provides for granting nonstatutory
stock options to employees and consultants, excluding officers and directors.
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 24% on the first anniversary from the date of grant, and ratably
each month over the remaining thirty-eight months. Options expire over terms not
exceeding ten years from the date of grant.
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 with exercise prices greater than $23.00 per share 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.
<PAGE>
The following table summarizes stock option activity under the Company's 1992,
1996 and 1998 Plans:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Option Average Option Average Option Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,328,289 $ 9.40 2,169,460 $ 1.41 2,676,975 $ 0.06
Granted 4,754,100 24.61 2,594,794 18.66 3,486,350 1.64
Exercised (620,996) 2.84 (544,937) 0.43 (3,016,445) 0.65
Canceled (608,996) 16.61 (891,028) 22.65 (977,420) 0.61
Outstanding at end of year 6,852,397 $ 19.97 3,328,289 $ 9.40 2,169,460 $ 1.41
------------------------------------------------------------------------------------------------------
Options exercisable at
year end 1,034,639 $ 8.59 779,900 $ 1.29 720,910 $ 0.04
------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at June 30, 1998:
Options Outstanding
<TABLE>
<CAPTION>
Options Exercisable
Weighted Weighted Weighted
Shares Average Average Shares Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Price June 30, 1998 Contractual Life Price June 30, 1998 Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .01 to $ .08 165,397 6 years $ 0.07 129,907 $ 0.07
$ .25 to $ 1.50 358,043 7 years $ 0.90 205,749 $ 0.90
$ 2.50 to $ 8.00 538,512 7 years $ 5.70 278,160 $ 5.30
$12.00 to $17.75 1,016,533 9 years $15.02 217,718 $14.06
$19.75 to $23.62 2,628,882 9 years $21.06 200,925 $20.43
$26.44 to $34.00 2,145,030 10 years $29.28 2,180 $27.01
------------------------------------------------------------------------------------
$ .01 to $34.00 6,852,397 9 years $19.97 1,034,639 $ 8.59
------------------------------------------------------------------------------------
</TABLE>
Employee stock purchase plan
On July 18, 1996, the Company's Board of Directors adopted an Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by shareholders in
September 1996. Under the Purchase Plan, eligible employees can have up to 15%
of their earnings withheld through payroll deductions for the purchase of shares
of Common Stock at 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.
Each offering period is divided into four consecutive semi-annual purchase
periods. The initial offering period commenced on the effectiveness of the
Company's initial public offering in September 1996. A total of 1,200,000 shares
of Common Stock have been reserved for issuance under the Purchase Plan. There
were 419,367 and 215,357 shares issued under the Purchase Plan in fiscal 1998
and 1997, respectively.
Stock-based compensation
At June 30, 1998, the Company has three stock-based compensation plans, as
described above. The Company has elected to continue to apply APB Opinion 25 and
related Interpretations in accounting for its plans (see Note 1). Accordingly,
no compensation cost has been recognized for the 1992, 1996 and 1998 Plans or
Purchase Plan. Pro forma information regarding net income and earnings per
share is required by SFAS 123 for awards granted after June 30, 1994, as if
the Company had accounted for its stock-based awards to employees under the
fair value method of SFAS 123. The fair value of the Company's stock-based
awards to employees was estimated using a Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options
<PAGE>
that have no vesting restrictions and are fully transferable. The Black-
Scholes model requires the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's stock-based awards
to employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards to employees. The fair value of the
Company's stock-based awards to employees was estimated assuming no expected
dividends and the following weighted-average assumptions:
Options Purchase Plan
1998 1997 1996 1998 1997
------------------------------------------------------------------------
Expected life (years) 4.50 4.50 4.50 0.50 0.50
Expected volatility 55% 55% 55% 70% 75%
Risk-free interest rate 5.47% 6.32% 5.92% 5.23% 5.82%
Dividend yield -- -- -- -- --
The weighted average estimated fair value of options granted under the 1998,
1996 and 1992 Plans during 1998, 1997 and 1996 was $12.48, $8.23 and $0.81,
respectively. The weighted average estimated fair value of purchase rights
granted under the Purchase Plan during 1998 and 1997 was $7.94 and $7.65,
respectively. For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is generally amortized over the options' vesting
period (for options) and the six-month purchase period (for stock purchases
under the Purchase Plan). The Company's pro forma information follows:
<TABLE>
<CAPTION>
Year Ended June 30,
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) As reported $16,110 $7,612 $1,742
Pro forma $ 2,484 $ (895) $1,580
Basic income (loss) per share As reported $ 0.51 $ 0.30 $ 0.21
Pro forma $ 0.08 $(0.04) $ 0.19
Diluted income (loss) per share As reported $ 0.47 $ 0.23 $ 0.06
Pro forma $ 0.07 $(0.04) $ 0.05
</TABLE>
The above pro forma disclosures are not likely to be representative of pro
forma disclosures of future years.
<PAGE>
7. INCOME TAXES
The provision for income taxes for the years ended June 30, 1998, 1997 and 1996
consists of the following (in thousands):
Year Ended June 30,
1998 1997 1996
- ------------------------------------------------
Current:
Federal $ 9,437 $ 4,705 $1,940
State 2,351 1,266 757
Foreign 231 165 --
12,019 6,136 2,697
- ------------------------------------------------
Deferred:
Federal (1,140) (963) (757)
State (150) (133) (100)
- ------------------------------------------------
(1,290) (1,096) (857)
- ------------------------------------------------
$10,729 $ 5,040 $1,840
- ------------------------------------------------
The provision for income taxes differs from the amount determined by applying
the U.S. statutory income tax rate to income before income taxes as summarized
below (in thousands).
Year Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------
Tax provision at statutory rate $ 9,393 $4,523 $1,604
State income taxes, net of federal benefit 1,528 736 370
Change in valuation allowance -- -- (309)
Tax exempt interest (528) (271) --
Nondeductible expenses 235 83 98
Other 101 (31) 77
- -----------------------------------------------------------------------
$10,729 $5,040 $1,840
- -----------------------------------------------------------------------
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):
June 30,
1998 1997
- -------------------------------------------------
Depreciation $1,071 $ 964
State income taxes 375 201
Allowance for doubtful accounts 594 225
Reserves and other accruals 1,203 563
- -------------------------------------------------
$3,243 $1,953
- -------------------------------------------------
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space for its corporate headquarters and various field
offices and certain computer equipment. Future annual minimum lease payments
under all noncancellable operating leases as of June 30, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year
<S> <C>
1999 $ 4,890
2000 3,850
2001 2,667
2002 1,683
2003 2,246
Thereafter 867
-------
$15,336
=======
</TABLE>
Total rent expense for the years ended June 30, 1998, 1997 and 1996 was
approximately $3.0 million, $1.3 million, and $545,000, respectively.
During 1998, the Company entered into an agreement with a client under which the
Company is required to pay royalties to the client, if and when revenue from
specified services exceeds a predetermined base of revenue for those services.
No royalties have been recorded under this agreement in fiscal 1998.
9. LINES OF CREDIT
The Company had a $10 million line of credit with a bank which expired in August
1998. Borrowings under the line of credit bore interest at the bank's prime rate
(8.5% at June 30, 1998). There were no borrowings under the line of credit at
June 30, 1998. The line of credit was secured by substantially all of the
Company's assets and required the Company to comply with certain financial
covenants. At June 30, 1998, the Company was in compliance with these financial
covenants.
In August 1998, the Company entered into an unsecured revolving line of credit
agreement with another bank which provides for borrowings up to $10 million.
Borrowings under the revolving line of credit bear interest at the bank's prime
rate less 1/2%, or the Company has the option to borrow at a fixed rate at
1 1/2% above the bank's LIBOR for a fixed term of up to three months. Balances
outstanding at February 14, 2000 that have been used to fund capital equipment
may be converted to a 3-year term loan which provides for the same interest rate
options. The line of credit expires in February 2000 and requires the Company to
comply with certain financial convenants.
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
INTERNATIONAL NETWORK SERVICES
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of
International Network Services and its subsidiaries at June 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998, 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.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
San Jose, California
July 24, 1998,
except for Note 9 which is
as of August 25, 1998
<PAGE>
Stock Price History
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol INSS. The Company completed its initial public offering in September
1996. The following table sets forth the high and low sales prices for the
Common Stock during the quarter indicated:
High Low
---------------------------------------------------------
June 30, 1998 $40.63 $27.50
March 31, 1998 $29.88 $21.00
December 31, 1997 $24.00 $16.00
September 30, 1997 $28.75 $19.38
June 30, 1997 $27.75 $15.50
March 31, 1997 $39.00 $17.94
December 31, 1996 $51.88 $26.13
September 30, 1996 $39.75 $28.00
The Company had 243 shareholders of record as of September 1, 1998.
No dividends have been paid on the Common Stock and the Company has no plans to
pay dividends in the future.
<PAGE>
Quarterly Results of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1998 Three Months Ended Fiscal 1997
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1998 1998 1997 1997 1997 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $52,458 $45,241 $38,265 $33,714 $30,511 $26,539 $23,337 $18,888
Operating expenses:
Professional personnel 22,906 19,989 17,408 15,356 13,569 12,366 10,445 8,446
Sales and marketing 7,316 6,280 5,436 4,447 4,243 3,950 3,713 2,534
General and
administrative 5,840 5,092 4,238 3,936 3,723 3,520 3,387 2,805
Other costs 8,355 7,217 5,699 5,233 4,841 3,568 3,159 3,143
----------------------------------------------------------------------------------------------
Total operating
expenses 44,417 38,578 32,781 28,972 26,376 23,404 20,704 16,928
Income from operations 8,041 6,663 5,484 4,742 4,135 3,135 2,633 1,960
Interest and other, net 548 531 478 352 355 350 374 (20)
----------------------------------------------------------------------------------------------
Income before income taxes 8,589 7,194 5,962 5,094 4,490 3,485 3,007 1,940
Provision for income taxes 3,438 2,874 2,379 2,038 1,751 1,359 1,173 757
----------------------------------------------------------------------------------------------
Net income 5,151 4,320 3,583 3,056 2,739 2,126 1,834 1,183
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock -- -- -- -- -- -- -- 270
Net income attributable
to Common Stock $ 5,151 $ 4,320 $ 3,583 $ 3,056 $ 2,739 $ 2,126 $ 1,834 $ 913
=============================================================================================
Net income attributable
to Common Stock per
share:
Basic $ 0.16 $ 0.14 $ 0.11 $ 0.10 $ 0.09 $ 0.07 $ 0.06 $ 0.07
Diluted $ 0.15 $ 0.13 $ 0.11 $ 0.09 $ 0.08 $ 0.06 $ 0.05 $ 0.03
---------------------------------------------------------------------------------------------
Shares used to compute
net income attributable
to Common Stock per
share:
Basic 32,154 31,637 31,241 30,797 30,351 29,757 29,317 12,481
Diluted 35,267 34,417 33,705 33,901 33,809 33,687 33,743 30,452
---------------------------------------------------------------------------------------------
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 43.7 44.2 45.5 45.5 44.5 46.6 44.8 44.7
Sales and marketing 14.0 13.9 14.2 13.2 13.9 14.9 15.9 13.4
General and
administrative 11.1 11.2 11.1 11.7 12.2 13.3 14.5 14.9
Other costs 15.9 16.0 14.9 15.5 15.9 13.4 13.5 16.6
---------------------------------------------------------------------------------------------
Total operating
expenses 84.7 85.3 85.7 85.9 86.4 88.2 88.7 89.6
Income from operations 15.3 14.7 14.3 14.1 13.6 11.8 11.3 10.4
Interest and other, net 1.0 1.2 1.3 1.0 1.2 1.3 1.6 (0.1)
---------------------------------------------------------------------------------------------
Income before income taxes 16.3 15.9 15.6 15.1 14.8 13.1 12.9 10.3
Provision for income taxes 6.5 6.4 6.2 6.0 5.7 5.1 5.0 4.0
---------------------------------------------------------------------------------------------
Net income 9.8 9.5 9.4 9.1 9.1 8.0 7.9 6.3
Accretion of Mandatory
Redeemable Preferred Stock -- -- -- -- -- -- -- 15
---------------------------------------------------------------------------------------------
Net income attributable
to Common Stock 9.8% 9.5% 9.4% 9.1% 9.1% 8.0% 7.9% 4.8%
=============================================================================================
</TABLE>
<PAGE>
Corporate Information
<TABLE>
<CAPTION>
BOARD OF DIRECTORS ANNUAL MEETING
- ------------------ --------------
<S> <C> <C>
Donald K. McKinney Fred Farinacci The Annual Meeting of
Chairman of the Board Vice President, Shareholders will be held
Northwest Central on Thursday, October 29,
Vernon Anderson Operations 1998 at 1 p.m., local time,
Investor at the Company's headquarters,
Ruth Gaines located at: 1213 Innsbruck Drive,
David Carlick Vice President, Sunnyvale, California 94089.
President, Mid-Atlantic Operations
Power Agent FORM 10-K
Tom Holt ---------
John L. Drew Vice President and The Company's Form 10-K as filed
Director, President and Chief Information Officer with the Securities and Exchange
Chief Executive Officer Commission, is available, without
Kevin J. Laughlin charge upon written request to:
Larry Finch Vice President and Investor Relations
Partner, Sigma Partners Chief Financial Officer International Network Services
1213 Innsbruck Drive
Douglas Allred Peter Licata Sunnyvale, CA 94089
Senior Vice President, Vice President, Telephone: (408) 542-0182
Customer Advocacy Business Development
World Wide Systems, TRANSFER AGENT AND
Support, Services Alan Roach REGISTRAR
Cisco Systems, Inc. Vice President, ------------------
United Kingdom ChaseMellon Shareholder
MANAGEMENT Operations Services
- ---------- 85 Challenger Road
John L. Drew Ross Roesner Overpeck Centre
President and Vice President, Ridgefield Park, NJ 07660
Chief Executive Officer Electronic Services Development
and Engineering INDEPENDENT ACCOUNTANTS
Elvin Ambler -----------------------
Vice President, Ralph Troupe PricewaterhouseCoopers LLP
Marketing Vice President, 150 Almaden Boulevard
Eastern Operations San Jose, CA 95113
David Butze
Vice President, Steve Umphreys LEGAL COUNSEL
North American Field Vice President, -------------
Operations Human Resources Wilson Sonsini Goodrich
& Rosati
Ted Case 650 Page Mill Road
Vice President, Palo Alto, CA 94034
Southwest Central
Operations
</TABLE>
<PAGE>
Offices
HEADQUARTERS GEORGIA OHIO
1213 Innsbruck Dr., Atlanta Cleveland
Sunnyvale, CA 94089 Columbus
Phone: (408) 542-0100 ILLINOIS
Fax: (408) 542-0101 Chicago OKLAHOMA
Tulsa
ARIZONA KANSAS
Phoenix Kansas City PENNSYLVANIA
Philadelphia
CALIFORNIA MASSACHUSETTS
Costa Mesa Boston TEXAS
Los Angeles Burlington Austin
Sacramento Dallas
San Diego MICHIGAN Houston
San Mateo Detroit San Antonio
San Ramon
Woodland Hills MINNESOTA WASHINGTON
Minneapolis Seattle
COLORADO
Denver NEW JERSEY WASHINGTON D.C.
Iselin
CONNECTICUT Parsippany EUROPE
Hartford London
NEW YORK
FLORIDA New York City CANADA
Jacksonville Toronto
Ft. Lauderdale NORTH CAROLINA
Tampa Charlotte
Raleigh
The knowledge behind the network and the Power of Operable Networks are service
marks of International Network Services. All other marks are the trademarks of
their respective owners.
Design: Cahan & Associates, San Francisco,CA
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-21075) of our report dated July 24, 1998, except
for Note 9 which is dated as of August 25, 1998, appearing in the 1998 Annual
Report to Shareholders of International Network Services which is incorporated
in International Network Services' Annual Report on Form 10-K for the year ended
June 30, 1998. We also consent to the incorporation by reference of our report
on the Financial Statement Schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 28,262 0
<SECURITIES> 25,319 0
<RECEIVABLES> 44,185 0
<ALLOWANCES> (1,468) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 102,276 0
<PP&E> 21,010 0
<DEPRECIATION> (9,918) 0
<TOTAL-ASSETS> 129,587 0
<CURRENT-LIABILITIES> 31,650 0
<BONDS> 0 0
0 0
0 0
<COMMON> 75,259 0
<OTHER-SE> 22,678 0
<TOTAL-LIABILITY-AND-EQUITY> 129,587 0
<SALES> 0 0
<TOTAL-REVENUES> 169,678 52,458
<CGS> 0 0
<TOTAL-COSTS> 144,748 44,417
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 26,839 8,589
<INCOME-TAX> 10,729 3,438
<INCOME-CONTINUING> 16,110 5,151
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,110 5,151
<EPS-PRIMARY> .51 .16
<EPS-DILUTED> .47 .15
</TABLE>
