<PAGE>
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, 1999 0-21131
INTERNATIONAL NETWORK SERVICES
(Exact name of registrant as specified in its charter)
Delaware 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: (650) 318-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 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. [_]
As of August 17, 1999, there were 57,355,904 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 August 17, 1999) was approximately
$2,059,690,925. Shares of Common Stock held by each executive officer and
director have been excluded in that such persons may be deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has not incorporated any documents by reference in this Form
10-K.
<PAGE>
International Network Services Form 10-K
For the Fiscal Year Ended June 30, 1999
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
Stockholder 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
2
<PAGE>
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 captions "Risks Related to the Proposed Lucent Merger" and "Risk
Factors that May Affect Operating Results."
General
International Network Services ("INS" or the "Company") is a global
provider of network consulting and software solutions. The Company provides
professional 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 multi-vendor environments. Areas of
expertise include wide area networks ("WANs"), network management, network and
host security, high-performance local area networks ("LANs"), and virtual LANs
("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 serves its
professional services clients, many of which have multi-location networks,
through its network systems engineers in 43 offices worldwide. In addition,
through its INSoft division, the Company offers application and network
performance management software products and software services. As of June 30,
1999, the Company employed 2,169 persons, including 1,580 network systems
engineers and managers.
Recent Developments
On August 9, 1999, the Company entered into an agreement and plan of merger
with Lucent Technologies Inc. ("Lucent"), pursuant to which each outstanding
share of INS Common Stock will be exchanged for 0.8473 shares of Lucent Common
Stock, and each outstanding option or warrant to purchase INS Common Stock will
be converted into an option or warrant to purchase Lucent Common Stock (adjusted
for the exchange ratio). The proposed merger is expected to be accounted for as
a pooling of interests and is expected to close in the quarter ending December
31, 1999, subject to standard conditions, including regulatory approvals and
approval by INS stockholders.
Effective August 26, 1999, pursuant to a Preferred Shares Rights Agreement
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, the Company's Board of Directors declared a dividend of one right (a
"Right") to purchase one one-thousandth of a share of the Company's Series A
Participating Preferred Stock, $0.001 par value ("Series A Preferred"), for each
outstanding share of Common Stock of the Company. The dividend is payable on
September 7, 1999 to stockholders of record as of the close of business on that
date. The Rights are not currently exercisable. Under certain conditions, each
Right entitles the registered holder to purchase from the Company one one-
thousandth of a share of Series A Preferred at an exercise price of Three
Hundred Dollars ($300.00) (the "Exercise Price"), subject to adjustment. If an
acquirer obtains 15% or more of the Company's Common Stock, other than any
action taken by Lucent pursuant to the agreement and plan of merger, (any such
acquirer, an "Acquiring Person"), then each Right (other than Rights owned by an
Acquiring Person or its affiliates) will entitle the holder thereof to purchase,
for the Exercise Price, a number of shares of the Company's Common Stock having
a then current market value of twice the Exercise Price. If, after an Acquiring
Person obtains 15% or more of the Company's Common Stock, (a) the Company merges
into another entity, (b) an acquiring entity merges into the Company or (c) the
Company sells more than 50% of the Company's assets or earning power, then each
Right (other than Rights owned by an Acquiring Person or its affiliates) will
entitle the holder thereof to purchase, for the Exercise Price, a number of
shares of Common Stock of the person engaging in the transaction having a then
current market value of twice the Exercise Price. Under certain conditions, the
rights may be redeemed by the Company's Board of Directors, in whole, but not in
part, at a price of $0.01 per right. The rights have no voting privileges and
will attach to and automatically trade with the Company's Common Stock. The
rights expire on the earlier of August 26, 2009, the exchange or redemption of
the rights, or the effectiveness of the Lucent merger.
3
<PAGE>
Background
Networking Industry
The network services market is growing rapidly, primarily due to the
increase in the number, size and complexity of networks, resulting from the
growth of the Internet and electronic commerce, and the convergence of voice and
data. Furthermore, the tools available to manage today's networks are very
complex. This market evolution, rapid technological change and increasing
complexity have made it difficult for enterprises and telecommunications service
providers to implement and manage their large multi-vendor network environments,
creating increased demand for third-party network services.
Growth of Networking and Convergence
The growth in data networking is a major trend, as is its anticipated
convergence with established voice networking. Convergence brings together
voice, data and video onto a single network using internet protocol (IP)
technology. Data networking services have grown from a fraction of the overall
communications market to the point where they are generally expected to equal
and then substantially exceed the voice market segment. Significant drivers of
this growth are:
- - the global expansion and use of the Internet for commercial and consumer
purposes;
- - the development of corporate intranets and the use of IP-based solutions
for internal communications within a particular business, and the
provisioning of remote access to these networks for employees;
- - the emerging areas of electronic commerce and the growth in IP-based
networks linking companies and their employees with partners, vendors,
other enterprises, and customers;
- - the emergence of bandwidth intensive applications such as multimedia
conferencing, telemedicine, distance learning; and
- - the further deployment of business applications built on the client server
and local-area computing infrastructures developed in the last decade
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.
Network Complexity
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, switches utilizing
asynchronous transfer mode ("ATM") technology 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. To ensure the
reliability and performance of these networks, and the business applications
that run on them, clients are increasingly relying on network and applications
performance management software.
Although companies have attempted to develop the necessary expertise, this
rapid technological change and increasing complexity have made it difficult for
companies to implement and manage their large multi-vendor 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 multi-vendor
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 multi-vendor environments.
Systems integrators and value-added resellers ("VARs") have historically focused
on legacy computing environments and often do
4
<PAGE>
not have sufficient expertise in distributed client/server network environments.
Telecommunications providers are often called upon to provide complex multi-
vendor 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 global provider of network consulting and software solutions for
complex 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 multi-vendor 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
communications network needs. In addition to professional services, through its
INSoft division, INS offers application and network performance management
software products and services for monitoring, managing and optimizing
application-ready networks. The Company is leveraging its expertise in complex
networks to develop software solutions that provide clients with a comprehensive
and detailed view into network and application performance. The Company serves
its clients, many of which have multi-location networks, through its network of
43 offices worldwide.
Strategy
The Company's objective is to become the premier global provider of
services and software solutions for complex 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 and software through a network of 43 offices in
the United States, Canada, the United Kingdom, Germany and Amsterdam. The
Company believes that a broad presence will strengthen its competitive position
within the network services and software markets 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 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.
Expand Software Solutions. Through its INSoft Division, the Company
intends to leverage its expertise in complex networks by continuing to develop
new software products and enhance existing products to generate software license
fees and software services.
Develop and Expand Corporate Infrastructure. The Company believes that its
corporate infrastructure provides it with a competitive advantage in delivering
services and software 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
5
<PAGE>
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 software solutions and support growth
in its operations.
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 software solutions.
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."
Professional Services and Software Solutions
The Company provides professional services and technology expertise for all
phases of the network life cycle and provides applications and network
performance management software solutions.
Professional Services
The Company had 1,580 network systems engineers and managers engaged in
providing services for complex networks as of June 30, 1999. The Company has
both the breadth of expertise required to support the full life cycle of a
network, which includes planning, design, implementation, operations and
optimization, and the depth of expertise required to address complex and rapidly
changing technology. The Company offers its services on a long or short-term
basis in any or all phases of the network life cycle. The Company's services
maximize flexibility in meeting customer requirements, offer added value, and
can be clearly described and presented.
In order to meet the challenge of providing consistent, quality service,
the Company staffs each project with a complement of network systems engineers
with requisite technical and management experience. The Company works with the
client to create a plan that defines what will be delivered as well as how
success or completion will be measured. To encourage quality assurance the
Company involves the service management team in all aspects of delivery and also
coordinates content 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."
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
6
<PAGE>
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 multi-vendor integration plans
- - Preparing technical design documentation
- - Developing engineering specifications and documents
- - Preparing Request for Proposal specifications or other make/buy criteria
- - Providing detailed component purchasing lists
Network Implementation. The network implementation phase includes high
value-added network services, such as internet protocol (IP) 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 devices, 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 communications network investments on behalf of the client
by such methods as reducing operating costs and increasing network utilization.
Although optimization may be viewed as a separate stage of the network life
cycle, optimization is closely linked with the other phases of the network life
cycle. Optimization services can be long-term in nature, address issues such as
cost containment and utilization, and are often aimed at optimizing LAN
infrastructure. These services can also be packaged as discrete projects,
designed to present alternatives for optimization of workgroup, departmental,
building, or campus network investments. Finally, the Company can assist in
optimizing "logical" networks, wherein the Company addresses a protocol, service
or application operating in the larger context of the client's 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
7
<PAGE>
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 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, RMON-II, HPOV, Optivity, Netview 6000, SunNet Manager, Spectrum, Seagate
NerveCenter, Remedy ARS and broad-based skills in network management concepts
and functions (fault, performance, configuration, accounting, security).
Network and Host Security. Network and host security practices include
research and documentation of security policies, selection and installation of
Internet and Intranet firewalls, secure remote access solutions, identification
and installation of various security tools, audits of server and workstation
security, and training of clients on security topics. Subject matter expertise
includes firewall design, remote access design, authentication, server, host,
and workstation industry best practices, new security protocols (S/WAN, SHTTP,
SSL), cryptography and encryption, and high performance secure platforms.
High Performance Local Area Networks and Virtual Local Area Networks.
Consulting on design and implementation of high-performance LANs and VLANs
requires maintaining state of the art expertise on a broad array of topics. The
Company has expertise in switching technology and products, performance tuning,
ATM technology and applications, ATM migration, full-duplex LANs, and other
high-speed LAN components.
Software Solutions
The VitalSuite Product Family
The Company has leveraged its expertise in complex networks to develop
applications and network performance management software solutions. The
VitalSuite product family delivers solutions that allow information technology
professionals, executives, and network managers to monitor, measure, and manage
their business-critical applications, as well as the networks that support those
applications. The product suite consists of four main components and various
extensions which, working together, deliver top-to-bottom visibility into
mission-critical network and application operations.
EnterprisePRO. EnterprisePRO is a web-based network performance management
-------------
solution which continuously tracks the utilization rates of key elements of a
global enterprise network, from frame relay circuits to wide area networks and
associated local area networks. EnterprisePRO's high-performance multi-threaded
polling engine enables clients to quickly identify network performance trends,
troubleshoot problems, anticipate bottlenecks, and properly budget and plan for
network upgrades and expansion.
VitalAgent. VitalAgent is a powerful software agent that resides on
----------
desktops throughout the enterprise to monitor interactions between the desktop
and the server. Data is analyzed, condensed, and forwarded to centralized
server-based products, where it is aggregated with other VitalAgent data to
provide an overview of application performance.
VitalAnalysis. VitalAnalysis uses VitalAgent data to show how the desktop,
-------------
the network, servers and business applications are performing as a unit.
VitalAnalysis provides a valuable tool for monitoring and verifying corporate
service level agreements.
VitalHelp. VitalHelp is a real-time fault detection and troubleshooting
---------
tool that enables help desk personnel to identify and fix application
performance problems quickly. VitalAgent reports problems directly to VitalHelp
in real time and from anywhere in the enterprise.
8
<PAGE>
The Company believes that its professional services and software solutions
complement one another. The cumulative expertise of the Company's professional
services staff provides valuable information upon which future software
solutions may be based. Software solutions are designed to build and maintain
client relationships and may 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 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, 1998 or 1999. See "Risk Factors That May Affect Operating
Results."
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. The Company's announcement of the
proposed merger with Lucent may be perceived as compromising the Company's
ability to provide unbiased solutions and has already had and may in the future
have an adverse effect on the Company's relationships with significant clients
and strategic partners. For example, the Company had developed a significant
relationship with Cisco Systems, Inc. ("Cisco"), a competitor of Lucent, and
had entered into direct relationships with clients as a result of referrals
from Cisco and had provided services directly to Cisco primarily as a
subcontractor. As a result of the announcement of the merger, Cisco has
terminated existing agreements with the Company and will likely cease
referring clients and subcontracting work to the Company.
The Company's VitalSuite software solutions are marketed primarily through
the Company's account managers and secondarily through OEMs and resellers.
Generally, VitalSuite resellers will identify potential clients and negotiate
the services contracts and are responsible for installation and first level
support of the client. The success of these relationships will depend in part on
the level of commitment and effort of these resellers. Software solutions 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
9
<PAGE>
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 under-utilization 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.
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.
Software Product Development
The Company believes that product and technology leadership is critical to
long-term success in the software market in which it competes. Timely
development of new software products and enhancements to existing software
products are essential to maintain its competitive position in the market. The
network and applications performance management software market is characterized
by rapid technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions.
The Company's research and development staff consisted of 47 employees as
of June 30, 1999. The Company's total research and development expenses were
approximately $2.3 million, $4.2 million, and $6.3 million for the years ended
June 30, 1997, 1998 and 1999, respectively.
There can be no assurance that such development efforts will result in
products, features or functionality, or that the software products, features or
functionality that are developed will be accepted by the market. If the Company
is unable to develop on a timely and cost-effective basis new software products
or enhancements to its existing products, or if such new products or
enhancements do not achieve market acceptance, the Company's business, operating
results and financial condition could suffer.
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, 1999, the
Company employed 2,169 persons, including 1,580 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 new
college graduate program. The Company's network systems engineers together have
expertise in a wide array of computer and network systems of the Company's
clients and a broad understanding of the industries in which the Company's
clients are involved.
Corporate Culture. The Company believes that developing a rich environment
and culture is critical to its success in achieving its mission of becoming the
premier provider of services for complex 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, stockholders 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.
10
<PAGE>
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.
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 the network and computer systems and a broad understanding of
the industries the Company serves. Competition for network systems engineers is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In particular, competition is intense
for the limited number of qualified managers and senior network systems
engineers. The Company has experienced, and may in the future experience, high
rates of turnover among its network systems engineers. As a result of the
announcement of the Company's proposed merger with Lucent, competitors have
been recruiting the Company's network system engineers and the Company's
employee turnover rate will be higher in the current quarter than in past
quarters. In addition, the recruiting cycle may take longer due to uncertainties
regarding the merger. Any inability of the Company to hire, train and retain a
sufficient number of qualified network systems engineers could impair the
Company's ability to adequately manage and complete its existing projects or to
obtain new projects, which, in turn, could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, 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 harm our business, operating results and financial condition.
Competition
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, 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 software solutions, the Company also faces competition
from companies such as Computer Associates, Concord Communications, Desktalk
Systems and Compuware, some of which have significantly greater financial,
technical and marketing resources, greater name recognition, and generate
greater revenue than the Company. The Company has faced, and expects to continue
to face, additional competition from new entrants into its markets, many of
which are well established in the software industry and have greater financial
resources. In addition, Cisco recently announced that it was making a large
investment in KPMG LLP's consulting business and Cisco has made investments in
several private companies which provide network services. Increased
competition could result in price reductions, fewer client projects, under-
utilization 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.
11
<PAGE>
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.
The Company believes that the principal competitive factors in the markets
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, software product development 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 also tries to protect its
software documentation and other written materials under trade secret and
copyright laws. In selling certain products, the Company relies on "end-user"
licenses that are not signed by licensees and such licenses may be unenforceable
under laws of certain jurisdictions. The laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of the
United States. The steps the Company has taken to protect its proprietary rights
may not be adequate to protect its intellectual property and the Company cannot
be certain that third parties will not infringe or misappropriate its patents,
copyrights, trademarks, tradedress and similar proprietary rights.
In addition, the Company may be unable to deter misappropriation of its
proprietary information and the proprietary information of its clients.
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. If the Company is not successful in its
efforts to protect its proprietary information and the proprietary information
of its clients, its business, financial condition and operating results could
suffer. In addition, policing unauthorized use of its products is difficult, and
the Company cannot determine the extent to which its software has been
misappropriated.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and service
development facilities are located in approximately 102,321 square feet in four
buildings in Sunnyvale, California pursuant to leases which expire in 2001
through 2005. The Company also leases a 23,305 square foot facility in Dallas,
Texas, primarily for its internal data center. In addition, the Company leases
field support offices in 43 cities. The field offices range from small executive
offices to 7,000 square foot facilities. 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 Amsterdam, The Netherlands; Atlanta, Georgia;
Austin, Texas; Baltimore, Maryland; Boston, Massachusetts; Burlington,
Massachusetts; Charlotte, North Carolina; Chicago, Illinois; Cleveland, Ohio;
Columbus, Ohio; Costa Mesa, California; Dallas, Texas; Denver, Colorado;
Detroit, Michigan; Frankfurt, Germany; Ft. Lauderdale, Florida; Hartford,
Connecticut; Houston, Texas; Iselin, New Jersey; Jacksonville, Florida; Kansas
City, Kansas; Los Angeles, California; Maidenhead, England; Minneapolis,
Minnesota; Nashville, Tennessee; New York, New York; Parsippany, New Jersey;
Philadelphia, Pennsylvania; Phoenix, Arizona; Pittsburgh, Pennsylvania; Raleigh,
North Carolina; Sacramento, California; San Antonio, Texas; San Diego,
California; San Mateo, California; San Ramon, California; Seattle, Washington;
Tampa, Florida; Toronto, Canada; Tulsa, Oklahoma; Warrington, England;
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.
12
<PAGE>
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 1999.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) 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
and reflects the three-for-two stock split that was effected on April 5, 1999.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1998
First Quarter $19.58 $11.83
Second Quarter $16.25 $10.17
Third Quarter $20.67 $14.00
Fourth Quarter $28.33 $18.75
Fiscal 1999
First Quarter $31.42 $21.17
Second Quarter $45.92 $16.42
Third Quarter $47.42 $30.92
Fourth Quarter $49.50 $33.63
Fiscal 2000
First Quarter (through August 17, 1999) $55.94 $38.88
</TABLE>
As of August 17, 1999, the Company had 433 stockholders of record. The
price for the Common Stock on the close of business on August 17, 1999 was
$54.25 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.
(b) Effective August 26, 1999, pursuant to a Preferred Shares Rights
Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, the Company's Board of Directors declared a dividend of one Right
to purchase one one-thousandth of a share of the Company's Series A Preferred,
for each outstanding share of Common Stock of the Company. The dividend is
payable on September 7, 1999 to stockholders of record as of the close of
business on that date. The Rights are not currently exercisable. Under certain
conditions, each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A Preferred at the Exercise
Price of Three Hundred Dollars ($300.00), subject to adjustment. If an Acquiring
Person obtains 15% or more of the Company's Common Stock, other than any action
taken by Lucent pursuant to the agreement and plan of merger, then each Right
(other than Rights owned by an Acquiring Person or its affiliates) will entitle
the holder thereof to purchase, for the Exercise Price, a number of shares of
the Company's Common Stock having a then current market value of twice the
Exercise Price. If, after an Acquiring Person obtains 15% or more of the
Company's Common Stock, (a) the Company merges into another entity, (b) an
acquiring entity merges into the Company or (c) the Company sells more than 50%
of the Company's assets or earning power, then each Right (other than Rights
owned by an Acquiring Person or its affiliates) will entitle the holder thereof
to purchase, for the Exercise Price, a number of shares of Common Stock of the
person engaging in the transaction having a then current market value of twice
the Exercise Price. Under certain conditions, the rights may be redeemed by the
Company's Board of Directors, in whole, but not in part, at a price of $0.01 per
right. The rights have no voting privileges and will attach to and automatically
trade with the Company's Common Stock. The rights expire on the earlier of
August 26, 2009, the exchange or redemption of the rights, or the effectiveness
of the Lucent merger.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Professional services............................... $276,488 $158,001 $95,542 $43,262 $15,419
Software licenses................................... 29,681 7,513 238 - -
Software support and maintenance.................... 8,920 7,284 3,733 830 130
-------- -------- ------- ------- -------
Total revenue.................................... 315,089 172,798 99,513 44,092 15,549
-------- -------- ------- ------- -------
Operating expenses:
Professional services personnel..................... 125,756 73,911 44,268 19,692 6,541
Other costs of professional services................ 39,306 23,155 12,216 5,110 2,116
Cost of software licenses........................... 847 402 25 - -
Cost of software support and maintenance............ 4,952 3,173 1,655 658 266
Research and development............................ 6,263 4,161 2,262 879 77
Sales and marketing................................. 48,826 26,389 14,985 7,990 3,843
General and administrative.......................... 38,575 19,735 13,715 5,049 1,890
Acquisition related charges......................... 7,176 - - - -
-------- -------- ------- ------- -------
Total operating expenses.......................... 271,701 150,926 89,126 39,378 14,733
-------- -------- ------- ------- -------
Income from operations................................... 43,388 21,872 10,387 4,714 816
Interest and other, net.................................. 3,102 2,135 854 3 17
-------- -------- ------- ------- -------
Income before provision for income taxes................. 46,490 24,007 11,241 4,717 833
Provision for income taxes............................... 21,037 9,603 4,489 1,840 58
-------- -------- ------- ------- -------
Net income............................................... 25,453 14,404 6,752 2,877 775
Accretion of Mandatorily Redeemable Convertible
Preferred Stock......................................... - - - 1,135 883
-------- -------- ------- ------- -------
Net income (loss) attributable to Common Stock........... $ 25,453 $ 14,404 $ 6,752 $ 1,742 $ (108)
======== ======== ======= ======= =======
Net income (loss) attributable to Common Stock:
Basic............................................... $0.47 $0.28 $0.17 $0.14 $(0.01)
Diluted............................................. $0.41 $0.25 $0.13 $0.04 $(0.01)
Shares used to compute net income attributable to Common
Stock per share(1):
Basic............................................... 54,444 50,582 39,531 12,704 10,580
Diluted............................................. 62,210 57,101 51,845 43,461 10,580
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used to compute net income (loss) per share.
15
<PAGE>
Selected Financial Data
(continued)
The following table sets forth, for the periods indicated, certain financial
information as a percent of revenue:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Professional services.......................................... 88% 92% 96% 98% 99%
Software licenses.............................................. 9 4 - - -
Software support and maintenance............................... 3 4 4 2 1
--- --- --- --- ---
Total revenue............................................... 100 100 100 100 100
--- --- --- --- ---
Operating expenses:
Professional services personnel................................. 40 43 44 45 42
Other costs of professional services............................ 13 14 12 12 14
Cost of software licenses....................................... - - - - -
Cost of software support and maintenance....................... 2 2 2 1 2
Research and development........................................ 2 2 2 2 0
Sales and marketing............................................. 15 15 15 18 25
General and administrative...................................... 12 11 14 11 12
Acquisition related charges..................................... 2 - - - -
--- --- --- --- ---
Total operating expenses.................................... 86 87 89 89 95
--- --- --- --- ---
Income from operations.............................................. 14 13 11 11 5
Interest and other, net............................................. 1 1 1 - -
--- --- --- --- ---
Income before provision for income taxes............................ 15 14 12 11 5
Provision for income taxes.......................................... 7 6 5 4 -
--- --- --- --- ---
Net income.......................................................... 8 8 7 7 5
Accretion of Mandatorily Redeemable Convertible
Preferred Stock.................................................... - - - 3 6
--- --- --- --- ---
Net income (loss) attributable to Common Stock...................... 8% 8% 7% 4% (1)%
=== === === === ===
</TABLE>
BALANCE SHEET DATA
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and investments.............................. $109,382 $ 73,001 $45,865 $ 869 $4,161
Working capital..................................................... 84,882 74,543 53,600 6,060 6,103
Total assets........................................................ 223,236 140,286 83,802 18,072 9,967
Notes payable, less current portion................................. - - - 316 732
Stockholders' equity (2)............................................ 163,353 102,307 71,945 9,883 6,897
</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.
16
<PAGE>
ITEM 7. 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 "Risks Related to the
Proposed Lucent Merger" and "Risk Factors That May Affect Operating Results".
Revenue
Total Revenue
- -------------
The Company's total revenue was $315.1 million, $172.8 million and $99.5
million in fiscal 1999, 1998 and 1997, representing increases over the prior
fiscal year of 82%, 74% and 126%, respectively. The Company does not believe
that this rate of growth is sustainable over the long term.
Professional Services
- ---------------------
The majority of the Company's revenue is derived from fees for professional
services. Professional services revenue was $276.5 million, $158.0 million and
$95.5 million in fiscal 1999, 1998 and 1997, representing increases over the
prior fiscal year of 75%, 65% and 121%, respectively. Professional services
revenue accounted for 88%, 92% and 96% of total revenue in fiscal 1999, 1998 and
1997, respectively. Professional services revenue increased primarily due to an
increase in the number and size of professional service projects and secondarily
due to an increase in average billing rates.
Software Licenses
- -----------------
Software licenses revenue consists principally of revenue earned under
software license agreements and under royalty agreements with OEMs. Software
licenses revenue was $29.7 million, $7.5 million and $238,000 in fiscal 1999,
1998 and 1997, respectively. Software licenses revenue was 9%, 4% and less than
1% of total revenue in fiscal 1999, 1998 and 1997, respectively. The increase
in software licenses revenue resulted from increased sales to new customers and
sales to existing customers for new products. Also, prior to fiscal 1998, the
Company offered its software solutions 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.
Software Support and Maintenance
- --------------------------------
The Company also derives revenue from software services. Software services
revenue consists of all inclusive service contracts, which include the right to
use software combined with installation, maintenance and support, as well as
services for installation, maintenance and support of software licenses sold
separately. Software support and maintenance revenue was $8.9 million, $7.3
million and $3.7 million in fiscal 1999, 1998 and 1997, respectively. Software
support and maintenance revenue was 3% of total revenue in fiscal 1999 and 4% of
total revenue in fiscal 1998 and 1997. The increase in software services
revenue resulted from increased sales to new customers and sales to existing
customers for new products.
No one client accounted for more than 10% of total revenue in fiscal 1999, 1998
or 1997.
Operating Expenses
Professional Services Personnel
- -------------------------------
Professional services personnel expenses consist primarily of compensation
and benefits of the Company's employees engaged in the delivery of professional
services. Professional personnel expenses were $125.8 million, $73.9 million and
$44.3 million in fiscal 1999, 1998 and 1997, respectively, representing
increases over the prior fiscal year of 70%, 67% and 125%, respectively. These
increases were due primarily to an increase in the number of network systems
engineers. The number of employees included in professional personnel was 1,580,
1,053 and 651 at the end of fiscal 1999, 1998 and 1997, respectively.
Professional personnel expenses were 40%, 43% and 44% of total revenue in fiscal
1999, 1998 and 1997, respectively. Professional personnel expenses were lower as
a percent of total revenue in fiscal 1999 than fiscal 1998 and 1997, due
primarily to an increase in billing rates for professional services, and to a
lesser extent, an increase in license revenue as a percent of sales.
Professional personnel expenses were 45%, 47% and 46% of total professional
services revenue in fiscal 1999, 1998 and 1997, respectively. Professional
personnel expenses were lower as a
17
<PAGE>
percent of professional services revenue in fiscal 1999 than fiscal 1998 and
1997, due primarily to primarily to an increase in billing rates for
professional services.
Other Costs of Professional Services
- ------------------------------------
Other costs of professional services 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. Other costs were $39.3 million, $23.2
million and $12.2 million in fiscal 1999, 1998 and 1997, respectively,
representing increases over the prior fiscal year of 70%, 90% and 139%,
respectively. The increases were primarily due to an increase in the number of
employees and, to a lesser extent, to the costs of field offices. Other costs
were 13%, 14%, and 12% of total revenue in fiscal 1999, 1998 and 1997,
respectively. Other costs were lower as a percent of total revenue in fiscal
1999 than fiscal 1998, due primarily to an increase in billing rates for
professional services, and an increase in software revenue. Other costs, as a
percent of total revenue, increased in fiscal 1998 from fiscal 1997 primarily
due to increases in recruiting, professional development and travel and
entertainment expenses.
Cost of Software Licenses
- -------------------------
Cost of software licenses consists primarily of the cost of product
components, product duplication, shipping and reproduction of manuals. Cost of
software license was $847,000, $402,000 and $25,000 in fiscal 1999, 1998 and
1997, respectively. Cost of software licenses was 3%, 5% and 11% of software
license revenue in fiscal 1999, 1998 and 1997, respectively. The decrease in
cost of software licenses as a percent of software licenses revenue was due
primarily to an increase in sales compared to increases in fixed costs.
Cost of Software Support and Maintenance
- ----------------------------------------
Cost of software support and maintenance expenses consist primarily of
compensation and benefits of the Company's employees engaged in the delivery of
software support and maintenance services as well as the related costs of travel
and entertainment, certain recruiting and professional development expenses,
field facilities, depreciation, expensed equipment and supplies. Cost of
software support and maintenance was $5.0 million, $3.2 million and $1.7 million
in fiscal 1999, 1998 and 1997, respectively. The increase in cost of software
support and maintenance was due to an increase in sales and was 2% of total
revenue in fiscal 1999, 1998 and 1997.
Research and Development
- ------------------------
All research and development expenses, including software development costs,
are charged to expense as incurred. Statement of Financial Accounting Standards
("SFAS") No. 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
software have not been significant. Accordingly, the Company has not capitalized
any software development costs. Research and development expenses were $6.3
million, $4.2 million, and $2.3 million in fiscal 1999, 1998 and 1997,
respectively. Research and development expenses were 2% of total revenue in
fiscal 1999, 1998 and 1997. The absolute dollar increase reflects an increase in
the number of employees to support the development of, and enhancements to,
software products.
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 $48.8 million, $26.4
million and $15.0 million in fiscal 1999, 1998 and 1997, respectively,
representing increases over the prior fiscal year of 85%, 76% and 88%,
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 15% of total revenue in
fiscal 1999, 1998 and 1997.
General and Administrative
- --------------------------
General and administrative expenses consist of expenses associated with
executive staff, finance, corporate facilities, information services and human
resources. General and administrative expenses were $38.6 million, $19.7 million
and $13.7 million in fiscal 1999, 1998 and 1997, respectively, representing
increases over the prior fiscal year of
18
<PAGE>
96%, 44% and 172%, respectively. The dollar increase reflects an increase in
the number of employees and the implementation of new human resource and
financial systems necessary to support the Company's growth in operations.
General and administrative expenses were 12%, 11% and 14% of total revenue in
fiscal 1999, 1998 and 1997, respectively. The increase from fiscal 1998 to
fiscal 1999 on a percentage basis was the result of increases in infrastructure
across finance, human resources and information services to support the
Company's growth. The decrease from fiscal 1997 to fiscal 1998 on a percentage
basis was due primarily to an increase in revenue.
Interest and Other, Net
Interest and other, net consists primarily of interest income. Interest and
other, net were $3.1 million, $2.1 million, and $854,000 in fiscal 1999, 1998
and 1997, respectively. Interest income consists primarily of interest on cash,
cash equivalents, investments and notes receivable from stockholders. Interest
expense consists of interest associated with bank borrowings. The increase in
net interest income 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 were 45.2%, 40% and 39% for fiscal
1999, 1998 and 1997, respectively. The increase in the effective tax rate for
fiscal 1999 was due to the acquisition related charges. In fiscal 1998 and
1997, the Company's effective tax rates approximated the combined federal and
state statutory rates, net of federal benefits.
Liquidity and Capital Resources
At June 30, 1999, the Company had $109.4 million in cash, cash equivalents
and investments, representing an increase of $36.4 million from June 30, 1998.
Working capital at June 30, 1999 was $84.9 million.
Net cash provided by operating activities was $27.7 million, $24.4 million and
$3.0 million in fiscal 1999, 1998 and 1997, 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 its receivables 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 operating activities also
resulted from prepayments for services and software resulting in an increase in
deferred revenue of $16.4 million. Net cash used in investing activities was
$61.8 million, $28.3 million and $29.3 million in fiscal 1999, 1998 and 1997,
respectively. Cash used in investing activities in fiscal 1999 primarily
reflected net investment activity and capital expenditures related to the
installation of new internal software as well as capital expenditures related to
new office facilities. Cash used in investing activities in fiscal 1998 and 1997
primarily reflected net investment activity in marketable securities and, to a
lesser extent, purchases of computer equipment and software. Net cash provided
by financing activities in fiscal 1999 of $26.5 million resulted primarily from
the proceeds from issuance of Common Stock related to the exercise of stock
options and employee stock purchases under the Company's Employee Stock Purchase
Plan. Net cash provided by financing activities in fiscal 1998 and 1997 of $11.9
million and $50.0 million, respectively, primarily resulted from the issuance of
Common Stock and a warrant to purchase Common Stock.
The Company has a $10 million line of credit with a bank, which expires in
February 2000. Borrowings under the line of credit bear interest at the bank's
prime rate less one half of one percent, or the Company has the option to borrow
at a fixed rate at one and one half percent above the bank's LIBOR for a fixed
term of up to three months. Balances outstanding at February 2000 that have
been used to fund capital equipment may be converted to a three-year term loan,
which provides for the same interest rate option. There were no borrowings
under the line of credit at June 30, 1999. The line of credit requires the
Company to comply with certain financial covenants. At June 30, 1999, the
Company was in compliance with these financial covenants.
The Company believes that its current cash and investment balances and cash
flow from operations will be sufficient to meet its working capital and capital
expenditure 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.
19
<PAGE>
Year 2000
The year 2000 issue is the result of computer programs having been written
using two digits, rather than four, to define the applicable year. Any of the
Company's computers, computer programs, and administration equipment or products
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. If any of the Company's systems that have date-
sensitive software use only two digits, system failures or miscalculations may
result causing disruptions of operations, including, among other things, a
temporary inability to process transactions or send and receive electronic data
with third parties or engage in similar normal business activities.
The Company believes its current software products are year 2000 compliant.
However, there can be no assurances that the Company's current products do not
contain undetected errors or defects associated with year 2000 date functions
that may result in material cost to the Company.
With respect to its internal information technology systems (including
information technology-based office facilities such as data and voice
communications, building management and security systems), the Company has
formed an ongoing internal review team to address the year 2000 issue. A team
of professionals has been engaged in a process to identify and resolve
significant year 2000 issues in a timely manner. The process includes an
assessment of issues, testing of systems and development of remediation plans,
where necessary, as they relate to internally used software, computer hardware
and use of computer applications in the Company's products. This internal review
team has substantially completed their assessment and while the Company has not
identified any significant issues, it is currently finalizing a contingency plan
to support critical business operations should it become necessary. The Company
anticipates that it will complete the assessment and contingency plans by the
end of October 1999. Executive management regularly monitors the status of the
Company's year 2000 remediation plans.
The Company has been contacting its key suppliers and other key third
parties to certify their year 2000 readiness and conducting ongoing risk
analysis and anticipates completing this process by the end of October 1999. To
the extent such third parties are materially adversely affected by the year 2000
issue, this could disrupt the Company's operations. There can be no assurance
that the Company's key contractors will have successful conversion programs, and
that any such year 2000 compliance failures will not have a material adverse
effect on the Company's business, results of operation or financial condition.
Based on information available to date, the Company has substantially
completed its year 2000 assessment. To date, the Company has not incurred any
material costs related to the assessment of, and efforts in connection with, its
year 2000 issues. The Company further believes that any further review and
modification, if any, will not require a material charge to operating expenses
over the next several years. Management believes that the Company is devoting
the necessary resources to identify and resolve significant year 2000 issues in
a timely manner.
Recently issued accounting pronouncements
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, 1999 and does not expect it to have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
RISKS RELATED TO THE PROPOSED LUCENT MERGER
We face risks relating to the proposed Lucent merger.
On August 9, 1999, we executed a merger agreement to be acquired by Lucent.
Under the terms of the agreement, each outstanding share of INS Common Stock
will be exchanged for 0.8473 shares of Lucent Common Stock. The announcement of
the proposed merger may have a negative impact on our ability to sell our
services and products, attract and retain employees and clients, and maintain
strategic relationships. The announcement has already had and may in the future
have an adverse effect on our relationships with significant clients and
strategic partners. The merger is subject to approval by the Company's
stockholders and various regulatory agencies, and there can be no assurance that
the merger will be successfully completed. In the event that the merger is not
successfully completed, the Company's results of operations and Common Stock
price could be materially adversely affected.
If the merger is successfully completed, holders of INS Common Stock will
become holders of Lucent Common Stock. Lucent's business differs from our
business, and Lucent's results of operations, as well as the price of Lucent
Common Stock, may be affected by factors different than those affecting our
results of operations and the price of our
20
<PAGE>
Common Stock. For a discussion of Lucent's business and certain factors to
consider in connection with such business, see Lucent's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998, as amended by Lucent's
Form 8-K filed on August 2, 1999, and Lucent's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.
If the Lucent merger is completed, our stockholders will receive a fixed number
of shares of Lucent Common Stock despite changes in the market value of our
Common Stock or Lucent Common Stock.
Under the merger agreement, each share of INS Common Stock will be
converted into the right to receive 0.8473 shares of Lucent Common Stock. This
exchange ratio is a fixed number and will not be adjusted in the event of any
increase or decrease in the price of Lucent Common Stock or INS Common Stock.
The prices of Lucent Common Stock and INS Common Stock at the closing of the
proposed merger may vary from their respective prices on the date the merger
agreement was signed. These prices may vary because of changes in the business,
operations or prospects of Lucent or INS, market assessments of the likelihood
that the merger will be completed, the timing of the completion of the merger,
the prospects of post-merger operations, regulatory considerations, general
market and economic conditions and other factors.
The anticipated benefits of the proposed merger may not be realized.
The success of our business has historically depended on our current and
potential clients perceiving us as a vendor independent provider of professional
services. Following the proposed merger, our existing and potential clients may
perceive our relationship with Lucent, a leading vendor of networking systems,
as compromising our ability to provide unbiased solutions. Such a perception
could have a material adverse effect on our business and operating results,
which would result in Lucent and us not achieving the anticipated potential
benefits of the proposed merger.
Our failure to complete the proposed merger with Lucent could adversely affect
our business.
If the merger is not completed, we may be subject to a number of material risks,
including the following:
. the public announcement of the proposed merger has adversely affected our
relationships with some of our clients and strategic partners, including
Cisco;
. the public announcement of the proposed merger has had an adverse effect
on our ability to attract and retain employees;
. we may be required to pay Lucent a termination fee of $110 million;
. the option we granted to Lucent to acquire 19.9% of the outstanding shares
of our Common Stock with an exercise price of $53.91 per share may become
exercisable and if Lucent exercises the option, we may not be able to
account for future transactions as a "pooling of interests";
. the price of our Common Stock may decline to the extent that the current
market price for our Common Stock reflects a market assumption that the
proposed merger will be completed; and
. costs related to the proposed merger, such as legal, accounting, and
financial advisor fees, must be paid even if the merger is not completed.
RISK FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors could materially and adversely affect our future
operating results and could cause actual events to differ materially from those
predicted in our forward-looking statements related to our business.
Our quarterly operating results are uncertain and are likely to fluctuate
significantly.
The underutilization of our network systems engineers may cause our operating
results to fluctuate. We derive the majority of our revenue from professional
services, which are generally provided on a "time and expenses" basis. We
recognize professional services revenue only when network systems engineers are
engaged on client projects. In addition, a majority of our 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 our operating
results in any particular quarter and could result in losses for such quarter.
Factors which could cause such underutilization, include:
21
<PAGE>
. 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.
A shortfall in software revenue could cause our operating results to decline.
We also derive a significant portion of our revenue from the license of our
software solutions. Our revenue from software solutions is hard to predict
because our license fee revenue is substantially dependent on orders booked and
shipped in that quarter and because we generally recognize a substantial portion
of our revenue from software solutions in the last month of the quarter. An
unanticipated shortfall of sales of our software solutions could harm our
operating results, particularly because profit margins are higher on software
solutions than on professional services.
Other factors may cause our operating results to fluctuate. Our revenue and
earnings may also fluctuate from quarter to quarter based on a variety of
factors, including:
. an inability to hire and retain sufficient numbers of employees, including
network systems engineers, account managers and software engineers;
. changes in billing rates or product pricing;
. market acceptance of current and future products;
. write-offs of billings or services performed at no charge as a result of
our failure to meet client expectations, product returns and undetected
product errors or failures;
. claims by our clients arising from actions of our employees which result
in damages to our clients' business or otherwise;
. competition;
. the development and introduction of new services and products by us and
our competitors;
. the loss of key employees;
. corporate acquisitions;
. decrease or slowdown in the growth of the networking industry as a whole;
. any slowdown in systems and software spending or in general business
expansion in connection with year 2000 issues; and
. general economic conditions.
In addition, we plan to continue to expand our operations based on sales
forecasts by hiring additional network systems engineers, account managers and
other employees, investing in new product development and adding new offices,
systems and other infrastructure. The resulting increase in operating expenses
would harm our operating results if revenue does not increase as much as
forecasted.
We believe that quarterly revenue and operating results are likely to vary
significantly in the future and that period-to-period comparisons of our
operating results are not necessarily meaningful. You should not rely on period-
to-period comparisons as indications of future performance. In some future
quarter, our revenue or operating results may be below the expectations of
public market analysts or investors. In that event, the price of our Common
Stock would probably decline.
Our pending merger with Lucent may create uncertainties which may cause our
existing and potential clients to delay purchasing our services and software,
which would impair our revenues and operating results. In addition, our
employee turnover has increased since the announcement of the proposed merger.
As a result of the foregoing factors, our revenue or operating results could be
below the expectations of public market analysts and investors in the current
and future quarters.
The announcement of our proposed merger with Lucent has had an impact on our
business.
The announcement of our proposed merger with Lucent may be perceived as
compromising our ability to provide unbiased solutions and has already had and
may in the future have an adverse effect on our relationships with significant
clients and strategic partners. For example, we had developed a significant
relationship with Cisco, a competitor of Lucent, and had entered into direct
relationships with clients as a result of referrals from Cisco and had provided
services directly to Cisco primarily as a subcontractor. As a result of the
announcement of the merger, Cisco has terminated existing agreements with us and
will likely cease referring clients and subcontracting work to us.
22
<PAGE>
In addition, our pending merger with Lucent may create uncertainties which may
cause our existing and potential clients to delay purchasing our services, which
would impair our revenues and operating results. In addition, competitors have
been recruiting our employees and our employee turnover rate will be higher in
the current quarter than in past quarters. As a result of the foregoing factors,
our revenue or operating results could be below the expectations of public
market analysts and investors in the current and future quarters.
Our success depends on our ability to attract and retain qualified network
systems engineers.
Our future success will depend in large part on our 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 we
serve. Competition for network systems engineers is intense, and we cannot be
certain that we 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. We have experienced, and may in
the future experience, high rates of turnover among our network systems
engineers. As a result of the announcement of our proposed merger with Lucent,
competitors have been recruiting our network systems engineers and our employee
turnover rate will be higher in the current quarter than in past quarters. In
addition, the recruiting cycle may take longer due to uncertainties regarding
the merger. Our inability to hire, train and retain a sufficient number of
qualified network systems engineers could impair our ability to adequately
manage and complete our existing projects or to obtain new projects, which, in
turn, could harm our business, operating results and financial condition. In
addition, we have experienced, and may in the future experience, increasing
compensation costs for our network systems engineers. Our inability to recover
increases in compensation of network systems engineers through higher billing
rates or to reduce other expenses to offset such increases, could harm our
business, operating results and financial condition.
We depend on a small number of customers for most of our revenues.
We have historically derived a significant portion of our revenue from a
limited number of clients and expect this concentration to continue. For the
fiscal year ended June 30, 1999, no one client accounted for more than 10% of
revenue and ten clients accounted for approximately 42% of revenue. We have
regularly experienced declines in revenue from clients that have accounted for
significant revenue, and we expect to continue to experience these declines in
the future. When revenue for one or more significant clients declines in a
quarter, we must rapidly redeploy network systems engineers to other projects in
order to minimize the underutilization of employees. If we are unable to do so,
our business, operating results and financial condition could suffer.
Our customers are generally able to reduce or cancel their contracts.
Our clients are generally able to reduce or cancel their use of our
professional services without penalty and with little or no notice. As a result,
we believe that the number and size of our existing projects are not reliable
indicators or measures of future revenue. When a client defers, modifies or
cancels a project, if we are not able to rapidly redeploy network systems
engineers to other projects in order to minimize the underutilization of
employees, our business, operating results and financial condition could suffer.
We face risks associated with our software solutions.
Development and introduction risks. The market for our software solutions is
characterized by rapid technological change, evolving industry standards,
changes in customer requirements and frequent new product introductions and
enhancements. The introduction of software products embodying new technologies
and the emergence of new industry standards can render existing software
products obsolete and unmarketable. The life cycles of our software solutions
are difficult to estimate. As a result, our future success will depend, in part,
upon our ability to continue to enhance our existing software solutions and
develop and introduce in a timely manner new software solutions that keep pace
with technological developments, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
software product opportunities and develop and bring new software products to
market in a timely and cost-effective manner, or that software products,
capabilities or technologies developed by others will not render our software
products or technologies obsolete or noncompetitive or shorten the life cycles
of our software products. If we are unable to develop on a timely and cost-
effective basis new software products or enhancements to our existing products,
or if such new products or enhancements do not achieve market acceptance, our
business, operating results and financial condition will suffer.
Risk of product "bugs." Software products as complex as ours frequently
contain undetected errors or "bugs" when first introduced or when new versions
are released that, despite testing by use, are discovered only after a product
has been
23
<PAGE>
installed and used by customers. There can be no assurance that errors
will not be found in our software solutions or that such errors will not result
in delay or loss of revenue, diversion of development resources, damage to our
reputation or impaired market acceptance of these products, which could harm our
business, operating results and financial condition.
Our success depends on our development of new business and our ability to
attract and retain qualified account managers.
Our future success will also depend in large part on the development of new
business by our account managers, who solicit new business and manage
relationships with existing clients. As a result, our success will depend on our
ability to attract and retain qualified account managers who have an
understanding of our business and the industry it serves. Competition for
account managers is intense and we have experienced, and may in the future
experience, high rates of turnover among our account managers. In addition,
integration of new account managers into our business can be lengthy. Our
inability to attract and retain a sufficient number of account managers or to
integrate new account managers into our operations on a timely basis could harm
our business, operating results and financial condition.
We must effectively manage the growth of our operations.
We have experienced a period of rapid revenue and client growth and an
increase in the number of employees and offices and in the scope of our
supporting infrastructure. We do 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 our
management and operating and financial systems. We will have to continue to hire
management personnel and improve our systems on a timely basis and in the manner
necessary to accommodate any increase in the number of our transactions and
clients, any increase in the size of our operations and any introduction of new
products and services. Our management or systems may not be adequate to support
our existing or future operations, particularly as we expand internationally.
Any failure to implement and improve our systems or to hire and retain
appropriate personnel to manage our operations would harm our business,
operating results and financial condition.
We face intense competition.
Our industry is comprised of a large number of participants and is subject to
rapid change and intense competition. With respect to professional services, we
face competition from system integrators, value-added resellers, 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 we do. With respect to software solutions,
we face competition from companies such as Concord Communications, Desktalk
Systems and Compuware, some of which have significantly greater financial,
technical and marketing resources and greater name recognition, and generate
greater revenue than we do. We have faced, and expect to continue to face,
additional competition from new entrants into our markets, many of which are
well established in the software industry and have greater financial resources.
In addition, Cisco recently announced that it was making a large investment in
KPMG LLP's consulting business and Cisco has made investments in several private
companies which provide network services. 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 harm our
business, operating results and financial condition. We cannot be sure that we
will be able to compete successfully against current or future competitors. Our
failure to compete successfully would harm our business, operating results and
financial condition.
We face risks from expansion of our international operations.
A component of our long-term strategy is to expand into international markets.
We have offices in the United Kingdom, the Netherlands, Germany and Canada. We
expect to generate an increasing proportion of our revenue from international
operations. The revenue generated from international operations may not be
adequate to offset the expense of establishing and maintaining these foreign
operations, and if revenue does not materialize as anticipated, our business,
operating results and financial condition could suffer. We cannot be certain
that we will be able to successfully market, sell and deliver our services in
international markets.
In addition to the uncertainty as to our ability to expand into international
markets, there are certain risks inherent in conducting business on an
international level, any one of which could adversely impact the success of our
international operations. These risks include:
. unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
24
<PAGE>
. employment laws and practices in foreign countries;
. longer payment cycles and 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.
One or more of these factors could harm our future international operations
and our business, operating results and financial condition. In addition, we may
not be able to compete effectively in these markets.
We face liability risks from the actions of our employees and the license of our
software products.
We are subject to claims by our clients for the actions of our employees
arising from damages to our clients' business or otherwise. In selling certain
products, we rely on "end user" licenses that are not signed by licensees and it
is possible that such licenses may be unenforceable under the laws of certain
jurisdictions. For these and other reasons, the limitation of liability
provisions contained in our license agreements may not be effective. A
successful liability claim brought against us as a result of the actions of our
employees or the license of our software products could harm our operating
results.
We may be unable to adequately protect our intellectual property.
Our success depends in part on our information technology, only some of which
is proprietary to us, and other intellectual property rights. We rely on a
combination of nondisclosure and other contractual arrangements, technical
measures, copyrights, patents and trade secret and trademark laws to protect our
proprietary rights. We also try to protect our software, documentation and other
written materials under trade secret and copyright laws. In selling certain
products, we rely on "end user" licenses that are not signed by licensees and
such licenses may be unenforceable under the laws of certain jurisdictions. The
laws of some foreign countries do not protect our proprietary rights to the same
extent as the laws of the United States. The steps we have taken to protect our
proprietary rights may not be adequate to protect our intellectual property and
we cannot be certain that third parties will not infringe or misappropriate our
patents, copyrights, trademarks, tradedress and similar proprietary rights.
We may be unable to deter misappropriation of our proprietary information and
the proprietary information of our clients.
We enter into confidentiality arrangements with our employees and attempt to
limit access to and distribution of our proprietary information and the
proprietary information of our clients. The steps we have taken in this regard
may not be adequate to deter misappropriation of proprietary information and we
may not be able to detect unauthorized use or take appropriate steps to enforce
intellectual property rights. If we are not successful in our efforts to protect
our proprietary information and the proprietary information of our clients, our
business, financial condition and operating results could suffer. In addition,
policing unauthorized use of our products is difficult, and we cannot determine
the extent to which piracy of our software exists.
We may infringe the intellectual property rights of others.
We may receive communication in the future from third parties or clients
asserting that we have infringed or misappropriated the proprietary rights of
such parties. We expect that software developers will increasingly be subject to
infringement claims as the number of products and the number of competitors in
our industry segment grows and the functionality of products in other industry
segments overlaps that of our products. Any such claims, with or without merit,
could be time consuming, result in costly litigation and divert technical and
management personnel, result in delays of product shipments, require us to
develop non-infringing technology or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all. If a claim of infringement or
misappropriation against us is successful and we fail to or cannot develop non-
infringing technology or license the infringed, misappropriated, or similar
technology, our business, operating results and financial condition could
suffer.
We face risks associated with acquisitions.
25
<PAGE>
We have recently acquired VitalSigns Software, and we may make additional
acquisitions of, or significant investments in, complementary companies,
products or technologies. Any such acquisitions will be accompanied by the risks
commonly encountered in making acquisitions of companies, products and
technologies. Such risks include, among others:
. the difficulty associated with assimilating the personnel and operations
of acquired companies;
. the potential disruption of our ongoing business;
. the distraction of management and other resources;
. the inability of management to maximize our financial and strategic
position 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, partners and clients as a
result of the acquisition.
We cannot be certain that we will be successful in overcoming these risks or
any other problems encountered in connection with any acquisitions. Any such
problems encountered in the transition and integration process could harm our
business, operating results and financial condition.
We face risks associated with the year 2000.
As a result of the year 2000 issue, we face risks including:
. Demand for our services and products may decrease as current and potential
clients reduce their spending on software and systems during the second
half of 1999 and into the year 2000 due to concerns or issues they
anticipate or experience in connection with the year 2000;
. Our internal systems may experience year 2000-related problems which may
significantly disrupt our operations, including a temporary inability to
process transactions or engage in normal business activities; and
. Our clients who experience year 2000 problems with their systems may claim
that our software products which they use are not Year 2000 compliant or
that our employees who performed services for them are responsible for the
year 2000 problems and, as a result, we could be required to provide
extensive technical support or services or we could become involved in
costly and/or protracted litigation.
The occurrence of any of the above events as well as other year 2000-related
problems could cause significant diversion of our management and financial
resources and could harm our business, financial condition and results of
operations.
We recently adopted a Preferred Shares Rights Plan which has anti-takeover
effects.
We recently entered into a Preferred Shares Rights Plan. See Item 5(b) of
this Form 10-K. The Plan has the anti-takeover effect of causing substantial
dilution to a person or group (other than Lucent) that attempts to acquire us on
terms not approved by our board of directors. These anti-takeover provisions
could limit the price that certain investors might be willing to pay in the
future for shares of our Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 three years and the maximum allowable average
maturity of the portfolio is fifteen months.
At the end of fiscal 1999, the Company had an investment portfolio of fixed
income securities totaling $84.6 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 component of other comprehensive
income/loss. 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 interest and other income
when realized.
26
<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 14%
of current rates in the portfolio) from levels as of June 30, 1999, the fair
market value of the portfolio would decline by approximately $678,000. 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 the 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 further 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. Commencing in fiscal 2000, the Company has entered into foreign
currency forward exchange contracts to manage exposure related to certain
foreign currency transactions. The Company does not enter into derivative
financial instruments for trading purposes. There were no outstanding forward
exchange contracts at June 30, 1999.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERNATIONAL NETWORK SERVICES
Consolidated Balance Sheets
(in thousands, except par value)
<TABLE>
<CAPTION>
June 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................................... $ 24,818 $ 32,484
Short-term investments.......................................................................... 28,297 25,319
Accounts receivable, net........................................................................ 77,962 47,035
Deferred income taxes........................................................................... 6,880 3,758
Prepaid expenses and other assets............................................................... 6,808 3,926
--------- ---------
Total current assets....................................................................... 144,765 112,522
Property and equipment, net....................................................................... 21,489 11,495
Deferred income taxes............................................................................. 715 1,071
Investments....................................................................................... 56,267 15,198
--------- ---------
$ 223,236 $ 140,286
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 10,723 $ 3,816
Accrued compensation and employee benefits...................................................... 24,653 12,638
Accrued liabilities............................................................................. 2,411 4,530
Income taxes payable............................................................................ 3,213 --
Deferred revenue................................................................................ 18,883 16,995
--------- ---------
Total current liabilities.................................................................. 59,883 37,979
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred Stock, $0.001 par value (no par value -- June 30, 1998),
5,000 shares authorized; none issued and outstanding..................................... -- --
Common Stock and additional paid-in capital, $0.001 par value (no par value -- June 30, 1998),
150,000 and 75,000 shares authorized; 57,174 and 54,797 shares issued
and outstanding.......................................................................... 120,280 83,648
Notes receivable from stockholders.............................................................. (919) (685)
Deferred compensation........................................................................... (1,792) (1,443)
Accumulated other comprehensive loss............................................................ (491) (35)
Retained earnings............................................................................... 46,275 20,822
--------- ---------
Total stockholders' equity................................................................. 163,353 102,307
--------- ---------
$ 223,236 $ 140,286
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
INTERNATIONAL NETWORK SERVICES
Consolidated Statements of Income
(in thousands, except per share amount)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Revenue:
Professional services.......................................... $ 276,488 $ 158,001 $ 95,542
Software licenses.............................................. 29,681 7,513 238
Software support and maintenance............................... 8,920 7,284 3,733
--------- --------- --------
Total revenue.............................................. 315,089 172,798 99,513
--------- --------- --------
Operating Expenses:
Professional services personnel................................ 125,756 73,911 44,268
Other costs of professional services........................... 39,306 23,155 12,216
Cost of software licenses...................................... 847 402 25
Cost of software support and maintenance....................... 4,952 3,173 1,655
Research and development.......................................... 6,263 4,161 2,262
Sales and marketing............................................... 48,826 26,389 14,985
General and administrative........................................ 38,575 19,735 13,715
Acquisition related charges....................................... 7,176 -- --
--------- --------- --------
Total operating expenses................................... 271,701 150,926 89,126
--------- --------- --------
Income from operations............................................ 43,388 21,872 10,387
Interest and other, net........................................... 3,102 2,135 854
--------- --------- --------
Income before provision for income taxes.......................... 46,490 24,007 11,241
Provision for income taxes........................................ 21,037 9,603 4,489
--------- --------- --------
Net income........................................................ $ 25,453 $ 14,404 $ 6,752
========= ========= ========
Net income per share:
Basic...................................................... $ 0.47 0.28 $ 0.17
========= ========= ========
Diluted.................................................... $ 0.41 0.25 $ 0.13
========= ========= ========
Shares used to compute net income per share:
Basic...................................................... 54,444 50,582 39,531
========= ========= ========
Diluted.................................................... 62,210 57,101 51,845
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
29
<PAGE>
INTERNATIONAL NETWORK SERVICES
Consolidated Statement of Stockholders' Equity (Deficit)
(in thousands)
<TABLE>
<CAPTION>
Accretion of
Common Stock Notes Mandatorily
and Additional Paid-in Capital Receivable Redeemable
------------------------------ From Convertible
Shares Amount Stockholders Preferred Stock
------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996................................... 17,140 $ 2,394 $ (1,880) $ (2,454)
Net income................................................. -- -- -- --
Issuance of Common Stock in public
offering, net of issuance costs........................... 4,313 41,709 -- --
Conversion of Mandatorily Redeemable
Convertible Preferred Stock in
connection with IPO....................................... 25,102 9,973 -- 2,454
Issuance of Common Stock upon exercise of
stock options and warrants, net........................... 1,241 245 (57) --
Issuance of Common Stock for cash, net..................... 4,533 6,566 -- --
Issuance of Common Stock under employee
stock purchase plan....................................... 323 2,983 -- --
-------- --------- -------- --------
Income tax benefit related to stock
option exercises.......................................... -- 3,594 -- --
Balance at June 30, 1997................................... 52,652 67,464 (1,937) --
Net income................................................. -- -- -- --
Translation adjustments.................................... -- -- -- --
Comprehensive income....................................... -- -- -- --
Issuance of Common Stock upon exercise of
stock options and warrants, net........................... 1,516 1,388 (64) --
Issuance of Common Stock under employee
stock purchase plan....................................... 629 6,047 -- --
Repayment of stockholders' notes........................... -- -- 1,316 --
Issuance of warrant........................................ -- 3,188 -- --
Deferred compensation , net................................ -- 1,513 -- --
Income tax benefit related to stock
option exercises.......................................... -- 4,048 -- --
-------- --------- -------- --------
Balance at June 30, 1998................................... 54,797 83,648 (685) --
Net income................................................. -- -- -- --
Translation adjustments.................................... -- -- -- --
Unrealized loss on investments, net........................ -- -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of
stock options............................................. 1,290 8,818 (350) --
Issuance of Common Stock, net.............................. 328 6,570 -- --
Issuance of Common Stock under employee
stock purchase plan....................................... 759 11,345 -- --
Repayment of stockholders' notes........................... -- -- 116 --
Deferred compensation, net................................. -- 1,125 -- --
Income tax benefit related to stock
option exercises.......................................... -- 8,774 -- --
-------- --------- -------- --------
Balance at June 30, 1999................................... 57,174 $ 120,280 $ (919) $ --
======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Retained
Deferred Comprehensive Earnings/
Compensation Income/(loss) (Deficit) Total
------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1996................................... $ -- $ -- $ (334) $ (2,274)
Net income................................................. -- -- 6,752 6,752
Issuance of Common Stock in public
offering, net of issuance costs........................... -- -- -- 41,709
Conversion of Mandatorily Redeemable
Convertible Preferred Stock in
connection with IPO....................................... -- -- -- 12,427
Issuance of Common Stock upon exercise of
stock options and warrants, net........................... -- -- -- 188
Issuance of Common Stock for cash, net..................... -- -- -- 6,566
Issuance of Common Stock under employee
stock purchase plan....................................... -- -- -- 2,983
Income tax benefit related to stock
option exercises.......................................... -- -- -- 3,594
-------- ------ -------- ---------
Balance at June 30, 1997................................... -- -- 6,418 71,945
Net income................................................. -- -- 14,404 14,404
Translation adjustments.................................... -- (35) -- (35)
Comprehensive income....................................... 14,369
Issuance of Common Stock upon exercise of
stock options and warrants, net........................... -- -- -- 1,324
Issuance of Common Stock under employee
stock purchase plan....................................... -- -- -- 6,047
Repayment of stockholders' notes........................... -- -- -- 1,316
Issuance of warrant........................................ -- -- -- 3,188
Deferred compensation , net................................ (1,443) -- -- 70
-------- ------ -------- ---------
Income tax benefit related to stock
option exercises.......................................... -- -- -- 4,048
Balance at June 30, 1998................................... (1,443) (35) 20,822 102,307
Net income................................................. -- -- 25,453 25,453
Translation adjustments.................................... -- (113) -- (113)
Unrealized loss on investments, net........................ -- (343) -- (343)
Comprehensive income....................................... 24,997
Issuance of Common Stock upon exercise of
stock options............................................. 8,468
Issuance of Common Stock, net.............................. -- -- -- 6,570
Issuance of Common Stock under employee
stock purchase plan....................................... -- -- -- 11,345
Repayment of stockholders' notes........................... -- -- -- 116
Deferred compensation, net................................. (349) -- -- 776
Income tax benefit related to stock
option exercises.......................................... -- -- -- 8,774
-------- ------ -------- ---------
Balance at June 30, 1999................................... $ (1,792) $ (491) $ 46,275 $ 163,353
======== ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
INTERNATIONAL NETWORK SERVICES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 25,453 $ 14,404 $ 6,752
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................ 8,144 5,982 3,848
Deferred income taxes........................................ (2,766) (2,325) (1,647)
Tax benefit from employee stock plans........................ 8,774 4,048 3,594
Changes in assets and liabilities:
Accounts receivable.......................................... (30,927) (22,929) (12,285)
Prepaid expenses and other assets............................ (2,882) (901) (2,639)
Accounts payable............................................. 6,907 446 1,462
Accrued liabilities.......................................... 9,896 9,235 3,979
Income taxes payable......................................... 3,213 -- --
Deferred revenue............................................. 1,888 16,441 (58)
-------- -------- --------
Net cash provided by operating activities.................. 27,700 24,401 3,006
Cash flows from investing activities:............................. -------- -------- --------
Purchases of property and equipment............................ (17,362) (9,105) (8,011)
Purchases of investments....................................... (82,770) (38,934) (25,414)
Sales of investments........................................... 38,380 19,732 4,099
-------- -------- --------
Net cash used for investing activities..................... (61,752) (28,307) (29,326)
-------- -------- --------
Cash flows from financing activities:
Payments under line of credit.................................. -- -- (1,000)
Payments on notes payable...................................... -- -- (715)
Proceeds from issuance of Common Stock, net.................... 26,383 10,623 51,716
Repayments of stockholder notes receivable..................... 116 1,252 --
-------- -------- --------
Net cash provided by financing activities.................. 26,499 11,875 50,001
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents...... (113) (35) --
-------- -------- --------
(Decrease) increase in cash and cash equivalents................. (7,666) 7,934 23,681
Cash and cash equivalents at beginning of period.................. 32,484 24,550 869
-------- -------- --------
Cash and cash equivalents at end of period........................ $ 24,818 $ 32,484 $ 24,550
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid for income taxes..................................... $ 10,938 $ 8,177 $ 7,599
Non-cash transactions:
Issuance of Common Stock in exchange for notes receivable
from stockholders............................................ $ 350 $ 64 $ 57
Conversion of Mandatorily Redeemable Convertible Preferred
Stock to Common Stock........................................ $ -- $ -- $ 9,973
Deferred compensation relating to granting of options below
fair market value................................................ $ 1,125 $ 1,513 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
INTERNATIONAL NETWORK SERVICES
Notes to Consolidated Financial Statements
June 30, 1999
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
- -----------
International Network Services (the "Company") was incorporated in California in
August 1991. Effective December 28, 1998 (the first day of the Company's third
fiscal quarter), the Company changed its state of incorporation from California
to Delaware. The Company is a global provider of enterprise network
professional services and software solutions. The Company provides professional
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 multi-vendor environments. To date, the
Company has provided limited professional services to certain of its United
States based clients in foreign locations. Through its INSoft Division, the
Company offers industry leading software solutions for managing and optimizing
application-ready networks. The Company's core software solutions include
EnterprisePRO, which was introduced in June 1996, and VitalSuite, which was
introduced in November 1997.
Significant accounting policies
- -------------------------------
Basis of Presentation 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. Certain prior year consolidated financial statement balances have been
reclassified to conform to the fiscal 1999 presentation.
Principles of consolidation The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries in the United
Kingdom, Germany, the Netherlands and Canada. All intercompany accounts and
transactions have been eliminated.
Stock Split In April 1999, the Company's Board of Directors effected a three-
for-two stock split payable in the form of a dividend of one additional share of
Common Stock for every two shares owned by stockholders. The stock split
resulted in the issuance of approximately 18.8 million additional shares of
Common Stock from authorized but unissued shares. Accordingly, all share and per
share data have been adjusted to retroactively reflect the stock split.
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.
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 translation
adjustments are recorded in stockholders' equity. Foreign exchange transaction
gains and losses were not material in all periods presented.
Derivative Financial Instruments Commencing in fiscal 2000, the Company has
entered into foreign currency forward exchange contracts ("forward contracts")
to manage exposure related to certain foreign currency transactions. The
Company does not enter into derivative financial instruments for trading
purposes. There were no outstanding forward contracts at June 30, 1999.
Revenue recognition Professional services revenue consists primarily of
revenues earned from professional services generally performed on a "time and
expenses" basis and related revenue is recognized as the services are performed.
The Company also performs a limited number of fixed-price engagements under
which revenue is recognized using the percentage-of-completion method of
accounting. Provision for estimated losses on such 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 professional
services revenue net of reimbursable expenses, which are billed to and collected
from clients. Payments received in advance of services performed are recorded
as deferred revenue.
32
<PAGE>
License revenue consists principally of revenue earned under software license
agreements and under royalty agreements with OEMs. License revenue is generally
recognized when a signed contract or other persuasive evidence of an arrangement
exists, the software has been shipped or electronically delivered, the license
fee is fixed or determinable, and collection of the resulting receivable is
probable. For contracts with multiple elements/obligations (e.g. software
products, upgrades/enhancements, maintenance, and services), revenue is
allocated to each element of the arrangement based on the Company's objective
evidence of the fair value as determined by the amount charged when the element
is sold separately. Revenue from subscription license agreements, which include
software, rights to future products and maintenance, is recognized ratably over
the term of the subscription period. Revenue on shipments to resellers, which
is generally subject to certain rights of return and price protection, is
recognized when the products are sold by the resellers to the end-user customer.
Royalty revenues that are contingent upon sale to an end user by OEMs are
generally recognized upon receipt of a report by the Company from the OEM.
Software support and maintenance consists of all inclusive service contracts,
which includes the right to use software combined with installation, maintenance
and support, as well as services for installation, maintenance and support of
software licenses sold separately and included in license fees. Prior to fiscal
1998, the Company only offered its EnterprisePRO solution as an all inclusive
contract. Revenue from all inclusive software service contracts is recognized
ratably over the term of the agreement. Services revenue related to
installation is generally recognized when the services are complete.
Maintenance revenue, which consists of fees for providing updates and user
documentation, and support services, which provide access to the Company's
Technical Assistance Center and field support, are recognized ratably over the
term of the agreement. Support services, which consists of technical support
and configuration, is recognized ratably over the term of the agreement.
Effective in fiscal 1999, the Company adopted Statement of Position ("SOP") 97-
2, "Software Revenue Recognition" and its related amendments. SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supercedes the previous guidance provided
by SOP 91-1. The adoption of SOP 97-2 did not have a material impact on the
Company's licensing practices or consolidated financial position or results of
operations.
Comprehensive income Effective in fiscal 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." SFAS No.130 establishes new rules for
the reporting and display of comprehensive income and its components. The
adoption of SFAS No. 130 had no impact on the Company's results of operations or
stockholders' equity. SFAS No. 130 requires companies to report a new,
additional measure of income on the income statement or to create a new
financial statement that has the new measure of income on it. "Comprehensive
income" includes foreign currency translation gains and losses and other
unrealized gains and losses that have been previously excluded from net income
and reflected instead in equity. The Company has reported the components of
comprehensive income on its Consolidated Statement of Stockholders' Equity
(Deficit).
Net income per share Basic net income per share is computed by dividing net
income (numerator) by the weighted average number of common shares outstanding
(denominator) during the period and excludes the dilutive effect of stock
options, warrants and Common Stock subject to repurchase. 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.
Operating expenses:
Professional services personnel Professional personnel expenses consist
primarily of compensation and benefits of the Company's employees engaged in
the delivery of professional services.
33
<PAGE>
Other costs of professional services 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.
Cost of software licenses Cost of software licenses consists primarily of the
cost of product components, product duplication, shipping and reproduction of
manuals.
Cost of software support and maintenance Cost of software support and
maintenance expenses consist primarily of compensation and benefits of the
Company's employees engaged in the delivery of software support and maintenance
services as well as the related costs of travel and entertainment, certain
recruiting and professional development expenses, field facilities,
depreciation, expensed equipment and supplies.
Research and development All research and development expenses, including
software development costs, are charged to expense as incurred. 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 software 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.
Cash equivalents and investments Cash equivalents consist of highly liquid
investments with original maturities of three months or less. Investments
consist of high quality debt securities with original maturity dates greater
than 90 days. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the Company's investments are
classified as available-for-sale and, at the balance sheet date, are reported at
fair value, with the unrealized gains and losses, net of related taxes, reported
as a component of stockholders' equity.
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.
Leasehold improvements are depreciated over the shorter of the lease term or the
estimated useful life.
Concentration of credit risk The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash, cash
equivalents, 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 1999, 1998 and 1997, no one customer accounted
for more than 10% of revenues.
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 except for a certain amount of
deferred compensation assumed by the Company through its acquisition of
VitalSigns Software, Inc. ("VitalSigns") (see Note 2). The Company has provided
additional pro forma disclosures as required under SFAS No. 123, "Accounting
for Stock-Based Compensation" (see Note 5).
Recently issued accounting pronouncements In April 1998, the American
Institute of Certified Public Accountants ("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, 1999 and does not expect it to have a material effect
on the Company's consolidated financial position, results of operations or cash
flows.
34
<PAGE>
2. ACQUISITION OF VITALSIGNS SOFTWARE, INC.
On November 20, 1998, the Company completed its acquisition of VitalSigns, which
has been accounted for as a pooling of interests, pursuant to the terms of the
Agreement and Plan of Reorganization, as amended and restated as of October 30,
1998. Each issued and outstanding share of VitalSigns Common Stock was
converted into .474124 shares of INS Common Stock; and each outstanding option
to acquire VitalSigns Common Stock was assumed by INS and became an equivalent
option with respect to the Company's Common Stock, on the same terms of the
original option adjusted to reflect the exchange ratio. The Company issued
approximately 5,933,000 shares of INS Common Stock in the acquisition and
assumed options that can be exercised for approximately 420,000 shares of INS
Common Stock.
Prior to the acquisition, VitalSigns' fiscal year ended on December 31. The
consolidated financial statements for the year ended June 30, 1998 reflect the
results of operations of the Company for the year ended June 30, 1998 combined
with the results of operations of VitalSigns for the twelve months ended June
30, 1998. The consolidated financial statements for the year ended June 30,
1997 reflect the results of operations of INS for the year ended June 30, 1997
combined with the results of operations of VitalSigns for the period from August
15, 1996 (inception) through June 30, 1997.
The results of operations previously reported by the separate companies and the
combined amounts in the accompanying consolidated statements of operations are
summarized below (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue:
INS........................................ $ 169,678 $ 99,275
VitalSigns................................. 3,120 238
--------- --------
Combined................................ $ 172,798 $ 99,513
========= ========
Net income (loss):
INS........................................ $ 16,110 $ 7,612
VitalSigns................................. (1,706) (860)
--------- --------
Combined................................ $ 14,404 $ 6,752
========= ========
</TABLE>
The Company incurred approximately $7.2 million in acquisition-related charges,
principally in the quarter ended December 31, 1998. These charges include
direct transaction costs primarily for financial advisory services, legal and
consulting fees and costs associated with combining the operations of the two
companies.
3. BALANCE SHEET COMPONENTS (in thousands)
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Accounts receivable:
Trade............................................................. 82,607 $ 48,503
Less: allowances.................................................. (4,645) (1,468)
--------- ---------
$ 77,962 $ 47,035
Property and equipment:............................................. --------- ---------
Computer equipment and software................................... $ 25,935 $ 15,885
Leasehold improvements............................................ 4,810 2,300
Furniture, fixtures, and other.................................... 7,790 3,364
--------- ---------
38,535 21,549
Less: accumulated depreciation.................................... (17,046) (10,054)
--------- ---------
$ 21,489 $ 11,495
========= =========
</TABLE>
35
<PAGE>
4. INVESTMENTS
The carrying value of the Company's investment portfolio approximates fair value
for all periods presented. Cash equivalents and investments consist of the
following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Money market fund............................................... $ 12,147 $ 10,334
Corporate debt securities....................................... 7,035 --
Government notes................................................ 2,967 --
State and local municipalities notes............................ 79,613 56,677
--------- ---------
Total available-for-sale securities.......................... 101,762 67,011
Less: amounts classified as cash equivalents................... (17,198) (26,494)
--------- ---------
Total investments............................................ $ 84,564 $ 40,517
========= =========
</TABLE>
The contractual maturities of marketable securities at June 30, 1999, regardless
of their balance sheet classification, was as follows (in thousands):
<TABLE>
<S> <C>
Due in 1 year or less $ 28,297
Due in 1-2 years 25,204
Due in 2-3 years 31,063
--------
Total investments $ 84,564
========
</TABLE>
At June 30, 1999, marketable securities totaling $17.2 million were classified
as cash equivalents and included money market funds of $12.1 and state and local
municipalities notes of $5.1 million.
5. STOCKHOLDERS' EQUITY
Common Stock
- ------------
In September 1996, the Company completed its initial public offering of
approximately 4,313,000 shares of Common Stock at $10.67 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 395,000 shares of Common Stock at $19.73 per share.
The warrant, which is exercisable immediately, expires on May 1, 2005. The
warrant was issued at fair market value.
In both fiscal 1999 and fiscal 1997, VitalSigns issued convertible preferred
stock for gross proceeds of approximately $6.6 million. Just prior to
consummation of the acquisition, all VitalSigns convertible preferred stock was
converted into VitalSigns Common Stock. Such amounts have been included in the
accompanying consolidated financial statements as if approximately 378,000 and
4,533,000 shares of the Company's Common Stock were issued during fiscal 1999
and 1997, respectively.
During 1999, the Company changed its state of incorporation from California to
Delaware. As a result of the change, the par value of the Company's stock was
changed from no par value to $0.001 per share. There was no impact on the
Company's financial condition or results of operations as a result of the
reincorporation. The reincorporation proposal was approved by the Company's
stockholders at the Company's annual meeting of stockholders. In addition, the
stockholders approved an increase in the number of authorized shares of the
Company's Common Stock from 75,000,000 to 150,000,000.
Certain Common Stock option holders (see "Stock Option Plans") have the right to
exercise unvested options, subject to a repurchase right held by the Company. At
June 30, 1999 and 1998, approximately 781,000 and 2,663,000 shares outstanding,
respectively, were subject to repurchase by the Company at the original purchase
price in the event of employee termination.
36
<PAGE>
At June 30, 1999, the Company had reserved 395,000, 1,077,000, and 19,290,000
shares of Common Stock for future issuance related to a warrant, its stock
purchase plan and its stock option plans, respectively.
Net Income Per Share
- --------------------
The following is a reconciliation between basic and diluted net income per share
computations for all periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Net income............................................................ $ 25,453 $ 14,404 $ 6,752
-------- -------- --------
Weighted average common shares used to
compute basic net income per share............................... 54,444 50,582 39,531
Effect of dilutive securities:
Option and warrants.............................................. 6,152 3,585 3,191
Common Stock subject to repurchase............................... 1,614 2,934 3,893
Preferred Stock.................................................. -- -- 5,230
-------- -------- --------
Weighted average common shares used to
compute diluted net income per share............................. 62,210 57,101 51,845
======== ======== ========
Net income per share:
Basic............................................................ $ 0.47 $ 0.28 $ 0.17
======== ======== ========
Diluted.......................................................... $ 0.41 $ 0.25 $ 0.13
========= ========= =========
</TABLE>
Options to purchase approximately 148,000, 571,000 and 227,000 shares of Common
Stock were outstanding during fiscal 1999, 1998 and 1997, 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, and
therefore were anti-dilutive.
Notes receivable from stockholders
- ----------------------------------
In exchange for the issuance of Common Stock upon exercise of options, the
Company has from time to time received notes receivable from stockholders which
bear interest at rates varying from 5.32% to 6.0% 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 stockholders'
equity.
Deferred compensation
- ---------------------
As of June 30, 1999, the Company has recorded approximately $2.6 million of
deferred compensation for the difference between the exercise or purchase price
and deemed fair value of certain stock options and shares of restricted stock
granted or issued to VitalSigns employees and consultants prior to the
acquisition. This amount is being amortized by charges to operations over the
vesting period of individual options and restricted shares, ranging from two to
four years.
Stock option plans
- ------------------
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"). A total of 20,250,000 shares of Common Stock plus annual increases equal
to the lesser of (i) 3,750,000 shares, (ii) 2.5 percent of the number of shares
of Common Stock outstanding on the last day of the preceding fiscal year, or
(iii) a lesser amount determined by the Company's Board of Directors are
currently reserved for issuance pursuant to both the 1996 Plan and the 1992
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
37
<PAGE>
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 7,750,000
shares for issuance under this plan. The 1998 Plan provides for granting
nonstatutory stock options to employees and consultants, excluding officers and
directors.
In August 1998, the Company's Board of Directors adopted the 1998 Director
Option Plan (the "Director Plan") and reserved 450,000 shares of Common Stock
for issuance thereunder. The Director Plan provides for granting options to
non-employee directors. There were no options granted under the Director Plan
in fiscal 1999.
The Company assumed certain options granted to former employees of VitalSigns
("Acquired Options"). The Acquired Options have been adjusted to effectuate the
conversion under the terms of the Agreement and Plan of Reorganization between
the Company and VitalSigns. The Acquired Options generally become exercisable
over a four-year period and generally expire ten years from the date of grant.
No additional options will be granted under VitalSigns' plan.
Incentive stock options must be granted at fair market value at the date of
grant, and non-statutory 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 $15.33 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 or $13.17 per
share. These new options were otherwise identical to the old options.
A summary of the status of all of the Company's stock option plans as of and
during the years ended June 30, 1999, 1998, and 1997 follows (in thousands,
except exercise price):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------- --------------------------------- ----------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............ 10,747 $ 12.75 5,427 $ 5.71 3,254 $ 0.94
Granted..... 9,930 28.05 7,981 14.73 4,498 10.74
Exercised... (1,290) 6.84 (1,807) 1.14 (981) 0.27
Canceled.... (745) 18.42 (854) 10.95 (1,344) 14.96
-------- ------- --------- ------- -------- -------
Outstanding at
end of year 18,642 $ 21.11 10,747 $ 12.75 5,427 $ 5.71
======== ======= ========= ======= ======== =======
Options vested
and exercisable
at year end..... 4,715 $ 13.54 2,027 $ 4.53 1,684 $ 0.76
======== ======= ========= ======= ======== =======
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at June 30, 1999 (in thousands, except exercise price):
<TABLE>
<CAPTION>
Options Outstanding Options Vested and Exercisable
-------------------------------------------------------------- ------------------------------------------
Weighted
Range of Average Weighted Shares Weighted
Exercise Price Shares Outstanding Remaining Average Exercisable Average Exercise
at June 30, 1999 Contractual Life Exercise Price at June 30, 1999 Price
- ---------------- ------------------- ------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
$0.01 to $0.05 130 5 Years $ 0.05 129 $ 0.05
$0.17 to $1.06 622 7 Years $ 0.54 554 $ 0.53
$1.67 to $8.00 1,031 7 Years $ 5.71 602 $ 5.26
$11.08 to $13.33 2,954 8 Years $12.75 1,240 $12.82
$15.00 to $17.63 3,459 9 Years $16.78 941 $16.39
$18.17 to $24.75 4,978 9 Years $22.99 1,200 $23.09
$25.17 to $35.50 5,468 10 Years $32.38 49 $28.12
- ---------------------------------------------------------------------------------------------------------------------------
$0.01 to $35.50 18,642 9 Years $21.11 4,715 $13.54
============================================================================================================================
</TABLE>
38
<PAGE>
Employee stock purchase plan
- ----------------------------
On July 18, 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). 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 2,788,000 shares of Common Stock have been authorized for issuance
under the Purchase Plan.
Pro Forma Information
- ---------------------
Pro forma information regarding net income (loss) per share is required by SFAS
No. 123 to illustrate the financial results of operations as if the Company had
accounted for its stock-based awards to employees under the fair value method of
SFAS No. 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 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:
<TABLE>
<CAPTION>
Option Plans Purchase Plan
------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)....................... 4.5 4.5 4.5 0.5 0.5 0.5
Expected volatility............................ 55% 55% 55% 70% 70% 75%
Risk free interest rate........................ 5.5% 5.5% 5.5% 5.2% 5.2% 5.8%
</TABLE>
The weighted average estimated fair value of options granted under all option
plans during 1999, 1998 and 1997 was $14.19, $7.46 and $4.60, respectively. The
weighted average estimated fair value of purchase rights granted under the
Purchase Plan during 1999, 1998 and 1997 was $7.99, $5.29 and $5.10,
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 or the six-month purchase period, as applicable. The Company's pro forma
information follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)........................ As reported $ 25,453 $ 14,404 $ 6,752
Pro forma (10,173) 702 (1,799)
Basic net income (loss) per share........ As reported 0.47 0.28 0.17
Pro Forma (0.19) 0.01 (0.05)
Diluted net income (loss) per share..... As reported 0.41 0.25 0.13
Pro forma (0.19) 0.01 (0.05)
</TABLE>
The above pro forma disclosures are not likely to be representative of pro
forma disclosures of future years.
39
<PAGE>
6. INCOME TAXES
The provision for income taxes for the years ended June 30, 1999, 1998 and 1997
consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal................................................... $19,423 $ 9,442 $ 4,705
State..................................................... 3,854 2,249 1,266
Foreign................................................... 525 231 165
------- ------- -------
23,802 11,922 6,136
------- ------- -------
Deferred:
Federal................................................... (2,429) (2,027) (1,443)
State..................................................... (336) (292) (204)
------- ------- -------
(2,765) (2,319) (1,647)
------- ------- -------
$21,037 $ 9,603 $ 4,489
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Tax provision at statutory rate............................. $16,272 $8,402 $4,029
State income taxes, net of federal benefit.................. 2,286 1,462 690
Tax exempt interest......................................... (757) (528) (271)
Nondeductible expenses...................................... 2,648 235 83
Other....................................................... 588 32 (42)
------- ------- -------
$21,037 $9,603 $4,489
------- ------- -------
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. The Company provides a valuation allowance for deferred tax
assets when it is more likely than not, based on available evidence, that some
portion or all of the deferred tax assets will not be realized. Significant
components of the Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Depreciation................................................................. $ 715 $1,071
State income taxes........................................................... 581 325
Allowance for doubtful accounts.............................................. 1,868 594
Reserves and accruals........................................................ 1,536 1,225
Deferred revenue............................................................. 2,895 1,614
------ ------
$7,595 $4,829
====== ======
</TABLE>
40
<PAGE>
7. 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, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending
June 30,
----------------
<S> <C>
2000............................................................................... $ 9,415
2001............................................................................... 7,005
2002............................................................................... 4,723
2003............................................................................... 3,279
2004............................................................................... 1,892
Thereafter.............................................................................. 604
-------
$26,918
=======
</TABLE>
Total rent expense for the years ended June 30, 1999, 1998 and 1997 was
approximately $4.8 million, $3.2 million, and $1.4 million, 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.
Royalty amounts recorded in fiscal 1999 and 1998 were not significant.
8. LINE OF CREDIT
The Company has a $10 million line of credit with a bank which expires in
February 2000. Borrowings under the line of credit bear interest at the bank's
prime rate (7.75% at June 30, 1999) less one half of one percent, or the Company
has the option to borrow at a fixed rate at one and one half percent above the
bank's LIBOR for a fixed term of up to three months. Balances outstanding at
February 2000 that have been used to fund capital equipment may be converted to
a three-year term loan, which provides for the same interest rate option. There
were no borrowings under the line of credit at June 30, 1999. The line of credit
requires the Company to comply with certain financial covenants. At June 30,
1999, the Company was in compliance with these financial covenants.
9. SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information."
The Company currently operates in two operating segments: professional services
and software solutions. Operating segments are defined as components of an
enterprise about which financial information is available and is evaluated by
the chief decision maker when deciding how to allocate resources and when
assessing performance. The Company's chief operating decision making group
consist of the Chief Executive Officer, the Chief Operating Officer and Chief
Financial Officer.
The professional services segment principally involves consulting services for
complex enterprise networks. The software solutions segment provides solutions
for managing and optimizing application-ready networks. The Company evaluates
the performance of its segments and allocates resources to them based on
contribution margin. There are no differences between the accounting policies
used to measure profit and loss for segments and those used on a consolidated
basis.
41
<PAGE>
The information in the following table is derived from the Company's internal
financial reporting used for corporate management purposes (in thousands).
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
--------------------------------------------------------------------
Professional Software
Services Solutions Other Total
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue.................................... $ 276,488 $ 38,601 $ -- $ 315,089
Expenses:
Professional services personnel........... (125,756) -- -- (125,756)
Other costs of professional services...... (39,306) -- -- (39,306)
Cost of software licenses................. -- (847) -- (847)
Cost of software support and maintenance.. -- (4,952) -- (4,952)
Research and development.................. -- (6,263) -- (6,263)
--------- --------- --------- ---------
Contribution margin........................ 111,426 26,539 -- 137,965
Sales and marketing........................ -- -- (48,826) (48,826)
General and administrative................. -- -- (38,575) (38,575)
Acquisition related charges................ -- -- (7,176) (7,176)
Interest and other, net.................... -- -- 3,102 3,102
Income before provision for --------- --------- --------- ---------
income taxes........................... $ 111,426 $ 26,539 $ (91,475) $ 46,490
========= ========= ========= =========
Depreciation and amortization.............. $ 1,515 $ 947 $ 4,906 $ 7,368
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
------------------------------------------------------------------
Professional Software
Services Solutions Other Total
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenue.................................... $158,001 $14,797 $ -- $172,798
Expenses:
Professional services personnel........... (73,911) -- -- (73,911)
Other costs of professional services...... (23,155) -- -- (23,155)
Cost of software licenses................. -- (402) -- (402)
Cost of software support and maintenance.. -- (3,173) -- (3,173)
Research and development.................. -- (4,161) -- (4,161)
-------- -------- -------- --------
Contribution margin........................ 60,935 7,061 -- 67,996
Sales and marketing........................ -- -- (26,389) (26,389)
General and administrative................. -- -- (19,735) (19,735)
Interest and other, net.................... -- -- 2,135 2,135
Income before provision for -------- -------- -------- --------
income taxes........................... $ 60,935 $ 7,061 $(43,989) $ 24,007
======== ======= ======== ========
Depreciation and amortization.............. $ 2,516 $ 713 $ 2,683 $ 5,912
======== ======= ======== ========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended June 30, 1997
--------------------------------------------------------------
Professional Software
Services Solutions Other Total
------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue........................................ $ 95,542 $ 3,971 $ -- $ 99,513
Expenses:
Professional services personnel............... (44,268) -- -- (44,268)
Other costs of professional services.......... (12,216) -- -- (12,216)
Cost of software licenses..................... -- (25) -- (25)
Cost of software support and maintenance...... -- (1,655) -- (1,655)
Research and development...................... -- (2,262) -- (2,262)
-------- -------- -------- --------
Contribution margin............................ 39,058 29 -- 39,087
Sales and marketing............................ -- -- (14,985) (14,985)
General and administrative..................... -- -- (13,715) (13,715)
Interest and other, net........................ -- -- 854 854
Income before provision for -------- -------- -------- --------
income taxes............................... $ 39,058 $ 29 $(27,846) $ 11,241
======== ======== ======== ========
Depreciation and amortization.................. $ 1,820 $ 459 $ 1,569 $ 3,848
======== ======== ======== ========
</TABLE>
Revenue from no single foreign country was material to the consolidated revenues
of the Company. The Company does not segregate assets by segment nor are there
any significant assets located in any foreign country.
10. SUBSEQUENT EVENT
On August 9, 1999, the Company and Lucent Technologies Inc. ("Lucent") signed a
definitive merger agreement. Under the terms of the agreement, each share of
the Company's Common Stock will be converted into 0.8473 shares of Lucent's
Common Stock. Subject to Stockholder and other regulatory approvals, the
proposed merger is expected to be completed during the quarter ending December
31, 1999 and is expected to be accounted for as a pooling of interests.
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
International Network Services
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 55 present fairly, in all material
respects, the financial position of International Network Services and its
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 55 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 23, 1999 (except for Note 10 which is dated as of August 9, 1999)
44
<PAGE>
Quarterly Results of Operations
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1999
----------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Professional services......................................... $81,736 $72,071 $64,864 $57,817
Software licenses............................................. 10,024 8,583 7,249 3,825
Software support and maintenance.............................. 2,383 2,050 1,733 2,754
------- ------- ------- -------
Total revenue............................................ 94,143 82,704 73,846 64,396
------- ------- ------- -------
Operating expenses:
Professional services personnel............................... 36,827 33,297 29,541 26,091
Other costs of professional services.......................... 11,463 9,881 9,517 8,445
Cost of software licenses..................................... 294 278 205 70
Cost of software support and maintenance...................... 1,425 1,111 1,206 1,210
Research and development...................................... 1,825 1,676 1,481 1,281
Sales and marketing........................................... 15,052 12,209 11,198 10,367
General and administrative.................................... 11,512 10,596 8,747 7,720
Acquisition related charges................................... - - 7,176 -
------- ------- ------- -------
Total operating expenses................................. 78,398 69,048 69,071 55,184
------- ------- ------- -------
Income from operations........................................... 15,745 13,656 4,775 9,212
Interest and other, net.......................................... 915 733 764 690
------- ------- ------- -------
Income before provision for income taxes......................... 16,660 14,389 5,539 9,902
Provision for income taxes....................................... 6,668 5,720 4,688 3,961
------- ------- ------- -------
Net income....................................................... $ 9,992 $ 8,669 $ 851 $ 5,941
======= ======= ======= =======
Net income per share:
Basic......................................................... $0.18 $0.16 $0.02 $0.11
Diluted....................................................... $0.16 $0.14 $0.01 $0.10
Shares used to compute net income per share:
Basic......................................................... 56,065 55,188 53,943 52,581
Diluted....................................................... 63,725 63,451 61,565 60,099
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1998
-----------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30,
1998 1998 1997 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Professional services......................................... $48,597 $42,039 $35,564 $31,801
Software licenses............................................. 3,143 2,048 1,894 428
Software support and maintenance.............................. 2,227 1,960 1,380 1,717
------- ------- ------- -------
Total revenue............................................ 53,967 46,047 38,838 33,946
------- ------- ------- -------
Operating expenses:
Professional services personnel............................... 22,357 19,524 17,027 15,002
Other costs of professional services.......................... 7,222 6,427 4,958 4,548
Cost of software licenses..................................... 168 162 42 31
Cost of software support and maintenance...................... 1,038 744 712 679
Research and development...................................... 1,245 997 1,163 756
Sales and marketing........................................... 8,364 6,962 6,161 4,902
General and administrative.................................... 6,011 5,278 4,413 4,033
Acquisition related charges................................... - - - -
------- ------- ------- -------
Total operating expenses................................. 46,405 40,094 34,476 29,951
------- ------- ------- -------
Income from operations........................................... 7,562 5,953 4,362 3,995
Interest and other, net 556 577 593 409
------- ------- ------- -------
Income before provision for income taxes......................... 8,118 6,530 4,955 4,404
Provision for income taxes....................................... 3,247 2,612 1,982 1,762
------- ------- ------- -------
Net income....................................................... $ 4,871 $ 3,918 $ 2,973 $ 2,642
======= ======= ======= =======
Net income per share:
Basic......................................................... $0.09 $0.08 $0.06 $0.05
Diluted....................................................... $0.08 $0.07 $0.05 $0.05
Shares used to compute net income per share:
Basic......................................................... 51,800 51,013 50,179 49,335
Diluted....................................................... 58,750 57,409 56,129 56,114
</TABLE>
45
<PAGE>
Quarterly Results of Operations
(unaudited)
(as a percentage of revenue)
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1999
-----------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1998 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Professional services.......................... 87% 87% 88% 90%
Software licenses.............................. 10 10 10 6
Software support and maintenance............... 3 3 2 4
------- ------- ------- -------
Total revenue................................ 100 100 100 100
------- ------- ------- -------
Operating expenses:
Professional services personnel................ 39 40 40 41
Other costs of professional services........... 12 12 13 13
Cost of software licenses...................... 0 0 0 0
Cost of software support and maintenance....... 2 1 2 2
Research and development....................... 2 2 2 2
Sales and marketing............................ 16 15 15 16
General and administrative..................... 12 13 12 12
Acquisition related charges.................... 0 - 10 -
------- ------- ------- -------
Total operating expenses..................... 83 83 94 86
------- ------- ------- -------
Income from operations........................... 17 17 6 14
Interest and other, net.......................... 1 1 1 1
------- ------- ------- -------
Income before provision for income taxes......... 18 18 7 15
Provision for income taxes....................... 7 7 6 6
------- ------- ------- -------
Net income....................................... 11% 11% 1% 9%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Fiscal 1998
---------------------------------------------------------------------
June 30, Mar. 31, Dec. 31, Sept. 30,
1998 1998 1997 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Professional services............................. 90% 91% 91% 94
Software licenses................................. 6 5 5 1
Software support and maintenance.................. 4 4 4 5
------ ------ ------ ------
Total revenue................................... 100 100 100 100
------ ------ ------ ------
Operating expenses:
Professional services personnel................... 42 42 44 44
Other costs of professional services.............. 13 14 13 13
Cost of software licenses......................... 0 0 0 0
Cost of software support and maintenance.......... 2 2 2 2
Research and development.......................... 2 2 3 2
Sales and marketing............................... 16 15 16 15
General and administrative........................ 11 11 11 12
Acquisition related charges....................... - - - -
------ ------ ------ ------
Total operating expenses........................ 86 86 89 88
------ ------ ------ ------
Income from operations.............................. 14 14 11 12
Interest and other, net............................. 1 1 2 1
------ ------ ------ ------
Income before provision for income taxes............ 15 15 13 13
Provision for income taxes.......................... 6 6 5 5
------ ------ ------ ------
Net income.......................................... 9% 9% 8% 8%
====== ====== ====== ======
</TABLE>
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the directors
and executive officers of the Company as of August 17, 1999.
<TABLE>
<CAPTION>
Name Age Position With the Company
- ---------------------- ------- -----------------------------------------------------------------------
<S> <C> <C>
Donald K. McKinney................ 50 Chairman of the Board
John L. Drew...................... 43 President, Chief Executive Officer and Director
Kevin J. Laughlin................. 38 Vice President of Finance and Chief Financial Officer
David M. Butze.................... 42 Vice President of Worldwide Operations and Chief Operating Officer
Vernon R. Anderson................ 68 Director
David Carlick..................... 49 Director
Lawrence G. Finch`................ 65 Director
</TABLE>
- ------------------
Donald K. McKinney. Mr. McKinney, the founder of the Company, served as
President and Director from the Company's inception in August 1991 until January
1996 and Chief Executive Officer from August 1991 until July 1998. Mr. McKinney
has served as Chairman of the Board since January 1996. Mr. McKinney formed
Watershed Capital Partners in October 1998 and has been a Partner since the
formation. Mr. McKinney served as the Vice President of Sales and Marketing of
Electronics for Imaging, Inc., a provider of hardware and software products for
the digital color imaging market, from May 1989 to February 1991. Mr. McKinney
has also served in various sales, management and consulting positions at Sequoia
Capital, Silicon Graphics, Inc., Chromatics and IBM. Mr. McKinney is also on the
Board of Directors of C-Cube Microsystems and several privately held companies.
John L. Drew. Mr. Drew served as Vice President of Operations from June
1994 to January 1996 and as President and Chief Operating Officer from February
1996 to July 1998. Mr. Drew has served as President and Chief Executive Officer
since July 1998. Mr. Drew is also a Director of the Company. Prior to joining
the Company, Mr. Drew was Vice President and General Manager for the Network
Enable Division of Unisys Corporation from April 1991 to June 1994. Mr. Drew
also served in other finance, marketing and management positions for Unisys
Corporation from July 1984 to March 1991.
Kevin J. Laughlin. Mr. Laughlin joined the Company in August 1993 as
Director of Finance and Secretary, became Vice President of Finance in August
1994, and became Chief Financial Officer in July 1996. Mr. Laughlin was
Controller of Electronics for Imaging, Inc., a provider of hardware and software
products for the digital color imaging market, from November 1989 to July 1993.
Mr. Laughlin also served as an Accounting Manager of Oracle Corporation and in
various positions at Ernst & Young.
David M. Butze. Mr. Butze joined the Company in April 1995 as Vice
President of Western Operations, served as Vice President of North American
Field Operations from September 1997 to June 1999 and became Vice President of
Worldwide Operations and Chief Operating Officer in July 1999. Mr. Butze was
Vice President of Sales and Marketing of Valence Technology, Inc., a battery
technology company, from May 1992 to March 1995. Mr. Butze was Vice President
of JWP Information Services, a systems integrator, from March 1989 to May 1992.
47
<PAGE>
Vernon R. Anderson. Mr. Anderson has served as a member of the Company's
Board of Directors since April 1992 and served as Chairman of the Board from
April 1992 to January 1996. Mr. Anderson has been a private investor and
management advisor since January 1994. Mr. Anderson was the President, Chief
Executive Officer and Vice Chairman of Axel Johnson, Inc., a diversified
industrial company, from March 1988 to October 1989, and Vice Chairman from
October 1989 to December 1993. Mr. Anderson was a founder, President and Chief
Executive Officer of Silicon Graphics, Inc., Collagen Corporation and Vidar
Corporation.
David Carlick. Mr. Carlick has served as a member of the Board of Directors
since April 1992. Mr. Carlick was the founder of Carlick Advertising in 1981,
which merged with Poppe Tyson in 1993, and was an Executive Vice President and
Director of Poppe Tyson from 1993 to March 1997. From April 1997 to September
1997, Mr. Carlick was President, Media Services, of PowerAgent. Since September
1997, Mr. Carlick has served as Senior Advisor to VantagePoint Venture Partners
and in June 1999 became a Venture Partner. Mr. Carlick is on the Board of
Directors of several privately held companies.
Lawrence G. Finch. Mr. Finch has served as a member of the Board of
Directors since June 1993. Mr. Finch has been a partner of Sigma Partners since
1989. Mr. Finch is on the Board of Directors of Splash Technology Inc., Genesis
Microchip Incorporated and several privately held companies.
Mr. Giancarlo resigned as a member of the Board of Directors in August 1999.
Mr. Giancarlo serves as the Senior Vice President of Small-to-Medium Business at
Cisco Systems, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act of 1934 ("Section 16(a)") requires the
Company's executive officers, directors and persons who own more than ten
percent of the Company's Common Stock to file initial reports of ownership on
Form 3 and changes in ownership on Form 4 or Form 5 with the SEC and the
National Association of Securities Dealers, Inc. Such executive officers,
directors and ten-percent stockholders are also required by SEC rules to furnish
the Company with copies of all such forms that they file.
Based solely on its review of the copies of such forms received by the
Company and written representations from certain reporting persons that all
required Forms 5 have been filed, the Company believes that during fiscal 1999
all Section 16(a) filing requirements applicable to its executive officers,
directors and ten-percent stockholders were complied with except that Form 4s
were filed late for Vernon Anderson in April 1999, John Drew in August 1998 and
Donald McKinney in July 1999. Additionally, Form 5s were filed late for Vernon
Anderson, David Butze, David Carlick, John Drew, Lawrence Finch and Kevin
Laughlin for fiscal 1999.
48
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, as to the Chief Executive Officer and the
Company's other executive officers whose salary plus bonus exceeded $100,000
during the last fiscal year (the "Named Officers"), information concerning
compensation earned for services to the Company in all capacities during the
last three fiscal years.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation --------------
---------------------
Securities
Fiscal Underlying
Name and Principal Position(1) Year Salary($) Bonus($) Options (#)
- -------------------------------------------------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Donald K. McKinney............................... 1999 $236,115 $ - 225,000
Chairman of the Board 1998 260,000 130,000 750,000
1997 245,000 105,000 0
John L. Drew..................................... 1999 346,538 - 2,475,000
President, Chief Executive Officer and Director 1998 260,000 130,000 749,999
1997 245,000 105,000 0
Kevin J. Laughlin................................ 1999 185,618 86,996 24,000
Vice President, Finance, Chief Financial 1998 148,560 62,616 187,500
Officer and Secretary 1997 148,000 37,500 0
David M. Butze................................... 1999 213,577 132,007 325,000
Vice President of Worldwide Operations and 1998 173,462 167,927 345,000
Chief Operating Officer 1997 123,077 179,754 149,999
</TABLE>
- ----------------
(1) Mr. McKinney was Chief Executive Officer until July 1998 at which time Mr.
Drew was appointed Chief Executive Officer.
The following table sets forth for each of the Named Officers certain
information concerning stock options granted during fiscal 1999.
Options Grants in Fiscal Year 1999
Individual Grants
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Percentage of Potential Realizable Value at Assumed
Number Total Options Annual Rates of Stock Price
Securities Granted to Appreciation for Option Term (4)
Underlying Employees in Exercise or -------------------------------------
Options Fiscal 1999 Base Price Expiration
Name Granted (1) (2) ($/Share) Date (3) 5% ($) 10% ($)
- ------------------------ -------------- ------------- ----------- ----------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Donald K. McKinney (5) 150,000 1.5% $ 24.75 09/23/02 $ 837,621 $ 1,811,686
Donald K. McKinney (5) 75,000 0.8 24.75 07/23/08 1,167,386 2,958,384
John L. Drew (5) 150,000 1.5 24.75 09/23/02 837,621 1,811,686
John L. Drew (5) 2,325,000 23.4 24.75 07/23/08 36,188,955 91,709,918
Kevin J. Laughlin (5) 24,000 0.2 34.50 06/15/09 520,725 1,319,619
David M. Butze 225,000 2.3 17.50 10/06/08 2,476,273 6,275,361
David M. Butze 100,000 1.0 34.50 06/15/09 2,169,686 5,498,411
</TABLE>
49
<PAGE>
- -------------------
(1) Options granted pursuant to the Company's 1996 Stock Plan typically vest as
follows: a total of 24% of the options vest upon completion of 12 months of
service with the Company, and the remaining shares vest at the rate of two
percent per month over the next 38 months of service.
(2) The Company granted options for 9,915,318 shares of Common Stock to
employees in fiscal 1999.
(3) Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's
death or disability.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices.
(5) A portion of these options will accelerate upon a change of control. See
"Employee Contracts and Change In Control".
The following table sets forth for each of the Named Officers certain
information concerning options exercised during fiscal 1999 and the number of
shares subject to both exercisable and unexercisable stock options as of fiscal
year-end. The table also sets forth information with respect to the value of
Stock Options held by such individuals as of June 27, 1999 (the Company's fiscal
year-end).
AGGREGATED OPTIONS EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ($) (1)
ACQUIRED ON REALIZED ------------------------------ --------------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald McKinney - $0 362,999 612,001 $ 6,022,421 $10,904,329
John L. Drew - 0 932,999 2,292,000 $14,851,528 $32,023,974
Kevin Laughlin - 0 77,999 133,501 $ 1,586,466 $ 2,163,962
David M. Butze - 0 216,148 566,352 $ 5,339,754 $10,276,010
</TABLE>
(1) These values have been calculated based on the closing price of the
Company's Common Stock on The Nasdaq National Market on June 25, 1999 of
$36.63 per share minus the exercise price.
EMPLOYEE CONTRACTS AND CHANGE IN CONTROL
The Company currently has no employment contracts with any of the Company's
Named Officers. The Company, however, adopted an executive management group
change-of-control plan in July 1998, and has entered into "change-of-control"
agreements with Messrs. McKinney, Drew and Laughlin. Pursuant to these
agreements, in the event of a change-of-control of the Company, the vesting
schedule of any options or restricted stock (the "Unvested Awards") that each
such officer holds shall accelerate such that a portion of such Unvested Awards
shall vest in full. In addition, each such officer is eligible to receive, in
the event that his employment is terminated within one year following a change-
of-control of the Company, other than for cause (as defined), death, disability
(as defined), or resignation other than for good reason (as defined), an amount
equal to 100% of his annual compensation, continuation of health benefits for
twelve months thereafter, and the remaining portion of Unvested Awards held by
such officer shall vest in full. For purposes of the agreement, "annual
compensation" means annual salary and incentive compensation. A "change-of-
control" is defined to include the following events (i) any person (as defined
in the Securities Exchange Act of 1934) becomes the beneficial owner, directly
or indirectly, of 50% or more of the outstanding voting securities of the
Company, (ii) a merger or acquisition of the Company resulting in a 50% or
greater change in the total voting power of the Company immediately following
such transaction, (iii) certain changes in the majority composition of the Board
of Directors during a twenty-four
50
<PAGE>
month period not initiated by the Board of Directors or (iv) the sale or
disposition of at least 75% of the Company's assets.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. Directors are eligible to receive stock option
grants to purchase Common Stock under the Company's 1996 Stock Plan and non-
employee directors are also eligible to receive option grants pursuant to the
Company's 1998 Director Option Plan. In August 1998, Messrs. Anderson and
Carlick each received an option to purchase 7,500 shares of Common Stock. The
options vest monthly over a 50 month period.
In addition, all directors are reimbursed for expenses incurred in attending
Board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Messrs.
Anderson and Carlick. No interlocking relationship exists between any member of
the Company's Board of Directors or Compensation Committee and any member of the
Board of Directors or compensation committee of any other company, nor has any
such interlocking relationship existed in the past. No member of the
Compensation Committee is or was formerly an officer or an employee of the
Company.
51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
the Company as of August 17, 1999 for the following: (i) each person or entity
who is known by the Company to own beneficially 5% or more of the outstanding
shares of the Company's Common Stock; (ii) each of the Company's directors;
(iii) each of the executive officers named in the Summary Compensation Table;
and (iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially Percentage of
Name and Address of Beneficial Owner Owned Total (1)
- ---------------------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
Donald K. McKinney(2)....................................................... 15,808,464 27.4%
c/o International Network Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Lucent Technologies Inc.(3)................................................. 15,808,464 27.4%
600 Mountain Avenue
Murray Hill, NJ 07974
Cisco Systems, Inc.......................................................... 3,872,418 6.8%
170 West Tasman Drive
San Jose, CA 95134
Pilgrim Baxter & Associates, Ltd. (4)....................................... 3,230,550 5.6%
825 Duportail Road
Wayne, PA 19087
John L. Drew(5)............................................................. 1,868,405 3.2%
Vernon R. Anderson(6)....................................................... 620,613 1.1%
Kevin J. Laughlin(7)........................................................ 385,914 *
Lawrence G. Finch(8)........................................................ 235,504 *
David Carlick(9)............................................................ 104,550 *
David M. Butze(10).......................................................... 365,801 *
-----------------------------------------------
All executive officers and directors as a group (7 persons)(11)............. 19,389,251 32.7%
-----------------------------------------------
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
the Company's Common Stock.
1. Based on 57,355,904 shares outstanding as of August 17, 1999. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of August 17, 1999 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing the
percentage ownership of each other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
2. Includes 14,473,465 shares held by the McKinney Family Trust, of which Mr.
McKinney is a trustee. Also includes 434,999 shares subject to options held
by Mr. McKinney that are exercisable within 60 days of August 17, 1999. All
of the shares beneficially owned by Mr. McKinney and the McKinney Family
Trust are subject to a Stockholder Agreement with Lucent under which Mr.
McKinney has agreed to vote the shares in favor of the proposed merger with
Lucent.
52
<PAGE>
3. Pursuant to a Stockholder Agreement between Lucent, Mr. McKinney and Mr.
McKinney as trustee of the McKinney Family Trust, Mr. McKinney has agreed to
vote the shares held in his name and in the McKinney Family Trust in favor
of the proposed Lucent merger. Lucent may be deemed to have acquired shared
voting power with respect to such shares.
4. As indicated in the Schedule 13G filed on February 9, 1999 by Pilgrim Baxter
& Associates, Ltd. pursuant to the Exchange Act.
5. Includes 95,583 shares held by John Drew and Ellen Drew Community Property
and 9,240 shares held by minor children. Also includes 37,500 shares subject
to a repurchase option in favor of the Company as of August 17, 1999. Also
includes 1,136,999 shares subject to options held by Mr. Drew that are
exercisable within 60 days of August 17, 1999.
6. Includes 600,663 shares held by the Vernon R. & Lysbeth W. Anderson Family
Trust of which Mr. Anderson is a trustee. Also includes 19,950 shares
subject to options held by Mr. Anderson that are exercisable within 60 days
of August 17, 1999.
7. Includes 7,500 shares subject to a repurchase option in favor of the Company
as of August 17, 1999. Also includes 92,666 shares subject to options held
by Mr. Laughlin that are exercisable within 60 days of August 17, 1999.
8. Also includes 23,400 shares subject to options held by Mr. Finch that are
exercisable within 60 days of August 17, 1999.
9. Includes 1,200 shares subject to a repurchase option in favor of the Company
as of August 17, 1999. Also includes 14,550 shares subject to options held
by Mr. Carlick that are exercisable within 60 days of August 17, 1999.
10. Includes 304,348 shares subject to options held by Mr. Butze that are
exercisable within 60 days of August 17, 1999.
11. Includes 46,200 shares subject to a repurchase option in favor of the
Company as of August 17, 1999. Also includes 2,026,912 shares subject to
options that are exercisable within 60 days of August 17, 1999.
As part of the executive management group change-of-control plan adopted in
July 1998, the Company entered into individual change-of-control agreements with
each of Messrs. McKinney, Drew and Laughlin. See "Employee Contracts and Change-
In-Control Arrangements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1999, the Company recognized revenue of $16,437,761 from services
provided to or on behalf of Cisco, which beneficially owns more than 5% of the
Company's outstanding Common Stock.
The Company has loans outstanding from certain of its executive officers
related to the exercise of stock options. The notes are collateralized by the
underlying stock and the stock is subject to a right of repurchase by the
Company in the event of termination. As of June 27, 1999, the amounts
outstanding for principal and interest on these loans were $183,316 and $63,960
for Messrs. McKinney and Carlick, respectively. On August 12, 1999, Mr. Carlick
repaid his loan in full.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders
53
<PAGE>
and their affiliates will be approved by a majority of the Board of Directors,
including a majority of the disinterested directors of the Board of Directors,
and will be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
54
<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 are included in this
Form 10-K:
<TABLE>
<CAPTION>
Page #
------
<S> <C>
Consolidated Balance Sheets at June 30, 1998 and 1999 28
Consolidated Statements of Income for each of the three years in the
period ended June 30, 1999 29
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended June 30, 1999 30
Consolidated Statements of Cash Flows for each of the three years in the
period ended June 30, 1999 31
Notes to Consolidated Financial Statements 32
Report of Independent Accountants 44
</TABLE>
2. Financial Statement Schedule. The following financial statement
schedule of the Company for each of the three years in the period
ended June 30, 1999 is filed as part of this Form 10-K and should
be read in conjunction with the Company's Consolidated Financial
Statements and related notes thereto:
<TABLE>
<CAPTION>
<S> <C>
----------------------------------------------------------------------
Page #
----------------------------------------------------------------------
Schedule II Valuation and Qualifying Accounts and Reserves S-1
----------------------------------------------------------------------
</TABLE>
Schedules not listed above have been omitted since they are
either not required, not applicable, or the information is
otherwise included herein.
3. Exhibits: See Item 14(c) below.
(b) Reports on Form 8-K. The Registrant filed the following
Reports on Form 8-K during the fourth quarter ended June 30, 1999:
On April 27, 1999, the Registrant filed a Report on Form 8-K dated
April 26, 1999 in connection with an anticipated follow-on offering of
Common Stock.
On May 13, 1999, the Registrant filed a Report on Form 8-K in
connection with its decision not to pursue a proposed follow-on offering of
Common Stock due to reduced interest by selling stockholders to participate
in the offering.
(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 Schedules. See Item 14(a)2 above.
55
<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 26th day
of August, 1999.
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 John L. Drew 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/ John L. Drew President, Chief Executive Officer and Director August 26, 1999
- ---------------------------- (Principal Executive Officer) ---------------
John L. Drew
/s/ Kevin J. Laughlin Vice President, Finance, Chief Financial Officer and August 26, 1999
- ---------------------------- Secretary (Principal Financial and Accounting Officer) ---------------
Kevin J. Laughlin
/s/ Donald K. McKinney Chairman of the Board August 26, 1999
- ---------------------------- ---------------
Donald K. McKinney
/s/ Vernon R. Anderson Director August 26, 1999
- ---------------------------- ---------------
Vernon R. Anderson
/s/ David Carlick Director August 26, 1999
- ---------------------------- ---------------
David Carlick
/s/ Lawrence G. Finch Director August 26, 1999
- ---------------------------- ---------------
Lawrence G. Finch
</TABLE>
56
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Exhibit Exhibits
No.
- -----------------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of August 9, 1999 among Lucent Technologies Inc., Intrepid
Merger Inc. and the Registrant.
- -----------------------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation. (3)
- -----------------------------------------------------------------------------------------------------------------
3.2 Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred
Stock of Registrant
- -----------------------------------------------------------------------------------------------------------------
3.3 Bylaws, as amended.
- -----------------------------------------------------------------------------------------------------------------
4.1 Reference is made to Exhibits 3.1 and 3.2.
- -----------------------------------------------------------------------------------------------------------------
4.2 Specimen Common Stock Certificate.
- -----------------------------------------------------------------------------------------------------------------
4.3 Investors' Rights Agreement between the Registrant and the parties named therein dated June 11, 1993,
as amended. (1)
- -----------------------------------------------------------------------------------------------------------------
4.4 Stock Option Agreement dated as of August 9, 1999, among Lucent Technologies Inc., Intrepid Merger
Inc. and the Registrant.
- -----------------------------------------------------------------------------------------------------------------
4.5 Stockholder Agreement dated as of August 9, 1999 between Lucent Technologies Inc. and a significant
stockholder of the Registrant.
- -----------------------------------------------------------------------------------------------------------------
4.6 Preferred Shares Rights Agreement Dated August 26, 1999
- -----------------------------------------------------------------------------------------------------------------
10.1* Form of Indemnification Agreement entered into between the Registrant and each of the executive
officers and directors and certain key employees. (5)
- -----------------------------------------------------------------------------------------------------------------
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. (3)
- -----------------------------------------------------------------------------------------------------------------
10.4* 1996 Employee Stock Purchase Plan. (3)
- -----------------------------------------------------------------------------------------------------------------
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. (2)
- -----------------------------------------------------------------------------------------------------------------
10.7 Credit Agreement between the Registrant and Wells Fargo Bank dated August 14, 1998. (2)
- -----------------------------------------------------------------------------------------------------------------
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. (2)
- -----------------------------------------------------------------------------------------------------------------
10.10* 1998 Director Option Plan. (2)
- -----------------------------------------------------------------------------------------------------------------
10.11 VitalSigns Software, Inc. 1996 Stock Option Plan. (4)
- -----------------------------------------------------------------------------------------------------------------
10.12 VitalSigns Software, Inc. Pre-Plan Options. (4)
- -----------------------------------------------------------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
- -----------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney (see page 56).
- -----------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-68121) as filed on December 1, 1998.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 28, 1998.
57
<PAGE>
INTERNATIONAL NETWORK SERVICES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning of Costs and Balance at
Description Year Expenses Deductions: End of Year
Allowance for returns and doubtful
accounts:
<S> <C> <C> <C> <C>
Year Ended June 30, 1997 $ 554 $ 561 $ (527) $ 588
Year Ended June 30, 1998 $ 588 $2,690 $(1,810) $1,468
Year Ended June 30, 1999 $1,468 $4,722 $(1,545) $4,645
</TABLE>
S-1
<PAGE>
EXHIBIT 2.1
================================================================================
AGREEMENT AND PLAN OF MERGER
Dated as of August 9, 1999
By and Among
LUCENT TECHNOLOGIES INC.,
INTREPID MERGER INC.
And
INTERNATIONAL NETWORK SERVICES
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
The Merger
----------
<S> <C> <C>
SECTION 1.01. The Merger.......................................... 2
SECTION 1.02. Closing............................................. 2
SECTION 1.03. Effective Time...................................... 2
SECTION 1.04. Effects of the Merger............................... 3
SECTION 1.05. Certificate of Incorporation and By-laws............ 3
SECTION 1.06. Board of Directors and Officers..................... 3
ARTICLE II
Effect of the Merger on the Capital Stock of the
------------------------------------------------
Constituent Corporations; Exchange of Certificates
--------------------------------------------------
<S> <C> <C>
SECTION 2.01. Effect on Capital Stock............................. 3
(a) Capital Stock of Sub............................ 4
(b) Cancelation of Treasury Stock and
Lucent-Owned Stock........................ 4
(c) Conversion of INS Common Stock.................. 4
(d) Anti-Dilution Provisions........................ 4
SECTION 2.02. Exchange of Certificates............................ 4
(a) Exchange Agent.................................. 4
(b) Exchange Procedures............................. 5
(c) Distributions with Respect to
Unexchanged Shares........................ 6
(d) No Further Ownership Rights in INS
Common Stock.............................. 6
(e) No Fractional Shares............................ 7
(f) Termination of Exchange Fund.................... 8
(g) No Liability.................................... 9
(h) Investment of Exchange Fund..................... 9
(i) Lost Certificates............................... 9
ARTICLE III
Representations and Warranties
------------------------------
<S> <C> <C>
SECTION 3.01. Representations and Warranties of INS............... 10
(a) Organization, Standing and Corporate
Power..................................... 10
(b) Subsidiaries.................................... 10
(c) Capital Structure............................... 11
(d) Authority; Noncontravention..................... 12
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(e) SEC Documents; Undisclosed
Liabilities............................... 14
(f) Information Supplied............................ 16
(g) Absence of Certain Changes or Events............ 16
(h) Litigation...................................... 17
(i) Compliance with Applicable Laws................. 18
(j) Absence of Changes in Benefit Plans............. 19
(k) ERISA Compliance................................ 19
(l) Taxes........................................... 22
(m) Voting Requirements............................. 23
(n) State Takeover Statutes......................... 23
(o) Accounting Matters.............................. 24
(p) Brokers......................................... 24
(q) Opinion of Financial Advisor.................... 24
(r) Intellectual Property; Year 2000................ 24
(s) Certain Contracts............................... 26
(t) Title to Properties............................. 26
(u) INS Rights Agreement............................ 27
SECTION 3.02. Representations and Warranties of Lucent
and Sub................................... 27
(a) Organization, Standing and Corporate
Power..................................... 28
(b) Capital Structure............................... 28
(c) Authority; Noncontravention..................... 29
(d) SEC Documents; Undisclosed
Liabilities............................... 31
(e) Information Supplied............................ 32
(f) Absence of Certain Changes or Events............ 32
(g) Voting Requirements............................. 32
(h) Tax Matters..................................... 33
(i) Interim Operations of Sub....................... 33
(j) Litigation...................................... 33
ARTICLE IV
Covenants Relating to Conduct of Business
-----------------------------------------
<S> <C> <C>
SECTION 4.01. Conduct of Business................................. 33
(a) Conduct of Business by INS...................... 33
(b) Advice of Changes............................... 37
SECTION 4.02. No Solicitation by INS.............................. 37
</TABLE>
<PAGE>
<TABLE>
ARTICLE V
Additional Agreements
---------------------
<S> <C> <C>
SECTION 5.01. Preparation of the Form S-4 and the INS
Proxy Statement; INS Stockholders
Meeting................................... 40
SECTION 5.02. Letters of INS's Accountants........................ 41
SECTION 5.03. Letters of Lucent's Accountants..................... 42
SECTION 5.04. Access to Information; Confidentiality.............. 42
SECTION 5.05. Commercially Reasonable Efforts..................... 43
SECTION 5.06. Stock Options....................................... 44
SECTION 5.07. Employee Matters.................................... 46
SECTION 5.08. Indemnification, Exculpation and
Insurance................................. 46
SECTION 5.09. Fees and Expenses................................... 47
SECTION 5.10. Public Announcements................................ 49
SECTION 5.11. Affiliates.......................................... 50
SECTION 5.12. Listings............................................ 50
SECTION 5.13. Litigation.......................................... 50
SECTION 5.14. Tax Treatment....................................... 50
SECTION 5.15. Pooling of Interests................................ 50
SECTION 5.16. Stockholder Agreement Legend........................ 50
SECTION 5.17. Rights Agreement.................................... 51
ARTICLE VI
Conditions Precedent
--------------------
<S> <C> <C>
SECTION 6.01. Conditions to Each Party's Obligation To
Effect the Merger......................... 51
(a) INS Stockholder Approval........................ 51
(b) HSR Act......................................... 51
(c) No Litigation................................... 51
(d) Form S-4........................................ 52
(e) NYSE Listing.................................... 52
SECTION 6.02. Conditions to Obligations of Lucent and Sub 52
(a) Representations and Warranties.................. 52
(b) Performance of Obligations of INS............... 52
(c) Tax Opinions.................................... 52
(d) Pooling Letters................................. 53
SECTION 6.03. Conditions to Obligations of INS.................... 53
(a) Representations and Warranties.................. 53
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(b) Performance of Obligations of Lucent
and Sub................................... 53
(c) Tax Opinions.................................... 54
SECTION 6.04. Frustration of Closing Conditions................... 54
ARTICLE VII
Termination, Amendment and Waiver
---------------------------------
<S> <C> <C>
SECTION 7.01. Termination......................................... 54
SECTION 7.02. Effect of Termination............................... 55
SECTION 7.03. Amendment........................................... 56
SECTION 7.04. Extension; Waiver................................... 56
SECTION 7.05. Procedure for Termination, Amendment,
Extension or Waiver....................... 56
ARTICLE VIII
General Provisions
------------------
<S> <C> <C>
SECTION 8.01. Nonsurvival of Representations and
Warranties................................ 56
SECTION 8.02. Notices............................................. 57
SECTION 8.03. Definitions......................................... 58
SECTION 8.04. Interpretation...................................... 59
SECTION 8.05. Counterparts........................................ 59
SECTION 8.06. Entire Agreement; No Third-Party
Beneficiaries............................. 60
SECTION 8.07. Governing Law....................................... 60
SECTION 8.08. Assignment.......................................... 60
SECTION 8.09. Enforcement......................................... 60
SECTION 8.10. Severability........................................ 61
</TABLE>
Annex I Index of Defined Terms
Exhibit A Form of Affiliate Letter
<PAGE>
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
August 9, 1999, among LUCENT TECHNOLOGIES INC., a Delaware
corporation ("Lucent"), INTREPID MERGER INC., a Delaware
corporation and a wholly owned subsidiary of Lucent ("Sub"), and
INTERNATIONAL NETWORK SERVICES, a Delaware corporation ("INS").
WHEREAS the respective Boards of Directors of Lucent, Sub and INS have
approved and declared advisable this Agreement and the merger of Sub with and
into INS (the "Merger"), upon the terms and subject to the conditions set forth
in this Agreement, whereby each issued and outstanding share of common stock,
par value $0.001 per share, of INS ("INS Common Stock"), other than shares owned
by Lucent, Sub or INS, will be converted into the right to receive the Merger
Consideration;
WHEREAS the respective Boards of Directors of Lucent, Sub and INS have
each determined that the Merger and the other transactions contemplated hereby
are consistent with, and in furtherance of, their respective business strategies
and goals;
WHEREAS Lucent, Sub and INS desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
WHEREAS for U.S. federal income tax purposes, it is intended that (a)
the Merger will qualify as a reorganization under the provisions of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
rules and regulations promulgated thereunder and (b) this Agreement constitutes
a plan of reorganization;
WHEREAS for financial accounting purposes, it is intended that the
Merger will be accounted for as a pooling of interests transaction;
WHEREAS simultaneously with the execution and delivery of this
Agreement and as a condition and inducement to the willingness of Lucent and Sub
to enter into this Agreement, Lucent and certain principal stockholders of INS
(collectively, the "Stockholder") are entering into an agreement (the
"Stockholder Agreement") pursuant to which the Stockholder will agree to vote to
adopt and approve the Merger Agreement and to take certain other actions in
furtherance of the Merger upon the terms
<PAGE>
2
and subject to the conditions set forth in the Stockholder Agreement; and
WHEREAS immediately following the execution and delivery of this
Agreement, INS and Lucent will enter into a stock option agreement (the "Option
Agreement"), pursuant to which INS will grant Lucent the option to purchase
shares of INS Common Stock, upon the terms and subject to the conditions set
forth therein.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
The Merger
----------
SECTION 1.01. The Merger. Upon the terms and subject to the
----------
conditions set forth in this Agreement, and in accordance with the Delaware
General Corporation Law (the "DGCL"), Sub shall be merged with and into INS at
the Effective Time. Following the Effective Time, INS shall be the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of Sub in accordance with the DGCL.
SECTION 1.02. Closing. The closing of the Merger (the "Closing")
-------
will take place at 10:00 a.m. on a date to be specified by the parties (the
"Closing Date"), which shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Article VI (other than
those conditions that by their nature are to be satisfied at the Closing, but
subject to the satisfaction or waiver of those conditions), unless another time
or date is agreed to by the parties hereto. The Closing will be held at such
location in the City of New York as is agreed to by the parties hereto.
SECTION 1.03. Effective Time. Subject to the provisions of this
--------------
Agreement, as soon as practicable on or after the Closing Date, the parties
shall file a certificate of merger or other appropriate documents (in any such
case, the "Certificate of Merger") executed in accordance with the relevant
provisions of the DGCL and shall make all other filings or recordings required
under the DGCL. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State, or at
such subsequent date or
<PAGE>
3
time as Lucent and INS shall agree and specify in the Certificate of Merger (the
time the Merger becomes effective being hereinafter referred to as the
"Effective Time").
SECTION 1.04. Effects of the Merger. The Merger shall have the
---------------------
effects set forth in Section 259 of the DGCL.
SECTION 1.05. Certificate of Incorporation and By-laws. (a) The
----------------------------------------
certificate of incorporation of INS, as in effect immediately prior to the
Effective Time, shall be amended as of the Effective Time of the Merger so that
Article FOURTH of such certificate of incorporation reads in its entirety as
follows: "The total number of shares of all classes of stock which the
corporation shall have authority to issue is 1,000 shares of common stock, par
value $1.00 per share.", and, as so amended, such certificate of incorporation
shall be the certificate of incorporation of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
(b) The by-laws of Sub, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.06. Board of Directors and Officers. (a) The directors of
-------------------------------
Sub immediately prior to the Effective Time shall be the directors of the
Surviving Corporation until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified, as the case may be.
(b) The officers of Sub immediately prior to the Effective Time shall
be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Capital Stock of the
------------------------------------------------
Constituent Corporations; Exchange of Certificates
--------------------------------------------------
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by
-----------------------
virtue of the Merger and without any action on the part of the holder of any
shares of INS Common Stock or any shares of capital stock of Sub:
<PAGE>
4
(a) Capital Stock of Sub. Each issued and outstanding share of
--------------------
capital stock of Sub shall be converted into one share of common stock of
the Surviving Corporation.
(b) Cancelation of Treasury Stock and Lucent-Owned Stock. Each share
----------------------------------------------------
of INS Common Stock that is owned by INS, Sub or Lucent shall automatically
be canceled and shall cease to exist, and no consideration shall be
delivered or deliverable in exchange therefor.
(c) Conversion of INS Common Stock. Subject to Section 2.02(e), each
------------------------------
issued and outstanding share of INS Common Stock (other than shares to be
canceled in accordance with Section 2.01(b)) shall be converted into the
right to receive 0.8473 (the "Exchange Ratio") fully paid and nonassessable
shares of common stock, par value $0.01 per share, of Lucent ("Lucent
Common Stock") (the "Merger Consideration"). As of the Effective Time, all
such shares of INS Common Stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each holder of a
certificate representing any such shares of INS Common Stock shall cease to
have any rights with respect thereto, except the right to receive the
Merger Consideration and any cash in lieu of fractional shares of Lucent
Common Stock to be issued or paid in consideration therefor upon surrender
of such certificate in accordance with Section 2.02, without interest.
(d) Anti-Dilution Provisions. In the event Lucent changes (or
------------------------
establishes a record date for changing) the number of shares of Lucent
Common Stock issued and outstanding prior to the Effective Date as a result
of a stock split, stock dividend, recapitalization, subdivision,
reclassification, combination, exchange of shares or similar transaction
with respect to the outstanding Lucent Common Stock and the record date
therefor shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted to reflect such stock split, stock dividend,
recapitalization, subdivision, reclassification, combination, exchange of
shares of similar transaction.
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. As of
------------------------ --------------
the Effective Time, Lucent shall enter into an agreement with such bank or trust
company as may be designated by Lucent (the "Exchange
<PAGE>
5
Agent"), which shall provide that Lucent shall deposit with the Exchange Agent
as of the Effective Time, for the benefit of the holders of shares of INS Common
Stock, for exchange in accordance with this Article II, through the Exchange
Agent, certificates representing the shares of Lucent Common Stock (such shares
of Lucent Common Stock, together with any dividends or distributions with
respect thereto with a record date after the Effective Time, any Excess Shares
and any cash (including cash proceeds from the sale of the Excess Shares)
payable in lieu of any fractional shares of Lucent Common Stock being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
2.01 in exchange for outstanding shares of INS Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of INS Common Stock (the "Certificates") whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.01, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as Lucent and INS may reasonably
specify) and (ii) instructions for use in surrendering the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancelation to the Exchange Agent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall receive in exchange
therefor a certificate representing that number of whole shares of Lucent Common
Stock which such holder has the right to receive pursuant to the provisions of
this Article II, certain dividends or other distributions in accordance with
Section 2.02(c) and cash in lieu of any fractional share of Lucent Common Stock
in accordance with Section 2.02(e), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of INS Common
Stock which is not registered in the transfer records of INS, a certificate
representing the proper number of shares of Lucent Common Stock may be issued to
a person other than the person in whose name the Certificate so surrendered is
registered if such Certificate shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such issuance shall pay any
transfer or other taxes required by reason of the issuance of shares of Lucent
Common Stock to
<PAGE>
6
a person other than the registered holder of such Certificate or establish to
the satisfaction of Lucent that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.02(b), each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the Merger Consideration and any cash in lieu of
fractional shares of Lucent Common Stock to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with this Section
2.02. No interest shall be paid or will accrue on any cash payable to holders of
Certificates pursuant to the provisions of this Article II.
(c) Distributions with Respect to Unexchanged Shares. No dividends
------------------------------------------------
or other distributions with respect to Lucent Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Lucent Common Stock represented
thereby, and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.02(e), and all such dividends, other
distributions and cash in lieu of fractional shares of Lucent Common Stock shall
be paid by Lucent to the Exchange Agent and shall be included in the Exchange
Fund, in each case until the surrender of such Certificate in accordance with
this Article II. Subject to the effect of applicable escheat or similar laws,
following surrender of any such Certificate there shall be paid to the holder of
the certificate representing whole shares of Lucent Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Lucent
Common Stock, and the amount of any cash payable in lieu of a fractional share
of Lucent Common Stock to which such holder is entitled pursuant to Section
2.02(e) and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of Lucent Common Stock.
(d) No Further Ownership Rights in INS Common Stock. All shares of
-----------------------------------------------
Lucent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article II (including any cash paid pursuant
to this Article II) shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the shares of INS Common Stock
theretofore
<PAGE>
7
represented by such Certificates, subject, however, to the Surviving
------- -------
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Time which may have been declared or
made by INS on such shares of INS Common Stock which remain unpaid at the
Effective Time, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of INS Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II, except as otherwise provided by law.
(e) No Fractional Shares. (i) No certificates or scrip
--------------------
representing fractional shares of Lucent Common Stock shall be issued upon the
surrender for exchange of Certificates, no dividend or distribution of Lucent
shall relate to such fractional share interests and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
stockholder of Lucent.
(ii) As promptly as practicable following the Effective Time, the
Exchange Agent shall determine the excess of (A) the number of whole shares of
Lucent Common Stock delivered to the Exchange Agent by Lucent pursuant to
Section 2.02(a) over (B) the aggregate number of whole shares of Lucent Common
Stock to be distributed to former holders of INS Common Stock pursuant to
Section 2.02(b) (such excess being herein called the "Excess Shares"). Following
the Effective Time, the Exchange Agent shall, on behalf of former stockholders
of INS, sell the Excess Shares at then-prevailing prices on the New York Stock
Exchange, Inc. (the "NYSE"), all in the manner provided in Section 2.02(e)(iii).
(iii) The sale of the Excess Shares by the Exchange Agent shall be
executed on the NYSE through one or more member firms of the NYSE and shall be
executed in round lots to the extent practicable. The Exchange Agent shall use
reasonable efforts to complete the sale of the Excess Shares as promptly
following the Effective Time as, in the Exchange Agent's sole judgment, is
practicable consistent with obtaining the best execution of such sales in light
of prevailing market conditions. Until the net proceeds of such sale or sales
have been distributed to the holders of Certificates formerly representing INS
Common Stock, the Exchange Agent shall hold such proceeds in trust for such
holders (the "Common Shares Trust"). INS shall
<PAGE>
8
pay all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of the Excess Shares. The Exchange Agent shall
determine the portion of the Common Shares Trust to which each former holder of
INS Common Stock is entitled, if any, by multiplying the amount of the aggregate
net proceeds comprising the Common Shares Trust by a fraction, the numerator of
which is the amount of the fractional share interest to which such former holder
of INS Common Stock is entitled (after taking into account all shares of INS
Common Stock held at the Effective Time by such holder) and the denominator of
which is the aggregate amount of fractional share interests to which all former
holders of INS Common Stock are entitled.
(iv) Notwithstanding the provisions of Section 2.02(e)(ii) and
(iii), Lucent may elect at its option, exercised prior to the Effective Time, in
lieu of the issuance and sale of Excess Shares and the making of the payments
hereinabove contemplated, to pay each former holder of INS Common Stock an
amount in cash equal to the product obtained by multiplying (A) the fractional
share interest to which such former holder (after taking into account all shares
of INS Common Stock held at the Effective Time by such holder) would otherwise
be entitled by (B) the closing price for a share of Lucent Common Stock as
reported on the NYSE Composite Transaction Tape (as reported in The Wall Street
---------------
Journal, or, if not reported thereby, any other authoritative source) on the
- -------
Closing Date, and, in such case, all references herein to the cash proceeds of
the sale of the Excess Shares and similar references shall be deemed to mean and
refer to the payments calculated as set forth in this Section 2.02(e)(iv).
(v) As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Certificates formerly representing INS
Common Stock with respect to any fractional share interests, the Exchange Agent
shall make available such amounts to such holders of Certificates formerly
representing INS Common Stock subject to and in accordance with the terms of
Section 2.02(c).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to Lucent, upon demand, and any
holders of the Certificates who have not theretofore complied with this Article
II shall thereafter
<PAGE>
9
look only to Lucent for payment of their claim for Merger Consideration, any
dividends or distributions with respect to Lucent Common Stock and any cash in
lieu of fractional shares of Lucent Common Stock.
(g) No Liability. None of Lucent, Sub, INS or the Exchange Agent
------------
shall be liable to any person in respect of any shares of Lucent Common Stock,
any dividends or distributions with respect thereto, any cash in lieu of
fractional shares of Lucent Common Stock or any cash from the Exchange Fund, in
each case delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificate shall not have been
surrendered prior to one year after the Effective Time (or immediately prior to
such date on which any amounts payable pursuant to this Article II would
otherwise escheat to or become the property of any Governmental Entity), any
such amounts shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest
---------------------------
any cash included in the Exchange Fund, as directed by Lucent, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
Lucent.
(i) Lost Certificates. If any Certificate shall have been lost,
-----------------
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Lucent, the posting by such person of a bond in such reasonable amount as Lucent
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent shall issue in exchange for such
lost, stolen or destroyed Certificate the applicable Merger Consideration with
respect thereto and, if applicable, any unpaid dividends and distributions on
shares of Lucent Common Stock deliverable in respect thereof and any cash in
lieu of fractional shares, in each case pursuant to this Agreement.
<PAGE>
10
ARTICLE III
Representations and Warranties
------------------------------
SECTION 3.01. Representations and Warranties of INS. Except as
-------------------------------------
disclosed in (x) the INS Filed SEC Documents, (y) INS's audited financial
statements for the fiscal year ended June 27, 1999, as delivered to Lucent prior
to the date hereof (the "Audited 1999 Financials") or (z) the Disclosure
Schedule delivered by INS to Lucent prior to the execution of this Agreement
(the "INS Disclosure Schedule") and making reference to the particular
subsection of this Agreement to which exception is being taken, INS represents
and warrants to Lucent and Sub as follows:
(a) Organization, Standing and Corporate Power. Each of INS and its
------------------------------------------
subsidiaries is a corporation or other legal entity duly organized, validly
existing and in good standing (with respect to jurisdictions which
recognize such concept) under the laws of the jurisdiction in which it is
organized and has the requisite corporate or other power, as the case may
be, and authority to carry on its business as now being conducted, except
for those jurisdictions where the failure to be so organized, existing or
in good standing individually or in the aggregate is not reasonably likely
to have a material adverse effect on INS. Each of INS and its subsidiaries
is duly qualified or licensed to do business and is in good standing (with
respect to jurisdictions which recognize such concept) in each jurisdiction
in which the nature of its business or the ownership, leasing or operation
of its assets makes such qualification or licensing necessary, except for
those jurisdictions where the failure to be so qualified or licensed or to
be in good standing individually or in the aggregate is not reasonably
likely to have a material adverse effect on INS. INS has made available to
Lucent prior to the execution of this Agreement complete and correct copies
of its certificate of incorporation and by-laws, as amended to the date of
this Agreement.
(b) Subsidiaries. Section 3.01(b) of the INS Disclosure Schedule
------------
sets forth a true and complete list of each of INS's subsidiaries. All the
outstanding shares of capital stock of, or other equity interests in (other
than shares held by directors or officers of INS or its subsidiaries for
regulatory reasons), each subsidiary of INS have been validly issued, are
fully paid and nonassessable and
<PAGE>
11
are owned directly or indirectly by INS, free and clear of all pledges,
claims, liens, charges, encumbrances, mortgages and security interests of
any kind or nature whatsoever (collectively, "Liens") and free of any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests except restrictions under applicable
law.
(c) Capital Structure. The authorized capital stock of INS
------------------
consists of 150,000,000 shares of INS Common Stock and 5,000,000 shares of
preferred stock, par value $0.001 per share, of INS ("INS Authorized
Preferred Stock"). At the close of business on August 6, 1999, (i)
57,323,907 shares of INS Common Stock were issued and outstanding; (ii) no
shares of INS Common Stock were held by INS in its treasury; (iii) no
shares of INS Authorized Preferred Stock were issued and outstanding; (iv)
26,470,779 shares of INS Common Stock were reserved, net of exercises, for
issuance pursuant to the INS 1996 Stock Plan, the INS 1992 Flexible
Incentive Stock Plan, the INS 1998 Nonstatutory Stock Plan, the INS 1998
Director Option Plan, the INS 1996 Employee Stock Purchase Plan (the
"ESPP"), the VitalSigns Software, Inc. 1996 Stock Option Plan and the
VitalSigns Software, Inc. Pre-Plan Options (such plans, collectively, the
"INS Stock Plans") (of which 19,216,448 are subject to outstanding INS
Stock Options); and (v) 394,500 shares of INS Common Stock were reserved
for issuance upon exercise of an outstanding warrant (the "Warrant").
Except as set forth above, at the close of business on August 6, 1999, no
shares of capital stock or other voting securities of INS were issued,
reserved for issuance or outstanding. There are no outstanding stock
appreciation rights ("SARs") or rights (other than the INS Stock Options)
to receive shares of INS Common Stock on a deferred basis granted under the
INS Stock Plans or otherwise. INS has delivered to Lucent a complete and
correct list, as of August 6, 1999, of each holder of outstanding stock
options or other rights to purchase or receive INS Common Stock granted
under the INS Stock Plans (collectively, "INS Stock Options"), the number
of shares of INS Common Stock subject to each such INS Stock Option, the
name of the INS Stock Plan pursuant to which such INS Stock Options were
granted and the exercise prices of such INS Stock Options. No bonds,
debentures, notes or other indebtedness of INS having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote)
on any matters on which
<PAGE>
12
stockholders of INS or any of its subsidiaries may vote are issued or
outstanding or subject to issuance. All outstanding shares of capital
stock of INS are, and all shares which may be issued will be, when issued,
duly authorized, validly issued, fully paid and nonassessable and will be
delivered free and clear of all Liens (other than Liens created by or
imposed upon the holders thereof) and not subject to preemptive rights.
Except as set forth in this Section 3.01(c) (including pursuant to the
conversion or exercise of the securities referred to above) and except
pursuant to the INS Stock Options issued after the date hereof as expressly
permitted by the terms of Section 4.01(a)(ii), (x) there are not issued,
reserved for issuance or outstanding (A) any shares of capital stock or
other voting securities of INS or any of its subsidiaries (other than
shares of capital stock or other voting securities of such subsidiaries
that are directly or indirectly owned by INS), (B) any securities of INS or
any of its subsidiaries convertible into or exchangeable or exercisable for
shares of capital stock or other voting securities of, or other ownership
interests in, INS or any of its subsidiaries or (C) any warrants, calls,
options or other rights to acquire from INS or any of its subsidiaries, and
no obligation of INS or any of its subsidiaries to issue, any capital stock
or other voting securities of, or other ownership interests in, or any
securities convertible into or exchangeable or exercisable for any capital
stock or other voting securities of, or other ownership interests in, INS
or any of its subsidiaries and (y) there are not any outstanding
obligations of INS or any of its subsidiaries to repurchase, redeem or
otherwise acquire any such securities or to issue, deliver or sell, or
cause to be issued, delivered or sold, any such securities. INS is not a
party to any voting agreement with respect to the voting of any such
securities. Other than the capital stock of, or other equity interests in,
its subsidiaries, INS does not directly or indirectly beneficially own any
securities or other beneficial ownership interests in any other entity.
(d) Authority; Noncontravention. INS has all requisite corporate
---------------------------
power and authority to enter into this Agreement and, subject to the INS
Stockholder Approval, to consummate the transactions contemplated by this
Agreement. INS has all requisite corporate power and authority to enter
into the Option Agreement and to consummate the transactions contemplated
<PAGE>
13
thereby. The execution and delivery of this Agreement and the Option
Agreement by INS and the consummation by INS of the transactions
contemplated by this Agreement and the Option Agreement have been duly
authorized by all necessary corporate action on the part of INS, subject,
in the case of the Merger, to the INS Stockholder Approval. This Agreement
and the Option Agreement have been duly executed and delivered by INS and,
assuming the due authorization, execution and delivery by each of the other
parties thereto, constitute legal, valid and binding obligations of INS,
enforceable against INS in accordance with their terms. The execution and
delivery of this Agreement and the Option Agreement do not, and the
consummation of the transactions contemplated by this Agreement and the
Option Agreement and compliance with the provisions of this Agreement and
the Option Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancelation or acceleration of any
obligation or to the loss of a benefit under, or result in the creation of
any Lien upon any of the properties or assets of INS or any of its
subsidiaries under, (i) the certificate of incorporation or by-laws of INS
or the comparable organizational documents of any of its subsidiaries, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, lease or
other contract, agreement, obligation, commitment, arrangement,
understanding, instrument, permit, concession, franchise, license or
similar authorization applicable to INS or any of its subsidiaries or their
respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, (A) any
judgment, order or decree or (B) any statute, law, ordinance, rule or
regulation, in each case applicable to INS or any of its subsidiaries or
their respective properties or assets, other than, in the case of clauses
(ii) and (iii), any such conflicts, violations, defaults, rights, losses or
Liens that individually or in the aggregate are not reasonably likely to
(x) have a material adverse effect on INS, (y) impair the ability of INS to
perform its obligations under this Agreement or the Option Agreement or (z)
prevent or materially delay the consummation of the transactions
contemplated by this Agreement or the Option Agreement. No consent,
approval, order or authorization of, action by or in respect of, or
registration, declaration or filing with, any federal, state, local or
foreign government,
<PAGE>
14
any court, administrative, regulatory or other governmental agency,
commission or authority or any non-governmental self-regulatory agency,
commission or authority (each a "Governmental Entity") is required by or
with respect to INS or any of its subsidiaries in connection with the
execution and delivery of this Agreement or the Option Agreement by INS or
the consummation by INS of the transactions contemplated by this Agreement
or the Option Agreement, except for (1) the filing of a premerger
notification and report form by INS under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and any applicable
filings and approvals under similar foreign antitrust or competition laws
and regulations; (2) the filing with the Securities and Exchange Commission
(the "SEC") of (A) a proxy statement relating to the INS Stockholders
Meeting (such proxy statement, as amended or supplemented from time to
time, the "INS Proxy Statement"), and (B) such reports under Section 13(a),
13(d), 15(d) or 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as may be required in connection with this Agreement,
the Option Agreement and the Stockholder Agreement and the transactions
contemplated by this Agreement, the Option Agreement and the Stockholder
Agreement; (3) the filing of the Certificate of Merger with the Delaware
Secretary of State and appropriate documents with the relevant authorities
of other states in which INS is qualified to do business and such filings
with Governmental Entities to satisfy the applicable requirements of state
securities or "blue sky" laws; (4) such filings with and approvals of The
Nasdaq National Market ("Nasdaq") to permit the shares of INS Common Stock
that are to be issued pursuant to the Option Agreement to be quoted on
Nasdaq; and (5) such other consents, approvals, orders, authorizations,
registrations, declarations and filings the failure of which to be made or
obtained individually or in the aggregate is not reasonably likely to (x)
have a material adverse effect on INS, (y) impair the ability of INS to
perform its obligations under this Agreement or the Option Agreement or (z)
prevent or materially delay the consummation of the transactions
contemplated by this Agreement or the Option Agreement.
(e) SEC Documents; Undisclosed Liabilities. INS has filed all
--------------------------------------
required reports, schedules, forms, statements and other documents
(including exhibits and all other information incorporated therein) with
the SEC since July 1, 1997 (collectively, the "INS SEC
<PAGE>
15
Documents"). As of their respective dates, the INS SEC Documents complied
in all material respects with the requirements of the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act, as the case
may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such INS SEC Documents, and none of the INS SEC Documents
when filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. Except to the extent that information
contained in any INS SEC Document has been revised or superseded by a later
filed INS SEC Document, none of the INS SEC Documents contains any untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The financial statements of INS included in the INS SEC Documents comply as
to form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto (the "Accounting
Rules"), have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present in all material respects the consolidated
financial position of INS and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to
normal recurring year-end audit adjustments). The Audited 1999 Financials
have been prepared in accordance with GAAP applied on a consistent basis
(except as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated financial position of INS and its
consolidated subsidiaries as of June 27, 1999, and the consolidated results
of their operations and cash flows for the fiscal year then ended. Except
(i) as reflected in such financial statements or in the notes thereto or
(ii) for liabilities incurred in connection with this Agreement or the
Option Agreement or the transactions contemplated hereby or thereby,
neither INS nor any of its subsidiaries has any liabilities or obligations
of any nature (whether
<PAGE>
16
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, are reasonably likely to have a material adverse effect on INS.
(f) Information Supplied. None of the information supplied or to
---------------------
be supplied by INS specifically for inclusion or incorporation by reference
in (i) the registration statement on Form S-4 to be filed with the SEC by
Lucent in connection with the issuance of Lucent Common Stock in the Merger
(the "Form S-4") will, at the time the Form S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or (ii) the INS Proxy Statement will,
at the date it is first mailed to INS's stockholders or at the time of the
INS Stockholders Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The INS Proxy
Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder.
No representation or warranty is made by INS with respect to statements
made or incorporated by reference therein based on information supplied by
Lucent specifically for inclusion or incorporation by reference in the INS
Proxy Statement.
(g) Absence of Certain Changes or Events. Except for liabilities
------------------------------------
incurred in connection with this Agreement or the Option Agreement or the
transactions contemplated hereby or thereby and except as disclosed in the
INS SEC Documents filed and publicly available prior to the date of this
Agreement (as amended to the date of this Agreement, the "INS Filed SEC
Documents") or as disclosed in the Audited 1999 Financials, since June 27,
1999, INS and its subsidiaries have conducted their business only in the
ordinary course, and since such date there has not been (1) any material
adverse change in INS, (2) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with
respect to any of INS's capital stock (other than as expressly permitted by
the terms of Section 4.01(a)(i)(C)), (3) any split, combination or
reclassification of any of INS's capital stock or any issuance or the
authorization of any issuance of any
<PAGE>
17
other securities in respect of, in lieu of or in substitution for shares of
INS's capital stock, (4) (A) any granting by INS or any of its subsidiaries
to any current or former director, executive officer or other employee of
INS or its subsidiaries of any increase in compensation, bonus or other
benefits, except for normal increases in cash compensation in the ordinary
course of business consistent with past practice or as was required under
any employment agreements in effect as of the date of the most recent
financial statements included in the INS Filed SEC Documents and other than
as expressly permitted by the terms of Section 4.01(a)(ii), (B) any
granting by INS or any of its subsidiaries to any such current or former
director, executive officer or employee of any increase in severance or
termination pay, except to non-key employees in the ordinary course of
business consistent with past practice, (C) any entry by INS or any of its
subsidiaries into, or any amendments of, any employment, deferred
compensation, consulting, severance, termination or indemnification
agreement with any such current or former director, executive officer or
employee, except with non-key employees in the ordinary course of business
consistent with past practice or (D) any amendment to, or modification of,
any INS Stock Option, (5) except insofar as may have been required by a
change in GAAP, any change in accounting methods, principles or practices
by INS or any of its subsidiaries materially affecting their respective
assets, liabilities or businesses, (6) any tax election that individually
or in the aggregate is reasonably likely to adversely affect in any
material respect the tax liability or tax attributes of INS or any of its
subsidiaries or (7) any settlement or compromise of any material income tax
liability.
(h) Litigation. There is no suit, action or proceeding pending or,
----------
to the knowledge of INS, threatened against or affecting INS or any of its
subsidiaries that, individually or in the aggregate, is reasonably likely
to have a material adverse effect on INS nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against INS or any of its subsidiaries having, or which is
reasonably likely to have, individually or in the aggregate, a material
adverse effect on INS; provided that for purposes of this paragraph (h) any
such suit, action, proceeding, judgment, decree, injunction, rule or order
arising after the date hereof shall not be deemed to have a material
adverse effect on INS if and to the extent
<PAGE>
18
such suit, action, proceeding, judgment, decree, injunction, rule or order
(or any relevant part thereof) is based on this Agreement or the
transactions contemplated hereby.
(i) Compliance with Applicable Laws. (i) INS and its subsidiaries
-------------------------------
hold all material permits, licenses, variances, exemptions, orders,
registrations and approvals of all Governmental Entities (the "INS
Permits") that are required for them to own, lease or operate their assets
and to carry on their businesses, except where the failure to have any such
INS Permits individually or in the aggregate is not reasonably likely to
have a material adverse effect on INS. INS and its subsidiaries are in
compliance in all material respects with the terms of the INS Permits and
all applicable statutes, laws, ordinances, rules and regulations, except
where the failure so to comply individually or in the aggregate is not
reasonably likely to have a material adverse effect on INS. No action,
demand, requirement or investigation by any Governmental Entity and no
suit, action or proceeding by any person, in each case with respect to INS
or any of its subsidiaries or any of their respective properties, is
pending or, to the knowledge of INS, threatened, other than, in each case,
those the outcome of which individually or in the aggregate are not (A)
reasonably likely to have a material adverse effect on INS or (B)
reasonably likely to impair the ability of INS to perform its obligations
under this Agreement, or prevent or materially delay the consummation of
any of the transactions contemplated by this Agreement; provided that for
--------
purposes of this paragraph (i)(i) any such action, demand, requirement or
investigation or any such suit, action or proceeding arising after the date
hereof shall not be deemed to have a material adverse effect on INS if and
to the extent such action, demand, requirement or investigation or such
suit, action or proceeding (or any relevant part thereof) is based on this
Agreement or the transactions contemplated hereby.
(ii) To INS's knowledge and except as is not, individually or in the
aggregate, reasonably likely to have a material adverse effect on INS, (A)
there have been no Releases of any Hazardous Materials at, on or under any
facility or property currently or formerly owned, leased, or operated by
INS or any of its subsidiaries, (B) neither INS nor any of its subsidiaries
is the subject of any pending or threatened investigation or proceeding
under
<PAGE>
19
Environmental Law relating in any manner to the off-site treatment, storage
or disposal of any Hazardous Materials generated at any facility or
property currently or formerly owned, leased or operated by INS or any of
its subsidiaries and (C) neither INS nor any of its subsidiaries has
assumed or otherwise agreed to be responsible for any liabilities arising
under Environmental Law. The term "Environmental Law" means any and all
applicable laws or regulations or other requirements of any Governmental
Entity concerning the protection of human health or the environment. The
term "Hazardous Materials" means all explosive or regulated radioactive
materials, hazardous or toxic substances, wastes or chemicals, petroleum
(including crude oil or any fraction thereof) or petroleum distillates,
asbestos or asbestos-containing materials, and all other materials or
chemicals regulated under any Environmental Law. The term "Release" means
any spill, emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching, emanation or migration in, into, onto, or
through the environment.
(j) Absence of Changes in Benefit Plans. Since the date of the
-----------------------------------
most recent audited financial statements included in the INS Filed SEC
Documents, there has not been any adoption or amendment by INS or any of
its subsidiaries of any collective bargaining agreement or any bonus,
pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, medical,
welfare benefit or other plan, arrangement or understanding providing
benefits to any current or former employee, officer or director of INS or
any of its wholly owned subsidiaries (collectively, the "INS Benefit
Plans"), or any change in any actuarial or other assumption used to
calculate funding obligations with respect to any INS pension plans, or any
change in the manner in which contributions to any INS pension plans are
made or the basis on which such contributions are determined.
(k) ERISA Compliance. (i) With respect to the INS Benefit Plans,
-----------------
no event has occurred and, to the knowledge of INS, there exists no
condition or set of circumstances, in connection with which INS or any of
its subsidiaries could be subject to any liability that individually or in
the aggregate is reasonably likely to have a material adverse effect on INS
under
<PAGE>
20
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the Code or any other applicable law.
(ii) Each INS Benefit Plan has been administered in accordance with
its terms, except for any failures so to administer any INS Benefit Plan
that individually or in the aggregate are not reasonably likely to have a
material adverse effect on INS. INS, its subsidiaries and all the INS
Benefit Plans are in compliance with the applicable provisions of ERISA,
the Code and all other applicable laws and the terms of all applicable
collective bargaining agreements, except for any failures to be in such
compliance that individually or in the aggregate are not reasonably likely
to have a material adverse effect on INS. Each INS Benefit Plan that is
intended to be qualified under Section 401(a) or 401(k) of the Code has
received a favorable determination letter from the IRS that it is so
qualified and each trust established in connection with any INS Benefit
Plan that is intended to be exempt from federal income taxation under
Section 501(a) of the Code has received a determination letter from the IRS
that such trust is so exempt. To the knowledge of INS, no fact or event
has occurred since that date of any determination letter from the IRS which
is reasonably likely to materially adversely affect the qualified status of
any such INS Benefit Plan or the exempt status of any such trust. There
are no pending or, to the knowledge of INS, threatened lawsuits, claims,
grievances, investigations or audits of any INS Benefit Plan that,
individually or in the aggregate, are reasonably likely to have a material
adverse effect on INS.
(iii) No INS Benefit Plan is a "defined benefit" plan (as defined in
Section 3(35) of ERISA) or is subject to the minimum funding requirements
of Section 302 of ERISA or Section 412 of the Code and neither INS nor any
of its subsidiaries has incurred any liability under Title IV of ERISA
which has not been satisfied in full. No INS Benefit Plan has incurred an
"accumulated funding deficiency" (within the meaning of Section 302 of
ERISA or Section 412 of the Code) whether or not waived. No INS Benefit
Plan is a "multiemployer plan" within the meaning of Section 3(37) of ERISA
and neither INS nor any of its subsidiaries or affiliates (as defined in
Section 8.03) has been required to contribute to any such multiemployer
plan in the past six years.
<PAGE>
21
(iv) INS and its subsidiaries are in compliance with all federal,
state and local requirements regarding employment, except for any failures
to comply that individually or in the aggregate are not reasonably likely
to have a material adverse effect on INS. Neither INS nor any of its
subsidiaries is a party to any collective bargaining or other labor union
contract applicable to persons employed by INS or any of its subsidiaries
and no collective bargaining agreement is being negotiated by INS or any of
its subsidiaries. As of the date of this Agreement, there is no labor
dispute, strike or work stoppage against INS or any of its subsidiaries
pending or, to the knowledge of INS, threatened which may interfere with
the respective business activities of INS or any of its subsidiaries,
except where such dispute, strike or work stoppage individually or in the
aggregate is not reasonably likely to have a material adverse effect on
INS. As of the date of this Agreement, to the knowledge of INS, none of
INS, any of its subsidiaries or any of their respective representatives or
employees has committed any unfair labor practice in connection with the
operation of the respective business of INS or any of its subsidiaries, and
there is no charge or complaint against INS or any of its subsidiaries by
the National Labor Relations Board or any comparable governmental agency
pending or threatened in writing, in each case except where such actions,
charges or complaints, individually or in the aggregate, are not reasonably
likely to have a material adverse effect on INS.
(v) No employee of INS will be entitled to any additional benefits
or any acceleration of the time of payment or vesting of any benefits under
any INS Benefit Plan as a result of the transactions contemplated by this
Agreement, the Option Agreement or the Stockholder Agreement. No amount
payable, or economic benefit provided, by INS or its subsidiaries
(including any acceleration of the time of payment or vesting of any
benefit) could be considered an "excess parachute payment" under Section
280G of the Code. No person is entitled to receive any additional payment
from INS or its subsidiaries or any other person (a "Parachute Gross-Up
Payment") in the event that the excise tax of Section 4999 of the Code is
imposed on such person. The Board of Directors of INS or any of its
subsidiaries has not granted to any person any right to receive any
Parachute Gross-Up Payment.
<PAGE>
22
(vi) Except as provided under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, no INS Benefit Plan provides post-
retirement health insurance plans, the total cost of which is not incurred
by the former employee.
(l) Taxes. (i) Each of INS and its subsidiaries has filed all
-----
material tax returns and reports required to be filed by it and all such
returns and reports are complete and correct in all material respects, or
requests for extensions to file such returns or reports have been timely
filed, granted and have not expired, except to the extent that such
failures to file, to be complete or correct or to have extensions granted
that remain in effect individually or in the aggregate are not reasonably
likely to have a material adverse effect on INS. INS and each of its
subsidiaries has paid (or INS has paid on its behalf) all taxes shown as
due on such returns, and the Audited 1999 Financials reflect an adequate
reserve for all taxes payable by INS and its subsidiaries for all taxable
periods and portions thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any taxes have been proposed, asserted or
assessed against INS or any of its subsidiaries that are not adequately
reserved for, except for deficiencies that individually or in the aggregate
are not reasonably likely to have a material adverse effect on INS. The
federal income tax returns of INS and each of its subsidiaries consolidated
in such returns have closed by virtue of the applicable statute of
limitations.
(iii) Neither INS nor any of its subsidiaries has taken any action or
knows of any fact, agreement, plan or other circumstance that is reasonably
likely to prevent the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code.
(iv) The INS Benefit Plans and other INS employee compensation
arrangements in effect as of the date of this Agreement have been designed
so that the disallowance of a material deduction under Section 162(m) of
the Code for employee remuneration will not apply to any amounts paid or
payable by INS or any of its subsidiaries under any such plan or
arrangement and, to the knowledge of INS, no fact or circumstance exists
that is reasonably likely to cause such disallowance to apply to any such
amounts.
<PAGE>
23
(v) Neither INS nor any of its subsidiaries has constituted either a
"distributing corporation" or a "controlled corporation" in a distribution
of stock qualifying for tax-free treatment under Section 355 of the Code
(x) in the two years prior to the date of this Agreement or (y) in a
distribution which could otherwise constitute part of a "plan" or "series
of related transactions" (within the meaning of Section 355(e) of the Code)
in conjunction with the Merger.
(vi) As used in this Agreement, "taxes" shall include all (x)
federal, state, local or foreign income, property, sales, excise and other
taxes or similar governmental charges, including any interest, penalties or
additions with respect thereto, (y) liability for the payment of any
amounts of the type described in (x) as a result of being a member of an
affiliated, consolidated, combined or unitary group, and (z) liability for
the payment of any amounts as a result of being party to any tax sharing
agreement or as a result of any express or implied obligation to indemnify
any other person with respect to the payment of any amounts of the type
described in clause (x) or (y).
(m) Voting Requirements. The affirmative vote of the holders of a
-------------------
majority of the voting power of all outstanding shares of INS Common Stock
at the INS Stockholders Meeting to adopt this Agreement (the "INS
Stockholder Approval") is the only vote of the holders of any class or
series of INS's capital stock necessary to approve and adopt this
Agreement, the Option Agreement and the transactions contemplated hereby
and thereby.
(n) State Takeover Statutes. The Board of Directors of INS
-----------------------
(including the disinterested directors thereof) has approved the terms of
this Agreement, the Option Agreement and the Stockholder Agreement and the
consummation of the Merger and the other transactions contemplated by this
Agreement, the Option Agreement and the Stockholder Agreement and such
approval constitutes approval of the Merger and the other transactions
contemplated by this Agreement, the Option Agreement and the Stockholder
Agreement by the INS Board of Directors under the provisions of Section 203
of the DGCL and represents all the action necessary to ensure that such
Section 203 does not apply to Lucent in connection with the Merger and the
other transactions contemplated by this Agreement, the
<PAGE>
24
Option Agreement and the Stockholder Agreement. To the knowledge of INS, no
other state takeover statute is applicable to the Merger or the other
transactions contemplated hereby, by the Option Agreement and by the
Stockholder Agreement.
(o) Accounting Matters. Neither INS nor any of its affiliates has
------------------
taken, failed to take or agreed to take any action that would prevent the
business combination to be effected by the Merger to be accounted for as a
pooling of interests.
(p) Brokers. No broker, investment banker, financial advisor or
-------
other person, other than Morgan Stanley & Co. Incorporated, the fees and
expenses of which will be paid by INS, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement and the
Option Agreement based upon arrangements made by or on behalf of INS. INS
has furnished to Lucent true and complete copies of all agreements under
which any such fees or expenses are payable and all indemnification and
other agreements related to the engagement of the persons to whom such fees
are payable.
(q) Opinion of Financial Advisor. INS has received the written
----------------------------
opinion of Morgan Stanley & Co. Incorporated, dated the date of this
Agreement, to the effect that, as of such date, the Exchange Ratio is fair
from a financial point of view to the stockholders of INS (other than
Lucent and its affiliates), a signed copy of which opinion has been or
promptly will be delivered to Lucent.
(r) Intellectual Property; Year 2000. (i) INS and its subsidiaries
--------------------------------
own, or are validly licensed or otherwise have the right to use, all
patents, patent rights, trademarks, trade secrets, trade names, service
marks, copyrights and other proprietary intellectual property rights and
computer programs (the "Intellectual Property Rights") which are material
to the conduct of the business of INS and its subsidiaries.
(ii) To the knowledge of INS, neither INS nor any of its subsidiaries
has interfered with, infringed upon, misappropriated or otherwise come into
conflict with any Intellectual Property Rights or other proprietary
information of any other person, except for any such interference,
infringement,
<PAGE>
25
misappropriation or other conflict which is not, individually or in the
aggregate, reasonably likely to have a material adverse effect on INS.
Neither INS nor any of its subsidiaries has received any written charge,
complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or other conflict (including any claim that
INS or any such subsidiary must license or refrain from using any
Intellectual Property Rights or other proprietary information of any other
person) which has not been settled or otherwise fully resolved. To INS's
knowledge, no other person has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual
Property Rights of INS or any of its subsidiaries, except for any such
interference, infringement, misappropriation or other conflict which is
not, individually or in the aggregate, reasonably likely to have a material
adverse effect on INS.
(iii) As the business of INS and its subsidiaries is presently
conducted and proposed to be conducted without giving effect to any change
with respect thereto that may be made by Lucent, to INS's knowledge,
Lucent's use after the Closing of the Intellectual Property Rights which
are material to the conduct of the business of INS and its subsidiaries
taken as a whole will not interfere with, infringe upon, misappropriate or
otherwise come into conflict with the Intellectual Property Rights of any
other person.
(iv) INS has taken reasonable steps to protect INS's rights in INS's
confidential information and trade secrets that it wishes to protect or any
trade secrets or confidential information of third parties provided to INS,
and, without limiting the foregoing, INS has and enforces a policy
requiring (x) each employee to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Lucent and (y) each contractor to enter into an agreement containing
provisions protecting INS's Intellectual Property and confidential
information, and all current and former employees and contractors of INS
have executed such agreements, except where the failure to do so is not
reasonably expected to be material to INS.
(v) INS has substantially completed a program directed at ensuring
that its and its subsidiaries' software products (including prior and
current
<PAGE>
26
software products and technology and software products and technology
currently under development) will, when used in accordance with associated
documentation on a specified platform or platforms that is or are year 2000
compliant, be capable upon installation of (i) operating in the same manner
on dates in both the Twentieth and Twenty-First centuries and (ii)
accurately processing, providing and receiving date data from, into and
between the Twentieth and Twenty-First centuries, including the years 1999
and 2000, and making leap-year calculations and that, to the knowledge of
INS, all other non-INS products (e.g., hardware, software and firmware)
used by INS in or in combination with INS software products, properly
exchange data with INS software products. In addition, INS has taken the
necessary steps to ensure that operations and all material systems utilized
to support such operations will not be materially adversely impacted by the
year 2000 date change or any other date change. INS further represents and
warrants: (i) the accuracy of year 2000 product information provided on its
external website; and (ii) that based on all currently available
information, INS believes it has sufficient resources to complete all
necessary customer year 2000 upgrades.
(s) Certain Contracts. Neither INS nor any of its subsidiaries is a
-----------------
party to or bound by any non-competition agreement or any other similar
agreement or obligation which purports to limit in any material respect the
manner in which, or the localities in which, the business of INS and its
subsidiaries is conducted.
(t) Title to Properties. (i) Section 3.01(t) of the INS Disclosure
-------------------
Schedule sets forth a true and complete list of all material real property
and leasehold property owned or leased by INS or any of its subsidiaries
with required payments of over $400,000 per annum. Each of INS and its
subsidiaries has good and valid title to, or valid leasehold interests in
or valid rights to, all its material properties and assets except for such
as are no longer used or useful in the conduct of its businesses or as have
been disposed of in the ordinary course of business and except for defects
in title, easements, restrictive covenants and similar encumbrances that
individually or in the aggregate do not materially interfere with its
ability to conduct its business as currently conducted. All such material
assets and properties, other than assets and properties in which
<PAGE>
27
INS or any of its subsidiaries has a leasehold interest, are free and clear
of all Liens except for Liens that individually or in the aggregate do not
materially interfere with the ability of INS and its subsidiaries to
conduct their respective businesses as currently conducted.
(ii) Each of INS and its subsidiaries has complied in all material
respects with the terms of all leases listed in Section 3.01(t) of the INS
Disclosure Schedule to which it is a party and under which it is in
occupancy, and all such leases are in full force and effect. Each of INS
and its subsidiaries enjoys peaceful and undisturbed possession under all
such leases, except for failures to do so that individually or in the
aggregate is not reasonably likely to have a material adverse effect on
INS.
(u) INS Rights Agreement. The Board of Directors of INS has
--------------------
authorized its management to adopt a rights plan on customary terms (the
"INS Rights Agreement") granting rights ("INS Rights") to stockholders of
INS. The terms of the INS Rights Agreement will provide that (i) it is
inapplicable to the Merger and the other transactions contemplated by this
Agreement, the Option Agreement and the Stockholder Agreement, (ii) (1)
neither Lucent nor Sub is deemed to be an Acquiring Person (as such term is
to be defined in the INS Rights Agreement) pursuant to the INS Rights
Agreement and (2) a Distribution Date, a Triggering Event or Stock
Acquisition Date (as such terms are to be defined in the INS Rights
Agreement) does not occur solely by reason of the execution and delivery of
this Agreement, the Option Agreement, the Stockholder Agreement, the
consummation of the Merger, or the consummation of the other transactions
contemplated by this Agreement, the Option Agreement and the Stockholder
Agreement and (iii) the Acquiring Person threshold is 15%, and INS agrees
that the foregoing provisions of the INS Rights Agreement may not be
amended by INS without the prior written consent of Lucent.
SECTION 3.02. Representations and Warranties of Lucent and Sub.
------------------------------------------------
Except as disclosed in the Lucent Filed SEC Documents or as set forth on the
Disclosure Schedule
<PAGE>
28
delivered by Lucent to INS prior to the execution of this Agreement (the "Lucent
Disclosure Schedule") and making reference to the particular subsection of this
Agreement to which exception is being taken, Lucent and Sub represent and
warrant to INS as follows:
(a) Organization, Standing and Corporate Power. Each of Lucent and
------------------------------------------
Sub is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is incorporated and has the
requisite corporate power and authority to carry on its business as now
being conducted. Each of Lucent and Sub is duly qualified or licensed to
do business and is in good standing (with respect to jurisdictions which
recognize such concept) in each jurisdiction in which the nature of its
business or the ownership, leasing or operation of its assets makes such
qualification or licensing necessary, except for those jurisdictions where
the failure to be so qualified or licensed or to be in good standing
individually or in the aggregate is not reasonably likely to have a
material adverse effect on Lucent. Lucent has made available to INS prior
to the execution of this Agreement complete and correct copies of its
certificate of incorporation and by-laws and the certificate of
incorporation and by-laws of Sub, in each case as amended to the date of
this Agreement.
(b) Capital Structure. The authorized capital stock of Lucent
-----------------
consists of 6 billion shares of Lucent Common Stock and 250 million shares
of preferred stock, par value $1.00 per share, of Lucent ("Lucent
Authorized Preferred Stock"), of which 15 million shares have been
designated Series A Junior Participating Preferred Stock (the "Lucent
Junior Preferred Stock"). As of June 30, 1999, (i) approximately 3 billion
shares of Lucent Common Stock were issued and outstanding, (ii) no shares
of Lucent Junior Preferred Stock were issued and outstanding and (iii)
other than the Lucent Junior Preferred Stock, no other shares of Lucent
Authorized Preferred Stock have been designated or issued. As of the date
of this Agreement, no bonds, debentures, notes or other indebtedness of
Lucent having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which stockholders
of Lucent may vote are issued or outstanding. All outstanding shares of
capital stock of Lucent are, and all shares which may be issued will be,
when issued, duly authorized, validly issued,
<PAGE>
29
fully paid and nonassessable and not subject to preemptive rights. Lucent
has made available to INS a complete and correct copy of the Rights
Agreement dated as of April 4, 1996, as amended (the "Lucent Rights
Agreement") between Lucent and The Bank of New York, as Rights Agent,
relating to rights ("Lucent Rights") to purchase Lucent Junior Preferred
Stock.
(c) Authority; Noncontravention. Each of Lucent and Sub has all
---------------------------
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. Lucent has all
requisite corporate power and authority to enter into the Option Agreement
and to consummate the transactions contemplated thereby. The execution and
delivery of this Agreement by Lucent and Sub, and the execution and
delivery of the Option Agreement by Lucent, and the consummation by Lucent
and Sub of the transactions contemplated by this Agreement and the
consummation by Lucent of the transactions contemplated by the Option
Agreement have been duly authorized by all necessary corporate action on
the part of Lucent and Sub, as applicable. This Agreement has been duly
executed and delivered by Lucent and Sub and, assuming the due
authorization, execution and delivery by each of the other parties thereto,
constitutes a legal, valid and binding obligation of Lucent and Sub,
enforceable against each of them in accordance with its terms. The Option
Agreement has been duly executed and delivered by Lucent, and, assuming the
due authorization, execution and delivery by each of the other parties
thereto, constitutes a legal, valid and binding obligation of Lucent,
enforceable against Lucent in accordance with its terms. The execution and
delivery of this Agreement and the Option Agreement do not, and the
consummation of the transactions contemplated by this Agreement and the
Option Agreement and compliance with the provisions of this Agreement and
the Option Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancelation or acceleration of any
obligation or loss of a benefit under, or result in the creation of any
Lien upon any of the properties or assets of Lucent or Sub under, (i) the
certificate of incorporation or by-laws of Lucent or Sub, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other contract,
agreement, obligation, commitment, arrangement, understanding, instrument,
permit, concession, franchise, license or
<PAGE>
30
similar authorization applicable to Lucent or Sub or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, (A) any judgment, order or
decree or (B) any statute, law, ordinance, rule or regulation, in each
case, applicable to Lucent or Sub or their respective properties or assets,
other than, in the case of clauses (ii) and (iii), any such conflicts,
violations, defaults, rights, losses or Liens that individually or in the
aggregate are not reasonably likely to (x) have a material adverse effect
on Lucent, (y) impair the ability of Lucent or Sub to perform its
obligations under this Agreement or, in the case of Lucent, to perform its
obligations under the Option Agreement or (z) prevent or materially delay
the consummation of the transactions contemplated by this Agreement or, in
the case of Lucent, the Option Agreement. No consent, approval, order or
authorization of, action by, or in respect of, or registration, declaration
or filing with, any Governmental Entity is required by or with respect to
Lucent or Sub in connection with the execution and delivery of this
Agreement by Lucent and Sub or the execution and delivery of the Option
Agreement by Lucent or the consummation by Lucent and Sub of the
transactions contemplated by this Agreement or the consummation by Lucent
of the transactions contemplated by the Option Agreement, except for (1)
the filing of a premerger notification and report form by Lucent under the
HSR Act and any applicable filings and approvals under similar foreign
antitrust or competition laws and regulations; (2) the filing with the SEC
of (A) the Form S-4 and (B) such reports under Section 13(a), 13(d), 15(d)
or 16(a) of the Exchange Act as may be required in connection with this
Agreement, the Option Agreement and the Stockholder Agreement and the
transactions contemplated by this Agreement, the Option Agreement and the
Stockholder Agreement; (3) the filing of the Certificate of Merger with the
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which Lucent is qualified to do business and
such filings with Governmental Entities to satisfy the applicable
requirements of state securities or "blue sky" laws; (4) such filings with
and approvals of the NYSE to permit the shares of Lucent Common Stock that
are to be issued in the Merger to be listed on the NYSE; and (5) such other
consents, approvals, orders, authorizations, registrations, declarations
and filings the failure of which to be made or obtained
<PAGE>
31
individually or in the aggregate is not reasonably likely to (x) have a
material adverse effect on Lucent, (y) impair the ability of Lucent or Sub
to perform its obligations under this Agreement or, in the case of Lucent,
to perform its obligations under the Option Agreement or (z) prevent or
materially delay the consummation of the transactions contemplated by this
Agreement or, in the case of Lucent, the Option Agreement.
(d) SEC Documents; Undisclosed Liabilities. Lucent has filed all
--------------------------------------
required reports, schedules, forms, statements and other documents
(including exhibits and all other information incorporated therein) with
the SEC since October 1, 1997 (collectively, the "Lucent SEC Documents").
As of their respective dates, the Lucent SEC Documents complied in all
material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such Lucent SEC Documents, and none of
the Lucent SEC Documents when filed contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to
the extent that information contained in any Lucent SEC Document has been
revised or superseded by a later filed Lucent SEC Document, none of the
Lucent SEC Documents contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial statements of
Lucent included in the Lucent SEC Documents comply as to form, as of their
respective dates of filing with the SEC, in all material respects with the
Accounting Rules, have been prepared in accordance with GAAP (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present in all material respects
the consolidated financial position of Lucent and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal recurring year-end audit adjustments).
Except (i) as reflected in such
<PAGE>
32
financial statements or in the notes thereto or (ii) for liabilities
incurred in connection with this Agreement or the Option Agreement or the
transactions contemplated hereby or thereby, neither Lucent nor any of its
subsidiaries has any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, are reasonably likely to have a material adverse effect on
Lucent.
(e) Information Supplied. None of the information supplied or to be
--------------------
supplied by Lucent specifically for inclusion or incorporation by reference
in (i) the Form S-4 will, at the time the Form S-4 becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or (ii) the INS Proxy Statement
will, at the date it is first mailed to INS's stockholders or at the time
of the INS Stockholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 will
comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder. No representation
or warranty is made by Lucent with respect to statements made or
incorporated by reference therein based on information supplied by INS
specifically for inclusion or incorporation by reference in the Form S-4.
(f) Absence of Certain Changes or Events. Except for liabilities
------------------------------------
incurred in connection with this Agreement, the Option Agreement or the
Stockholder Agreement or the transactions contemplated hereby or thereby
and except as disclosed in the Lucent SEC Documents filed and publicly
available prior to the date of this Agreement (the "Lucent Filed SEC
Documents"), since March 31, 1999, Lucent and its subsidiaries have
conducted their business only in the ordinary course, and there has not
been any material adverse change in Lucent.
(g) Voting Requirements. No vote of the holders of shares of Lucent
-------------------
Common Stock or any other class or series of capital stock of Lucent is
necessary to approve and adopt this Agreement, the Option Agreement
<PAGE>
33
and the Stockholder Agreement and the transactions contemplated hereby and
thereby.
(h) Tax Matters. Neither Lucent nor any of its subsidiaries has
-----------
taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
(i) Interim Operations of Sub. Sub was formed solely for the
-------------------------
purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activities and has conducted its operations only as
contemplated hereby.
(j) Litigation. There is no suit, action or proceeding pending, or
----------
to the knowledge of Lucent, threatened against or affecting Lucent or any
of its subsidiaries that, individually or in the aggregate, is reasonably
likely to have a material adverse effect on Lucent nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Lucent or any of its subsidiaries having, or
which is reasonably likely to have, individually or in the aggregate, a
material adverse effect on Lucent; provided that, for purposes of this
--------
paragraph (j), any such suit, action, proceeding, judgment, decree,
injunction, rule or order arising after the date hereof shall not be deemed
to have a material adverse effect on Lucent if and to the extent such suit,
action proceeding, judgment, decree, injunction, rule or order (or any
relevant part thereof) is based on this Agreement, the Option Agreement or
the transactions contemplated hereby or thereby.
ARTICLE IV
Covenants Relating to Conduct of Business
-----------------------------------------
SECTION 4.01. Conduct of Business. (a) Conduct of Business by INS.
-------------------- --------------------------
Except as set forth in Section 4.01(a) of the INS Disclosure Schedule, as
otherwise expressly contemplated by this Agreement or the Option Agreement or as
consented to in writing by Lucent, during the period from the date of this
Agreement to the Effective Time, INS shall, and shall cause its subsidiaries to,
carry on their respective businesses in the ordinary course consistent with past
practice and in compliance in all material
<PAGE>
34
respects with all applicable laws and regulations and, to the extent consistent
therewith, use commercially reasonable efforts to (x) preserve intact their
current business organizations, (y) keep available the services of their current
officers and other key employees and (z) preserve their relationships with those
persons having business dealings with them, in each case to the end that their
goodwill and ongoing businesses shall not be impaired in any material respect at
the Effective Time. Without limiting the generality of the foregoing (but
subject to the above exceptions), during the period from the date of this
Agreement to the Effective Time, INS shall not, and shall not permit any of its
subsidiaries to:
(i) other than dividends and distributions (including liquidating
distributions) by a direct or indirect wholly owned subsidiary of INS to
its parent, (x) declare, set aside or pay any dividends on, or make any
other distributions (whether in cash, stock, property or otherwise) in
respect of, any of its capital stock, (y) split, combine or reclassify any
of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (z) purchase, redeem or otherwise acquire, directly or
indirectly, any shares of capital stock of INS or any of its subsidiaries
or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities, other than pursuant to (A) the
exercise of existing stock repurchase rights outstanding as of the date
hereof in accordance with the present terms of the INS Stock Plans, (B) a
claim made against the escrow fund established in connection with INS's
acquisition of VitalSigns Software, Inc. in accordance with the present
terms of the escrow fund or (C) the declaration and payment of a dividend
consisting of INS Rights in connection with the implementation of the INS
Rights Agreement;
(ii) issue, deliver, sell, pledge or otherwise encumber or subject to
any Lien any shares of its capital stock, any other voting securities or
any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities,
other than (w) the issuance of the INS Rights, (x) the issuance of INS
Stock Options granted consistent with past practice to employees (other
than executive officers) of INS representing in the aggregate not more than
1,200,000 shares of INS Common Stock (net of INS Stock Option
cancelations), if issued within the three month
<PAGE>
35
period commencing on the date of this Agreement and, if applicable, up to
an additional 400,000 shares of INS Common Stock (net of INS Stock Option
cancelations) per month for each month thereafter, (y) the issuance of INS
Common Stock upon the exercise of (A) INS Stock Options, (B) the Warrant
and (C) the INS Rights, in each case outstanding as of the date hereof in
accordance with their present terms, or upon the exercise of the INS Stock
Options referred to in clause (x) in accordance with their terms or (z) the
issuance of INS Common Stock pursuant to the ESPP in accordance with its
present terms and not in violation of this Agreement;
(iii) amend INS's certificate of incorporation, by-laws or other
comparable organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing assets of, or by any other manner, any business or any
person;
(v) sell, lease, license, sell and leaseback, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any of its
properties or assets (including securitizations), other than in the
ordinary course of business consistent with past practice;
(vi) (x) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of INS or any of
its subsidiaries, guarantee any debt securities of another person, enter
into any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for short-term borrowings
incurred in the ordinary course of business (or to refund existing or
maturing indebtedness) consistent with past practice and except for
intercompany indebtedness between INS and any of its subsidiaries or
between such subsidiaries, or (y) make any loans, advances or capital
contributions to, or investments in, any other person, except for employee
loans or employee advances made in the ordinary course of business
consistent with past practice;
(vii) make or agree to make any new capital expenditure or
expenditures which, individually, are
<PAGE>
36
in excess of $1.0 million or, in the aggregate, are in excess of $5.0
million;
(viii) make any tax election that, individually or in the aggregate,
is reasonably likely to adversely affect in any material respect the tax
liability or tax attributes of INS or any of its subsidiaries or settle or
compromise any material income tax liability;
(ix) (x) pay, discharge, settle or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), or litigation (whether or not commenced prior to
the date of this Agreement) other than the payment, discharge, settlement
or satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities recognized or
disclosed in the Audited 1999 Financials or incurred since the date of such
financial statements, or (y) waive the benefits of, agree to modify in any
manner, terminate, release any person from or fail to enforce any
confidentiality, standstill or similar agreement to which INS or any of its
subsidiaries is a party or of which INS or any of its subsidiaries is a
beneficiary;
(x) except as required by law or contemplated hereby and except
for labor agreements negotiated in the ordinary course, enter into, adopt
or amend or terminate any INS Benefit Plan or any other agreement, plan or
policy involving INS or its subsidiaries, and one or more of its directors,
officers or employees, or change any actuarial or other assumption used to
calculate funding obligations with respect to any pension plan, or change
the manner in which contributions to any pension plan are made or the basis
on which such contributions are determined;
(xi) except for normal increases in the ordinary course of business
consistent with past practice or as contemplated hereby or by the terms of
any employment agreement the existence of which does not constitute a
violation of this Agreement, increase the cash compensation of any
director, officer or other employee or pay any benefit or amount not
required by a plan or arrangement as in effect on the date of this
Agreement to any such person;
(xii) transfer or license to any person or entity or otherwise
extend, amend or modify any rights to the
<PAGE>
37
Intellectual Property Rights of INS and its subsidiaries other than in the
ordinary course of business consistent with past practices; provided that
in no event shall INS license on an exclusive basis or sell any
Intellectual Property Rights of INS and its subsidiaries;
(xiii) enter into or amend any agreements pursuant to which any
person is granted exclusive marketing, manufacturing or other rights with
respect to any INS product, process or technology;
(xiv) take any action that would, or that is reasonably likely to,
(A) result in any representation or warranty made by INS becoming untrue or
inaccurate such that the condition set forth in Section 6.02(a) would not
be satisfied or (B) result in any other condition to the Merger set forth
in Article VI not being satisfied; or
(xv) authorize, commit or agree to take any of the foregoing
actions.
(b) Advice of Changes. INS and Lucent shall promptly advise the
-----------------
other party orally and in writing to the extent it has knowledge of (i) any
representation or warranty made by it (and, in the case of Lucent, made by Sub)
contained in this Agreement or the Option Agreement becoming untrue or
inaccurate such that the condition set forth in Section 6.02(a) or Section
6.03(a), respectively, would not be satisfied, (ii) the failure by it (and, in
the case of Lucent, by Sub) to comply with or satisfy in any material respect
any covenant, condition or agreement to be complied with or satisfied by it
under this Agreement or the Option Agreement and (iii) any change or event
causing, or which is reasonably likely to cause, any of the conditions set forth
in Article VI not to be satisfied; provided, however, that no such notification
-------- -------
shall affect the representations, warranties, covenants or agreements of the
parties (or remedies with respect thereto) or the conditions to the obligations
of the parties under this Agreement or the Option Agreement.
SECTION 4.02. No Solicitation by INS. (a) INS shall not, nor shall
----------------------
it permit any of its subsidiaries to, nor shall it authorize or permit any of
its directors, officers or employees or any investment banker, financial
advisor, attorney, accountant or other representative retained by it or any of
its subsidiaries to, directly or indirectly through another person, (i) solicit,
initiate or encourage (including by way of furnishing information), or
<PAGE>
38
take any other action to facilitate, any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any Takeover
Proposal (as defined below) or (ii) participate in any discussions or
negotiations regarding any Takeover Proposal; provided, however, that if, at any
-------- -------
time prior to the date of the INS Stockholders Meeting (the "Applicable
Period"), the Board of Directors of INS determines in good faith, after
consultation with outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to INS's stockholders under applicable law, INS
and its representatives may, in response to a Superior Proposal which was not
solicited by it or which did not otherwise result from a breach of this Section
4.02(a), and subject to providing prior written notice of its decision to take
such action to Lucent (a "Section 4.02 Notice") and compliance with Section
4.02(c), (x) furnish information with respect to INS and its subsidiaries to any
person making a Superior Proposal pursuant to a customary confidentiality
agreement (as determined by INS after consultation with its outside counsel) and
(y) participate in discussions or negotiations regarding such Superior Proposal.
For purposes of this Agreement, "Takeover Proposal" means any inquiry, proposal
or offer from any person relating to any direct or indirect acquisition or
purchase of 15% or more of the assets of INS and its subsidiaries, taken as a
whole, or 15% or more of any class or series of equity securities of INS or any
of its subsidiaries, any tender offer or exchange offer that if consummated
would result in any person beneficially owning 15% or more of any class or
series of equity securities of INS or any of its subsidiaries, or any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving INS or any of its subsidiaries, other than the
transactions contemplated by this Agreement.
(b) Neither the Board of Directors of INS nor any committee thereof
shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Lucent, the approval or recommendation by such Board of
Directors or such committee of the Merger or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Takeover Proposal,
or (iii) approve or recommend, or propose to approve or recommend, or execute or
enter into, any letter of intent, agreement in principle, merger agreement,
acquisition agreement, option agreement or other similar agreement or propose
publicly or agree to do any of the foregoing (each, an "Acquisition Agreement")
related to any Takeover Proposal, other than any such agreement entered into
<PAGE>
39
concurrently with a termination pursuant to the next sentence in order to
facilitate such action. Notwithstanding the foregoing, during the Applicable
Period, in response to a Superior Proposal which was not solicited by INS and
which did not otherwise result from a breach of Section 4.02(a), if the Board of
Directors of INS determines in good faith, after consultation with outside
counsel, that it is necessary to do so in order to comply with its fiduciary
duties to INS's stockholders under applicable law, the Board of Directors of INS
may (subject to this and the following sentence) terminate this Agreement (and
concurrently with or after such termination, if it so chooses, cause INS to
enter into any Acquisition Agreement with respect to any Superior Proposal), but
only at a time that is during the Applicable Period and is after the tenth
business day following Lucent's receipt of written notice advising Lucent that
the Board of Directors of INS is prepared to accept a Superior Proposal,
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal. For purposes of this
Agreement, a "Superior Proposal" means any proposal made by a third party to
acquire, directly or indirectly, including pursuant to a tender offer, exchange
offer, merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction, for consideration consisting of
cash and/or securities, more than 50% of the combined voting power of the shares
of INS Common Stock then outstanding or all or substantially all the assets of
INS and otherwise on terms which the Board of Directors of INS determines in its
good faith judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be more favorable to INS's stockholders than the
Merger and for which financing, to the extent required, is then committed or
which, in the good faith judgment of the Board of Directors of INS, is
reasonably capable of being obtained by such third party.
(c) In addition to the obligations of INS set forth in paragraphs
(a) and (b) of this Section 4.02, INS shall promptly (and no later than 48
hours) advise Lucent orally and in writing of any request for information or of
any inquiry with respect to a Takeover Proposal, the material terms and
conditions of such request, inquiry or Takeover Proposal and the identity of the
person making such request, inquiry or Takeover Proposal. INS will promptly keep
Lucent informed of the status and details (including amendments or changes or
proposed amendments or changes) of any such request, inquiry or Takeover
Proposal.
<PAGE>
40
(d) Nothing contained in this Section 4.02 or elsewhere in this
Agreement shall prohibit INS from taking and disclosing to its stockholders a
position contemplated by Rule 14e-2(a) promulgated under the Exchange Act or
from making any disclosure to INS's stockholders if, in the good faith judgment
of the Board of Directors of INS, after consultation with outside counsel,
failure so to disclose would be inconsistent with its obligations under
applicable law; provided, however, that neither INS nor its Board of Directors
-------- -------
nor any committee thereof shall withdraw or modify, or propose to withdraw or
modify, its position with respect to this Agreement or the Merger or approve or
recommend, or propose to approve or recommend, a Takeover Proposal.
ARTICLE V
Additional Agreements
---------------------
SECTION 5.01. Preparation of the Form S-4 and the INS Proxy
---------------------------------------------
Statement; INS Stockholders Meeting. (a) As soon as practicable following the
- ------------------------------------
date of this Agreement, Lucent and INS shall prepare and INS shall file with the
SEC the INS Proxy Statement and Lucent and INS shall prepare and Lucent shall
file with the SEC the Form S-4, in which the INS Proxy Statement will be
included as a prospectus. Each of INS and Lucent shall use all reasonable
efforts to have the Form S-4 declared effective under the Securities Act as
promptly as practicable after such filing. INS will use all reasonable efforts
to cause the INS Proxy Statement to be mailed to INS's stockholders as promptly
as practicable after the Form S-4 is declared effective under the Securities
Act. Lucent shall also take any action (other than qualifying to do business in
any jurisdiction in which it is not now so qualified or to file a general
consent to service of process) required to be taken under any applicable state
securities laws in connection with the issuance of Lucent Common Stock in the
Merger and INS shall furnish all information concerning INS and the holders of
capital stock of INS as may be reasonably requested in connection with any such
action and the preparation, filing and distribution of the INS Proxy Statement.
No filing of, or amendment or supplement to, or correspondence to the SEC or its
staff with respect to, the Form S-4 will be made by Lucent, or the INS Proxy
Statement will be made by INS, without providing the other party a reasonable
opportunity to review and comment thereon. Lucent will advise INS, promptly
after it receives notice thereof, of the time when the Form S-4 has become
effective or any supplement or amendment has been filed, the issuance
<PAGE>
41
of any stop order, the suspension of the qualification of the Lucent Common
Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Form S-4 or
comments thereon and responses thereto or requests by the SEC for additional
information. INS will advise Lucent, promptly after it receives notice thereof,
of any request by the SEC for the amendment of the INS Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information. If at any time prior to the Effective Time any information relating
to INS or Lucent, or any of their respective affiliates, officers or directors,
should be discovered by INS or Lucent which should be set forth in an amendment
or supplement to any of the Form S-4 or the INS Proxy Statement, so that any of
such documents would not include any misstatement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of INS.
(b) INS shall, as soon as practicable following the date of this
Agreement, establish a record date (which will be as soon as practicable
following the date of this Agreement) for, duly call, give notice of, convene
and hold a meeting of its stockholders (the "INS Stockholders Meeting") solely
for the purpose of obtaining the INS Stockholder Approval. INS shall, through
its Board of Directors, recommend to its stockholders the approval and adoption
of this Agreement, the Merger and the other transactions contemplated hereby.
Without limiting the generality of the foregoing but subject to its right to
terminate this Agreement pursuant to Section 4.02(b), INS agrees that its
obligations pursuant to the first sentence of this Section 5.01(b) shall not be
affected by the commencement, public proposal, public disclosure or
communication to INS of any Takeover Proposal.
SECTION 5.02. Letters of INS's Accountants. (a) INS shall use
----------------------------
reasonable efforts to cause to be delivered to Lucent two letters from INS's
independent public accountants, one dated a date within two business days before
the date on which the Form S-4 shall become effective and one dated a date
within two business days before the Closing Date, each addressed to Lucent, in
form and substance reasonably satisfactory to Lucent and customary in scope and
substance for comfort letters
<PAGE>
42
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
(b) INS shall provide all reasonable cooperation to each of
Lucent's independent public accountants and INS's independent public accountants
to enable them to issue the letters referred to in Section 6.02(d) and shall use
all reasonable efforts to cause them to do so.
SECTION 5.03. Letters of Lucent's Accountants. (a) Lucent shall use
-------------------------------
reasonable efforts to cause to be delivered to INS two letters from Lucent's
independent accountants, one dated a date within two business days before the
date on which the Form S-4 shall become effective and one dated a date within
two business days before the Closing Date, each addressed to INS, in form and
substance reasonably satisfactory to INS and customary in scope and substance
for comfort letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
(b) Lucent shall provide all reasonable cooperation to each of
Lucent's independent public accountants and INS's independent public accountants
to enable them to issue the letters referred to in Section 6.02(d) and shall use
all reasonable efforts to cause them to do so, unless Section 6.02(d) is
otherwise waived by Lucent.
SECTION 5.04. Access to Information; Confidentiality. Upon
--------------------------------------
reasonable notice and subject to the Confidentiality Agreement dated April 23,
1999, between Lucent and INS (the "Confidentiality Agreement"), INS shall, and
shall cause each of its subsidiaries to, afford to Lucent and to its officers,
employees, accountants, counsel, financial advisors and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to all its properties, books, contracts, commitments, personnel
and records and, during such period, INS shall, and shall cause each of its
subsidiaries to, furnish promptly to Lucent (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as Lucent
may reasonably request (including INS's outside accountants work papers). INS
shall not be required to provide access to or disclose information where such
access or disclosure would contravene any law, rule, regulation, order or
decree. No review pursuant to this Section 5.04 shall have an effect
<PAGE>
43
for the purpose of determining the accuracy of any representation or warranty
given by either party hereto to the other party hereto. Lucent will hold, and
will cause its officers, employees, accountants, counsel, financial advisors and
other representatives and affiliates to hold, any nonpublic information in
accordance with the terms of the Confidentiality Agreement.
SECTION 5.05. Commercially Reasonable Efforts. (a) Upon the terms
-------------------------------
and subject to the conditions set forth in this Agreement, each of the parties
agrees to use commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated by this Agreement, the Option Agreement and
the Stockholder Agreement, including using commercially reasonable efforts to
accomplish the following: (i) the taking of all commercially reasonable acts
necessary to cause the conditions to Closing to be satisfied as promptly as
practicable, (ii) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (iii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iv) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement, the
Option Agreement or the Stockholder Agreement or the consummation of the
transactions contemplated by this Agreement, the Option Agreement or the
Stockholder Agreement, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed, and (v) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by, and to fully carry out
the purposes of, this Agreement, the Option Agreement and the Stockholder
Agreement.
(b) In connection with and without limiting the foregoing, INS and
its Board of Directors and Lucent and its Board of Directors shall (i) take all
action necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to the Merger, this Agreement, the Option
Agreement, the Stockholder Agreement or any of the other transactions
contemplated by this
<PAGE>
44
Agreement, the Option Agreement or the Stockholder Agreement and (ii) if any
state takeover statute or similar statute or regulation becomes applicable to
the Merger, this Agreement, the Option Agreement, the Stockholder Agreement or
any other transaction contemplated by this Agreement, the Option Agreement or
the Stockholder Agreement, take all action necessary to ensure that the Merger
and the other transactions contemplated by this Agreement, the Option Agreement
and the Stockholder Agreement may be consummated as promptly as practicable on
the terms contemplated by this Agreement, the Option Agreement and the
Stockholder Agreement and otherwise to minimize the effect of such statute or
regulation on the Merger and the other transactions contemplated by this
Agreement, the Option Agreement and the Stockholder Agreement.
SECTION 5.06. Stock Options. (a) As soon as practicable following
-------------
the date of this Agreement, the Board of Directors of INS (or, if appropriate,
any committee thereof administering the INS Stock Plans) shall adopt such
resolutions or take such other actions as may be required to effect the
following:
(i) adjust the terms of all outstanding INS Stock Options granted
under the INS Stock Plans, whether vested or unvested, as necessary to
provide that, at the Effective Time, each INS Stock Option outstanding
immediately prior to the Effective Time shall be amended and converted into
an option to acquire, on the same terms and conditions as were applicable
under such INS Stock Option the number of shares of Lucent Common Stock
(rounded down to the nearest whole share) equal to (A) the number of shares
of INS Common Stock subject to such INS Stock Option immediately prior to
the Effective Time multiplied by (B) the Exchange Ratio, at an exercise
price per share of Lucent Common Stock (rounded to the nearest one-
hundredth of a cent) equal to (x) the exercise price per share of such INS
Common Stock immediately prior to the Effective Time divided by (y) the
Exchange Ratio (each, as so adjusted, an "Adjusted Option"); and
(ii) make such other changes to the INS Stock Plans as INS and
Lucent may agree are appropriate to give effect to the Merger.
(b) As soon as practicable after the Effective Time, Lucent shall
deliver to the holders of INS Stock Options appropriate notices setting forth
such holders'
<PAGE>
45
rights pursuant to the respective INS Stock Plans and the agreements evidencing
the grants of such INS Stock Options and that such INS Stock Options and
agreements shall be assumed by Lucent and shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 5.06
after giving effect to the Merger).
(c) A holder of an Adjusted Option may exercise such Adjusted
Option in whole or in part in accordance with its terms by following procedures
to be communicated by Lucent with the notice contemplated by Section 5.06(b),
together with the consideration therefor and the federal withholding tax
information, if any, required in accordance with the related INS Stock Plan.
(d) Except as otherwise contemplated by this Section 5.06 and
except to the extent required under the respective terms of the INS Stock
Options or under the respective terms of the change of control agreements with
certain employees of INS as in effect on the date hereof, all restrictions or
limitations on transfer and vesting with respect to INS Stock Options awarded
under the INS Stock Plans or any other plan, program or arrangement of INS or
any of its subsidiaries, to the extent that such restrictions or limitations
shall not have already lapsed, shall remain in full force and effect with
respect to such options after giving effect to the Merger and the assumption by
Lucent as set forth above.
(e) After the Closing and within five business days after receipt
by Lucent of all required information from INS, Lucent shall prepare and file
with the SEC a registration statement on Form S-8 (or another appropriate form)
registering a number of shares of Lucent Common Stock equal to the number of
shares subject to the Adjusted Options. Such registration statement shall be
kept effective (and the current status of the prospectus or prospectuses
required thereby shall be maintained) at least for so long as the Adjusted
Options remain outstanding. INS shall cooperate with, and assist Lucent in the
preparation of, such registration statement.
(f) INS shall take, or cause to be taken, all action necessary to
amend the ESPP to terminate the ESPP and all future offering periods thereunder,
in each case, effective as of the date that is five business days prior to the
Closing Date. Within one month after the Closing Date, employees of INS will
become eligible to participate in Lucent's employee stock purchase plan, subject
to the terms and conditions of such plan.
<PAGE>
46
SECTION 5.07. Employee Matters. (a) As soon as practicable after
----------------
the Closing Date (the "Benefits Date"), Lucent shall provide, or cause to be
provided, employee benefit plans, programs and arrangements to employees of INS
that are the same as those made generally available to similarly situated non-
represented employees of Lucent who are hired by Lucent after December 31, 1998.
From the Effective Time to the Benefits Date (which the parties acknowledge may
occur on different dates with respect to different plans, programs or
arrangements of Lucent), Lucent shall provide, or cause to be provided, the
employee benefit plans, programs and arrangements of INS (other than equity-
based plans, programs and arrangements) provided to employees of INS as of the
date hereof.
(b) With respect to each benefit plan, program, practice, policy or
arrangement maintained by Lucent (the "Lucent Plans") in which employees of INS
subsequently participate, (i) service with INS and its subsidiaries prior to the
Effective Time shall be credited against all service and waiting period
requirements under the Lucent Plans (provided that such recognition shall not be
for the purpose of determining (x) retirement benefits under Lucent's defined
benefit pension plans (unless otherwise required by law) or (y) any Lucent
subsidy under Lucent's retiree health plans), (ii) the Lucent Plans shall not
provide any pre-existing condition exclusions and (iii) the deductibles,
copayments and out-of-pocket maximums in effect under the Lucent Plans shall be
reduced by any deductibles, copayments and out-of-pocket maximums paid by such
individuals under the INS Benefit Plans for the plan year in which the Effective
Time occurs.
SECTION 5.08. Indemnification, Exculpation and Insurance. (a)
------------------------------------------
Lucent agrees that all rights to indemnification and exculpation from
liabilities for acts or omissions occurring at or prior to the Effective Time
now existing in favor of the current or former directors or officers of INS and
its subsidiaries as provided in their respective certificate of incorporation or
by-laws (or comparable organizational documents) and any indemnification
agreements of INS (as each is in effect on the date hereof), the existence of
which does not constitute a breach of this Agreement, shall be assumed by the
Surviving Corporation in the Merger, without further action, as of the Effective
Time and shall survive the Merger and shall continue in full force and effect in
accordance with their terms, and Lucent shall cause the Surviving Corporation to
honor all such rights.
<PAGE>
47
(b) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person and
is not the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, or otherwise dissolves the Surviving
Corporation, then, and in each such case, Lucent shall cause proper provision to
be made so that the successors and assigns of the Surviving Corporation assume
the obligations set forth in this Section 5.08.
(c) Lucent shall, at its option, for a period of not less than six
years after the Effective Time, either (i) maintain INS's current directors' and
officers' liability insurance covering acts or omissions occurring prior to the
Effective Time ("D&O Insurance") with respect to those persons who are currently
covered by INS's directors' and officers' liability insurance policy on terms
with respect to such coverage and amount no less favorable than those of such
policy in effect on the date hereof or (ii) cause to be provided by a reputable
insurance company coverage no less favorable to such directors or officers, as
the case may be, than the D&O Insurance, in each case so long as the annual
premium therefor would not be in excess of 200% of the last annual premium paid
for the D&O Insurance prior to the date of this Agreement (such 200% amount the
"Maximum Premium"). If the existing or substituted directors' and officers'
liability insurance expires, is terminated or canceled during such six-year
period, Lucent will obtain as much D&O Insurance as can be obtained for the
remainder of such period for an annualized premium not in excess of the Maximum
Premium. INS represents that the Maximum Premium is $350,000.
(d) The provisions of this Section 5.08 (i) are intended to be for
the benefit of, and will be enforceable by, each indemnified party, his or her
heirs and his or her representatives and (ii) are in addition to, and not in
substitution for, any other rights to indemnification or contribution that any
such person may have by contract or otherwise.
SECTION 5.09. Fees and Expenses. (a) All fees and expenses incurred
------------------
in connection with the Merger, this Agreement, the Option Agreement, the
Stockholder Agreement and the transactions contemplated by this Agreement, the
Option Agreement and the Stockholder Agreement shall be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated,
except that each of
<PAGE>
48
Lucent and INS shall bear and pay one-half of (1) the costs and expenses
incurred in connection with the filing, printing and mailing of the Form S-4 and
the INS Proxy Statement (including SEC filing fees) and (2) the filing fees for
the premerger notification and report forms under the HSR Act. Lucent shall file
any return with respect to, and shall pay, any state or local taxes (including
any penalties or interest with respect thereto), if any, which are attributable
to the transfer of the beneficial ownership of INS's real property
(collectively, the "Real Estate Transfer Taxes") as a result of the Merger
(other than any such taxes that are solely the obligations of a stockholder of
INS, in which case INS shall pay any such taxes). INS shall cooperate with
Lucent in the filing of such returns including, in the case of INS, supplying in
a timely manner a complete list of all real property interests held by INS and
any information with respect to such property that is reasonably necessary to
complete such returns. The fair market value of any real property of INS subject
to the Real Estate Transfer Taxes shall be as agreed to between Lucent and INS.
(b) In the event that (1) a bona fide Takeover Proposal shall have
been made known to INS or any of its subsidiaries or has been made directly to
the stockholders of INS generally or shall have otherwise become publicly known
or any person shall have publicly announced an intention (whether or not
conditional) to make a Takeover Proposal and thereafter this Agreement is
terminated by either Lucent or INS pursuant to Section 7.01(b)(i) or (ii) or (2)
this Agreement is terminated (x) by INS pursuant to Section 7.01(f) or (y) by
Lucent pursuant to Section 7.01(d), then INS shall promptly, but in no event
later than the date of such termination, pay Lucent a fee equal to $110 million
(the "Termination Fee"), payable by wire transfer of same day funds; provided,
--------
however, that no Termination Fee shall be payable to Lucent pursuant to clause
- -------
(1) of this paragraph (b) or pursuant to a termination by Lucent pursuant to
Section 7.01(d) unless and until within 15 months of such termination INS or any
of its subsidiaries enters into any Acquisition Agreement or consummates any
Takeover Proposal (for the purposes of the foregoing proviso the terms
"Acquisition Agreement" and "Takeover Proposal" shall have the meanings assigned
to such terms in Section 4.02 except that the references to "15%" in the
definition of "Takeover Proposal" in Section 4.02(a) shall be deemed to be
references to "35%" and "Takeover Proposal" shall only be deemed to refer to a
transaction involving INS, or with respect to assets (including the shares of
any subsidiary), INS and its subsidiaries, taken as a whole, and not any of its
<PAGE>
49
subsidiaries alone), in which event the Termination Fee shall be payable upon
the first to occur of such events. INS acknowledges that the agreements
contained in this Section 5.09(b) are an integral part of the transactions
contemplated by this Agreement, and that without these agreements Lucent would
not enter into this Agreement; accordingly, if INS fails promptly to pay the
amount due pursuant to this Section 5.09(b), and, in order to obtain such
payment, Lucent commences a suit which results in a judgment against INS for the
fee set forth in this Section 5.09(b), INS shall pay to Lucent its costs and
expenses (including attorneys' fees and expenses) in connection with such suit,
together with interest on the amount of the fee at the prime rate of Citibank,
N.A. in effect on the date such payment was required to be made.
SECTION 5.10. Public Announcements. Lucent and INS will consult with
---------------------
each other before issuing, and provide each other the opportunity to review,
comment upon and concur with, any press release or other public statements with
respect to the transactions contemplated by this Agreement, including the
Merger, the Option Agreement and the Stockholder Agreement, and shall not issue
any such press release or make any such public statement prior to such
consultation, except as either party may determine is required by applicable
law, the SEC, court process or by obligations pursuant to any listing agreement
with any national securities exchange or national trading system. The parties
agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement, the Option Agreement and the
Stockholder Agreement shall be in the form heretofore agreed to by the parties.
SECTION 5.11. Affiliates. INS shall deliver to Lucent at least 30
-----------
days prior to the Closing Date, a letter identifying all persons who are, at the
time of such letter, "affiliates" of INS for purposes of Rule 145 under the
Securities Act or for purposes of qualifying the Merger for pooling of interests
accounting treatment under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations. INS shall use reasonable efforts to cause
each such person to deliver to Lucent at least 30 days prior to the Closing
Date, a written agreement substantially in the form attached as Exhibit A
hereto. Lucent shall use reasonable efforts to cause all persons who are
"affiliates" of Lucent for purposes of qualifying the Merger for pooling of
interests accounting treatment under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations to deliver to INS at least 30
days prior to the Closing
<PAGE>
50
Date, a written agreement complying with the fourth paragraph of Exhibit A
hereto.
SECTION 5.12. Listings. Lucent shall use reasonable efforts to cause
---------
the Lucent Common Stock issuable in the Merger to be approved for listing on the
NYSE, subject to official notice of issuance, as promptly as practicable after
the date hereof, and in any event prior to the Closing Date. INS shall use
reasonable efforts to cause the shares of INS Common Stock to be issued pursuant
to the Option Agreement to be approved for quotation on Nasdaq, subject to
official notice of issuance, as promptly as practicable after the date hereof,
and in any event prior to the Closing Date.
SECTION 5.13. Litigation. INS shall give Lucent the opportunity to
-----------
participate in the defense of any litigation against INS and/or its directors
relating to the transactions contemplated by this Agreement, the Option
Agreement and the Stockholder Agreement.
SECTION 5.14. Tax Treatment. Each of Lucent and INS shall use
--------------
reasonable efforts to cause the Merger to qualify as a reorganization under the
provisions of Section 368 of the Code and to obtain the opinions of counsel
referred to in Sections 6.02(c) and 6.03(c), including the execution of the
letters of representation referred to therein.
SECTION 5.15. Pooling of Interests. Each of INS and Lucent shall use
---------------------
reasonable efforts to cause the transactions contemplated by this Agreement,
including the Merger, the Option Agreement and the Stockholder Agreement to be
accounted for as a pooling of interests under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations, and each of INS and
Lucent agrees that it shall take no action that would cause such accounting
treatment not to be obtained.
SECTION 5.16. Stockholder Agreement Legend. INS will inscribe upon
-----------------------------
any certificate representing Subject Shares (as defined in the Stockholder
Agreement) tendered by the Stockholder (as defined in the Stockholder Agreement)
in connection with any proposed transfer of any Subject Shares by the
Stockholder in accordance with the terms of the Stockholder Agreement the
following legend: "THE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF
INTERNATIONAL NETWORK SERVICES, REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDER AGREEMENT DATED AS OF AUGUST 9, 1999, AND ARE SUBJECT TO THE TERMS
THEREOF. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT THE PRINCIPAL
<PAGE>
51
EXECUTIVE OFFICES OF INTERNATIONAL NETWORK SERVICES."; and INS will return such
certificate containing such inscription to the Stockholder within three business
days following INS's receipt thereof.
SECTION 5.17. Rights Agreement. INS's Board of Directors shall not,
-----------------
without the prior written consent of Lucent, (a) amend the INS Rights Agreement
after it is adopted or (b) take any action with respect to, or make any
determination under, the INS Rights Agreement, including, a redemption of the
INS Rights or any action to facilitate a Takeover Proposal.
ARTICLE VI
Conditions Precedent
--------------------
SECTION 6.01. Conditions to Each Party's Obligation To Effect the
---------------------------------------------------
Merger. The respective obligation of each party to effect the Merger is subject
- -------
to the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) INS Stockholder Approval. The INS Stockholder Approval shall
-------------------------
have been obtained.
(b) HSR Act. The waiting period (and any extension thereof)
--------
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(c) No Litigation. No judgment, order, decree, statute, law,
--------------
ordinance, rule or regulation, entered, enacted, promulgated, enforced or
issued by any court or other Governmental Entity of competent jurisdiction
or other legal restraint or prohibition (collectively, "Restraints") shall
be in effect, and there shall not be pending or threatened any suit, action
or proceeding by any Governmental Entity (i) preventing the consummation of
the Merger, (ii) prohibiting or limiting the ownership or operation by INS
or Lucent and their respective subsidiaries of any material portion of the
business or assets of INS or Lucent and their respective subsidiaries taken
as a whole, or compelling INS or Lucent and their respective subsidiaries
to dispose of or hold separate any material portion of the business or
assets of INS or Lucent and their respective subsidiaries taken as a whole,
as a result of the Merger or any of the other transactions contemplated by
this Agreement, the
<PAGE>
52
Option Agreement or the Stockholder Agreement or (iii) which otherwise is
reasonably likely to have a material adverse effect on INS or Lucent, as
applicable; provided, however, that each of the parties shall have used its
-------- -------
reasonable efforts to prevent the entry of any such Restraints and to
appeal as promptly as possible any such Restraints that may be entered.
(d) Form S-4. The Form S-4 shall have become effective under the
---------
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(e) NYSE Listing. The shares of Lucent Common Stock issuable to
-------------
INS's stockholders as contemplated by this Agreement shall have been
approved for listing on the NYSE, subject to official notice of issuance.
SECTION 6.02. Conditions to Obligations of Lucent and Sub. The
--------------------------------------------
obligation of Lucent and Sub to effect the Merger is further subject to
satisfaction or waiver of the following conditions:
(a) Representations and Warranties. The representations and
-------------------------------
warranties of INS set forth herein shall be true and correct as of the date
hereof and as of the Effective Time, with the same effect as if made at and
as of such time (except to the extent expressly made as of an earlier date,
in which case as of such date), except where the failure of such
representations and warranties to be so true and correct (without giving
effect to any limitation as to "materiality" or "material adverse effect"
set forth therein) does not have, and is not reasonably likely to have,
individually or in the aggregate, a material adverse effect on INS. Lucent
shall have received a certificate signed on behalf of INS by the chief
executive officer of INS to such effect.
(b) Performance of Obligations of INS. INS shall have performed in
----------------------------------
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date. Lucent shall have received
a certificate signed on behalf of INS by the chief executive officer of INS
to such effect.
(c) Tax Opinions. Lucent shall have received from Cravath, Swaine &
-------------
Moore, counsel to Lucent, on the date on which the Form S-4 is declared
effective
<PAGE>
53
by the SEC and on the Closing Date, an opinion, in each case dated as of
such respective date and stating that the Merger will qualify for U.S.
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. The issuance of such opinion shall be
conditioned upon the receipt by such tax counsel of customary
representation letters from each of Lucent, Sub and INS, in each case, in
form and substance reasonably satisfactory to such tax counsel.
(d) Pooling Letters. Each of Lucent and INS shall have received
----------------
letters, dated as of the Closing Date, in each case addressed to Lucent and
INS, from PricewaterhouseCoopers LLP stating in substance that
PricewaterhouseCoopers LLP concurs with the conclusion of Lucent's and
INS's management that no conditions exist that would preclude accounting
for the merger as a pooling of interests under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations.
SECTION 6.03. Conditions to Obligations of INS. The obligation of INS
---------------------------------
to effect the Merger is further subject to satisfaction or waiver of the
following conditions:
(a) Representations and Warranties. The representations and
-------------------------------
warranties of Lucent and Sub set forth herein shall be true and correct as
of the date hereof and as of the Effective Time, with the same effect as if
made at and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such date), except where the failure of
such representations and warranties to be so true and correct (without
giving effect to any limitation as to "materiality" or "material adverse
effect" set forth therein) does not have, and is not reasonably likely to
have, individually or in the aggregate, a material adverse effect on
Lucent. INS shall have received a certificate signed on behalf of Lucent
by an authorized signatory of Lucent to such effect.
(b) Performance of Obligations of Lucent and Sub. Lucent and Sub
---------------------------------------------
shall have performed in all material respects all obligations required to
be performed by them under this Agreement at or prior to the Closing Date.
INS shall have received a certificate signed on behalf of Lucent by an
authorized signatory of Lucent to such effect.
<PAGE>
54
(c) Tax Opinions. INS shall have received from Wilson Sonsini
-------------
Goodrich & Rosati, counsel to INS, on the date on which the Form S-4 is
declared effective by the SEC and on the Closing Date, an opinion, in each
case dated as of such respective date and stating that the Merger will
qualify for U.S. federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code. The issuance of such opinion shall
be conditioned upon the receipt by such tax counsel of customary
representation letters from each of INS, Sub and Lucent, in each case, in
form and substance reasonably satisfactory to such tax counsel.
SECTION 6.04. Frustration of Closing Conditions. None of Lucent, Sub
----------------------------------
or INS may rely on the failure of any condition set forth in Section 6.01, 6.02
or 6.03, as the case may be, to be satisfied if such failure was caused by such
party's failure to use reasonable efforts to consummate the Merger and the other
transactions contemplated by this Agreement, the Option Agreement and the
Stockholder Agreement, as required by and subject to Section 5.05.
ARTICLE VII
Termination, Amendment and Waiver
---------------------------------
SECTION 7.01. Termination. This Agreement may be terminated at any
------------
time prior to the Effective Time, whether before or after the INS Stockholder
Approval:
(a) by mutual written consent of Lucent, Sub and INS;
(b) by either Lucent or INS:
(i) if the Merger shall not have been consummated by April 30,
2000; provided, however, that the right to terminate this Agreement
-------- -------
pursuant to this Section 7.01(b)(i) shall not be available to any
party whose failure to perform any of its obligations under this
Agreement results in the failure of the Merger to be consummated by
such time;
(ii) if the INS Stockholder Approval shall not have been obtained
at an INS Stockholders Meeting duly convened therefor or at any
adjournment or postponement thereof; or
<PAGE>
55
(iii) if any Restraint having any of the effects set forth in
Section 6.01(c) shall be in effect and shall have become final and
nonappealable; provided that the party seeking to terminate this
--------
Agreement pursuant to this Section 7.01(b)(iii) shall have used
reasonable efforts to prevent the entry of and to remove such
Restraint;
(c) by Lucent, if INS shall have breached or failed to perform in any
material respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
(A) would give rise to the failure of a condition set forth in Section
6.02(a) or (b), and (B) is incapable of being or has not been cured by INS
within 30 calendar days after giving written notice to INS of such breach
or failure to perform;
(d) by Lucent, if INS or any of its directors or officers shall
participate in discussions or negotiations in breach of Section 4.02;
(e) by INS, if Lucent shall have breached or failed to perform in any
material respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
(A) would give rise to the failure of a condition set forth in Section
6.03(a) or (b), and (B) is incapable of being or has not been cured by
Lucent within 30 calendar days after the giving of written notice to Lucent
of such breach or failure to perform; or
(f) by INS in accordance with Section 4.02(b); provided that, in order
--------
for the termination of this Agreement pursuant to this paragraph (f) to be
deemed effective, INS shall have complied with all provisions of Section
4.02, including the notice provisions therein, and with applicable
requirements, including the payment of the Termination Fee, of Section
5.09.
SECTION 7.02. Effect of Termination. In the event of termination of
----------------------
this Agreement by either INS or Lucent as provided in Section 7.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Lucent or INS, other than the provisions of Section
3.01(p), the last sentence of Section 5.04, Section 5.09, this Section 7.02 and
Article VIII, which provisions survive such termination,
<PAGE>
56
and except to the extent that such termination results from the willful and
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
SECTION 7.03. Amendment. This Agreement may be amended by the
----------
parties at any time before or after the INS Stockholder Approval; provided,
--------
however, that after any such approval, there shall not be made any amendment
- -------
that by law requires further approval by the stockholders of INS or the approval
of the stockholders of Lucent without the further approval of such stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
SECTION 7.04. Extension; Waiver. At any time prior to the Effective
------------------
Time, a party may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c) subject
to the proviso of Section 7.03, waive compliance by the other party with any of
the agreements or conditions contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
SECTION 7.05. Procedure for Termination, Amendment, Extension or
--------------------------------------------------
Waiver. A termination of this Agreement pursuant to Section 7.01, an amendment
- -------
of this Agreement pursuant to Section 7.03 or an extension or waiver pursuant to
Section 7.04 shall, in order to be effective, require, in the case of Lucent or
INS, action by its Board of Directors or, with respect to any amendment to this
Agreement, the duly authorized committee of its Board of Directors to the extent
permitted by law.
ARTICLE VIII
General Provisions
------------------
SECTION 8.01. Nonsurvival of Representations and Warranties. None of
----------------------------------------------
the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.01 shall not limit any covenant or agreement of
<PAGE>
57
the parties which by its terms contemplates performance after the Effective
Time.
SECTION 8.02. Notices. All notices, requests, claims, demands and
--------
other communications under this Agreement shall be in writing and shall be
deemed given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Lucent or Sub, to
Lucent Technologies Inc.
600 Mountain Avenue
Room 6A 311
Murray Hill, NJ 07974
Telecopy No.: Separately supplied
Attention: Pamela F. Craven
Vice President-Law
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Telecopy No.: Separately supplied
Attention: Robert A. Kindler
Robert I. Townsend, III; and
(b) if to INS, to
International Network Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Telecopy No.: Separately supplied
Attention: Susan H. Thornton
<PAGE>
58
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Telecopy No.: Separately supplied
Attention: Elizabeth Flint
SECTION 8.03. Definitions. For purposes of this Agreement:
------------
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person, where "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a person, whether through the
ownership of voting securities, by contract, as trustee or executor, or
otherwise;
(b) "business day" means any day other than Saturday, Sunday or any
other day on which banks are legally permitted to be closed in New York;
(c) "knowledge" of any person which is not an individual means the
knowledge of such person's executive officers after reasonable inquiry;
(d) "material adverse change" or "material adverse effect" means, when
used in connection with INS or Lucent, any change, effect, event,
occurrence, condition or development or state of facts that is materially
adverse to the business, results of operations or financial condition of
such party and its subsidiaries taken as a whole, other than any change,
effect, event, occurrence, condition, development or state of facts (i)
relating to the economy or securities markets in general, (ii) relating to
the industries in which such party operates in general, (iii) arising as a
result of this Agreement or the transactions contemplated hereby or the
announcement or pendency thereof (including (w) actions by customers or
competitors, (x) loss of personnel, customers, resellers or referrals, (y)
the delay or cancelation of orders for services and products and (z) any
failure by INS to meet any revenue or earnings predictions or expectations
to the extent resulting from the foregoing clauses (w), (x)
<PAGE>
59
and (y)) or (iv) in the case of INS, litigation brought or threatened
against INS or any member of its Board of Directors in respect of this
Agreement;
(e) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(f) a "subsidiary" of any person means another person, an amount of
the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board
of Directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) is owned directly
or indirectly by such first person.
SECTION 8.04. Interpretation. When a reference is made in this
---------------
Agreement to an Article, Section or Exhibit, such reference shall be to an
Article or Section of, or an Exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation". The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. All
terms defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto unless otherwise
defined therein. The definitions contained in this Agreement are applicable to
the singular as well as the plural forms of such terms and to the masculine as
well as to the feminine and neuter genders of such term. Any agreement,
instrument or statute defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes and references to all
attachments thereto and instruments incorporated therein. References to a
person are also to its permitted successors and assigns.
SECTION 8.05. Counterparts. This Agreement may be executed in one or
-------------
more counterparts, all of which shall
<PAGE>
60
be considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
SECTION 8.06. Entire Agreement; No Third-Party Beneficiaries. This
-----------------------------------------------
Agreement (including the documents and instruments referred to herein), the
Option Agreement, the Stockholder Agreement and the Confidentiality Agreement
(a) constitute the entire agreement, and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement and (b) except for the provisions of Article
II, Section 5.06, and Section 5.08, are not intended to confer upon any person
other than the parties any rights or remedies.
SECTION 8.07. Governing Law. This Agreement shall be governed by,
--------------
and construed in accordance with, the laws of the State of Delaware, regardless
of the laws that might otherwise govern under applicable principles of conflict
of laws thereof.
SECTION 8.08. Assignment. Neither this Agreement nor any of the
-----------
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties hereto
without the prior written consent of the other parties. Any assignment in
violation of the preceding sentence shall be void. Subject to the preceding two
sentences, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 8.09. Enforcement. Each of the parties hereto agrees that
------------
irreparable damage would occur and that the parties would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in the
State of Delaware or in Delaware state court, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself to the personal jurisdiction
of any federal court located in the State of Delaware or any Delaware state
court in the event any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that it will not attempt
to deny or defeat such
<PAGE>
61
personal jurisdiction by motion or other request for leave from any such court
and (c) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than a
federal court sitting in the State of Delaware or a Delaware state court.
SECTION 8.10. Severability. If any term or other provision of this
-------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
<PAGE>
62
IN WITNESS WHEREOF, Lucent, Sub and INS have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
LUCENT TECHNOLOGIES INC.,
by
/s/ Patricia F. Russo
--------------------------
Name: Patricia F. Russo
Title: Executive Vice
President, Strategy
and Corporate
Operations
INTREPID MERGER INC.,
by
/s/ Pamela F. Craven
--------------------------
Name: Pamela F. Craven
Title: Vice President,
Secretary and
Treasurer
INTERNATIONAL NETWORK SERVICES,
by
/s/ John L. Drew
--------------------------
Name: John L. Drew
Title: President and Chief
Executive Officer
<PAGE>
ANNEX I
TO THE MERGER AGREEMENT
Index of Defined Terms
----------------------
<TABLE>
<CAPTION>
Term Page Term Page
- ---- ---- ---- ----
<S> <C> <C> <C>
Accounting Rules................. 15 INS Stock Plans.................. 11
Acquisition Agreement............ 38 INS Stockholder Approval......... 23
Adjusted Option.................. 44 INS Stockholders Meeting......... 41
affiliate........................ 58 Intellectual Property
Agreement........................ 1 Rights......................... 24
Applicable Period................ 38 knowledge........................ 58
Audited 1999 Financials.......... 10 Liens............................ 11
Benefits Date.................... 46 Lucent........................... 1
business day..................... 58 Lucent Authorized Preferred
Certificate of Merger............ 2 Stock.......................... 28
Certificates..................... 5 Lucent Common Stock.............. 4
Closing.......................... 2 Lucent Disclosure Schedule....... 28
Closing Date..................... 2 Lucent Filed SEC Documents....... 32
Code............................. 1 Lucent Junior Preferred
Common Shares Trust.............. 7 Stock.......................... 28
Confidentiality Agreement........ 42 Lucent Plans..................... 46
control.......................... 58 Lucent Rights.................... 29
D&O Insurance.................... 47 Lucent Rights Agreement.......... 29
DGCL............................. 2 Lucent SEC Documents............. 31
Effective Time................... 3 material adverse change.......... 58
Environmental Law................ 19 material adverse effect.......... 58
ERISA............................ 20 Maximum Premium.................. 47
ESPP............................. 11 Merger........................... 1
Excess Shares.................... 7 Merger Consideration............. 4
Exchange Act..................... 14 Nasdaq........................... 14
Exchange Agent................... 4 NYSE............................. 7
Exchange Fund.................... 5 Option Agreement................. 2
Exchange Ratio................... 4 Parachute Gross-Up Payment....... 21
Form S-4......................... 16 person........................... 59
GAAP............................. 15 Real Estate Transfer Taxes....... 48
Governmental Entity.............. 14 Release.......................... 19
Hazardous Materials.............. 19 Restraints....................... 51
HSR Act.......................... 14 SARs............................. 11
INS.............................. 1 SEC.............................. 14
INS Authorized Preferred Section 4.02 Notice.............. 38
Stock.......................... 11 Securities Act................... 15
INS Benefit Plans................ 19 Stockholder...................... 1
INS Common Stock................. 1 Stockholder Agreement............ 1
INS Disclosure Schedule.......... 10 Sub.............................. 1
INS Filed SEC Documents.......... 16 subsidiary....................... 59
INS Permits...................... 18 Superior Proposal................ 39
INS Proxy Statement.............. 14 Surviving Corporation............ 2
INS Rights....................... 27 Takeover Proposal................ 38
INS Rights Agreement............. 27 taxes............................ 23
INS SEC Documents................ 14 Termination Fee.................. 48
INS Stock Options................ 11 Warrant.......................... 11
</TABLE>
<PAGE>
EXHIBIT A
TO THE MERGER AGREEMENT
Form of Affiliate Letter
------------------------
Dear Sirs:
The undersigned, a holder of shares of common stock, par value $.001 per
share ("INS Common Stock"), of International Network Services, a Delaware
corporation ("INS"), is entitled to receive in connection with the merger (the
"Merger") of a subsidiary of Lucent Technologies Inc., a Delaware corporation
("Lucent"), with and into INS, securities of Lucent, as the parent of the
surviving corporation in the Merger (the "Lucent Securities"). The undersigned
acknowledges that the undersigned may be deemed an "affiliate" of INS within the
meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), by the Securities and Exchange Commission
(the "SEC") and may be deemed an "affiliate" of INS for purposes of qualifying
the Merger for pooling of interests accounting treatment under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations, although
nothing contained herein should be construed as an admission of either such
fact.
If in fact the undersigned were an affiliate under the Securities Act, the
undersigned's ability to sell, assign or transfer the Lucent Securities received
by the undersigned in exchange for any shares of INS Common Stock in connection
with the Merger may be restricted unless such transaction is registered under
the Securities Act or an exemption from such registration is available. The
undersigned understands that such exemptions are limited and the undersigned has
obtained or will obtain advice of counsel as to the nature and conditions of
such exemptions, including information with respect to the applicability to the
sale of such securities of Rules 144 and 145(d) promulgated under the Securities
Act. The undersigned understands that Lucent will not be required to maintain
the effectiveness of any registration statement under the Securities Act for the
purposes of resale of Lucent Securities by the undersigned.
The undersigned hereby represents to and covenants with Lucent that the
undersigned will not sell, assign or transfer any of the Lucent Securities
received by the undersigned in exchange for shares of INS Common Stock in
connection with the Merger except (i) pursuant to an effective registration
statement under the Securities Act, (ii) in conformity with the volume and other
limitations of Rule 145 or (iii) in a transaction which, in the opinion of
counsel to Lucent or other counsel satisfactory to Lucent or as described in a
"no-action" or interpretive letter
<PAGE>
3
from the Staff of the SEC specifically issued with respect to a transaction to
be engaged in by the undersigned, is not required to be registered under the
Securities Act.
The undersigned hereby further represents to and covenants with Lucent that
the undersigned has not, within the preceding 30 days, sold, transferred or
otherwise disposed of any shares of INS Common Stock held by the undersigned and
that the undersigned will not sell, transfer or otherwise dispose of any Lucent
Securities received by the undersigned in connection with the Merger until after
such time as results covering at least 30 days of post-Merger combined
operations of INS and Lucent have been published by Lucent, in the form of a
quarterly earnings report, an effective registration statement filed with the
SEC, a report to the SEC on Form 10-K, 10-Q or 8-K, or any other public filing
or announcement which includes such combined results of operations, except as
would not otherwise reasonably be expected to adversely affect the qualification
of the Merger as a pooling-of-interests.
In the event of a sale or other disposition by the undersigned of Lucent
Securities pursuant to Rule 145, the undersigned will supply Lucent with
evidence of compliance with such Rule, in the form of a letter in the form of
Annex I hereto and the opinion of counsel or no-action letter referred to above.
The undersigned understands that Lucent may instruct its transfer agent to
withhold the transfer of any Lucent Securities disposed of by the undersigned,
but that (provided such transfer is not prohibited by any other provision of
this letter agreement) upon receipt of such evidence of compliance, Lucent shall
cause the transfer agent to effectuate the transfer of the Lucent Securities
sold as indicated in such letter.
Lucent covenants that it will take all such actions as may be reasonably
available to it to permit the sale or other disposition of Lucent Securities by
the undersigned under Rule 145 in accordance with the terms thereof.
The undersigned acknowledges and agrees that the legends set forth below
will be placed on certificates representing Lucent Securities received by the
undersigned in connection with the Merger or held by a transferee thereof, which
legends will be removed by delivery of substitute certificates upon receipt of
an opinion in form and substance reasonably satisfactory to Lucent from
independent counsel reasonably satisfactory to Lucent to the effect that such
legends are no longer required for purposes of the Securities Act.
<PAGE>
4
There will be placed on the certificates for Lucent Securities issued to
the undersigned, or any substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued pursuant to a
business combination which is being accounted for as a pooling of interests, in
a transaction to which Rule 145 promulgated under the Securities Act of 1933
applies. The shares have not been acquired by the holder with a view to, or
for resale in connection with, any distribution thereof within the meaning of
the Securities Act of 1933. The shares may not be sold, pledged or otherwise
transferred (i) until such time as Lucent Technologies Inc. shall have
published financial results covering at least 30 days of combined operations
after the Effective Time and (ii) except in accordance with an exemption from
the registration requirements of the Securities Act of 1933."
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the distribution, sale, transfer or other disposition of Lucent Securities
and (ii) the receipt by Lucent of this letter is an inducement to Lucent's
obligations to consummate the Merger.
Very truly yours,
Dated:
<PAGE>
ANNEX I
TO EXHIBIT A
[Name] [Date]
On , the undersigned sold the securities of Lucent
Technologies Inc., a Delaware corporation ("Lucent"), described below in the
space provided for that purpose (the "Securities"). The Securities were
received by the undersigned in connection with the merger of a subsidiary of
Lucent with and into International Network Services, a Delaware corporation.
Based upon the most recent report or statement filed by Lucent with the
Securities and Exchange Commission, the Securities sold by the undersigned were
within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The undersigned hereby represents that the Securities were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Securities Act
or in transactions directly with a "market maker" as that term is defined in
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended. The
undersigned further represents that the undersigned has not solicited or
arranged for the solicitation of orders to buy the Securities, and that the
undersigned has not made any payment in connection with the offer or sale of the
Securities to any person other than to the broker who executed the order in
respect of such sale.
Very truly yours,
[Space to be provided for description of the Securities.]
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF DESIGNATIONS OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES A PARTICIPATING PREFERRED STOCK
OF INTERNATIONAL NETWORK SERVICES
The undersigned, Kevin J. Laughlin, does hereby certify:
1. That he is the duly elected and acting Vice President, Finance and
Chief Financial Officer of International Network Services, a Delaware
corporation (the "Corporation").
2. That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the said Corporation, the said Board of
Directors effective on August 7, 1999 adopted the following resolution creating
a series of 150,000 shares of Preferred Stock designated as Series A
Participating Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Restated Certificate of Incorporation, as amended, the
Board of Directors does hereby provide for the issue of a series of Preferred
Stock of the Corporation and does hereby fix and herein state and express the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of such series of Preferred Stock
as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Participating Preferred Stock." The Series A
Participating Preferred Stock shall have a par value of $.001 per share, and the
number of shares constituting such series shall be 150,000.
Section 2. Proportional Adjustment. In the event the Corporation shall at
-----------------------
any time after the issuance of any share or shares of Series A Participating
Preferred Stock (i) declare any dividend on Common Stock of the Corporation
("Common Stock") payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Corporation shall
simultaneously effect a proportional adjustment to the number of outstanding
shares of Series A Participating Preferred Stock.
Section 3. Dividends and Distributions.
---------------------------
(a) Subject to the prior and superior right of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Participating Preferred Stock with respect to dividends, the holders
of shares of Series A Participating Preferred Stock shall be entitled to receive
when, as and if declared by the Board of Directors out of funds legally
available for such purpose, quarterly dividends payable in cash on the last day
of January, April, July and October in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Participating Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to 1,000 times the aggregate per share
amount of all cash
<PAGE>
dividends, and 1,000 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Participating Preferred Stock.
(b) The Corporation shall declare a dividend or distribution on the
Series A Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue on outstanding shares of Series
A Participating Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Participating Preferred
Stock, unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Participating
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
shares of Series A Participating Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
Section 4. Voting Rights. The holders of shares of Series A Participating
-------------
Preferred Stock shall have the following voting rights:
(a) Each share of Series A Participating Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of
the stockholders of the Corporation.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series A Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(c) Except as required by law, holders of Series A Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
-2-
<PAGE>
Section 5. Certain Restrictions.
--------------------
(a) The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for consideration
any shares of Common Stock after the first issuance of a share or fraction of a
share of Series A Participating Preferred Stock unless concurrently therewith it
shall declare a dividend on the Series A Participating Preferred Stock as
required by Section 3 hereof.
(b) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Participating Preferred Stock as provided
in Section 3 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of Series A
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Participating Preferred Stock;
(ii) declare or pay dividends on, make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with Series A Participating Preferred
Stock, except dividends paid ratably on the Series A Participating Preferred
Stock and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Participating Preferred
Stock;
(iv) purchase or otherwise acquire for consideration any
shares of Series A Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(c) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 5, purchase or otherwise acquire such shares at such time and in
such manner.
-3-
<PAGE>
Section 6. Reacquired Shares. Any shares of Series A Participating
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein and, in the Restated Certificate of Incorporation, as then amended.
Section 7. Liquidation, Dissolution or Winding Up. Upon any liquidation,
--------------------------------------
dissolution or winding up of the Corporation, the holders of shares of Series A
Participating Preferred Stock shall be entitled to receive an aggregate amount
per share equal to 1,000 times the aggregate amount to be distributed per share
to holders of shares of Common Stock plus an amount equal to any accrued and
unpaid dividends on such shares of Series A Participating Preferred Stock.
Section 8. Consolidation, Merger, etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share equal to 1,000 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged.
Section 9. No Redemption. The shares of Series A Participating Preferred
-------------
Stock shall not be redeemable.
Section 10. Ranking. The Series A Participating Preferred Stock shall rank
-------
junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 11. Amendment. The Restated Certificate of Incorporation of the
---------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preference or special rights of the Series A
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Participating Preferred Stock, voting separately as a class.
Section 12. Fractional Shares. Series A Participating Preferred Stock may
-----------------
be issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Participating Preferred Stock.
-4-
<PAGE>
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Designation of
Rights, Preferences and Privileges in accordance with the foregoing resolution
and the provisions of Delaware law and to take such actions as they may deem
necessary or appropriate to carry out the intent of the foregoing resolution."
He further declares under penalty of perjury that the matters set forth in
the foregoing Certificate of Designation are true and correct to his
knowledge.
Executed at Sunnyvale, California on August 26, 1999.
/s/ Kevin J. Laughlin
_______________________________________
Kevin J. Laughlin, Vice President,
Finance and Chief Financial Officer
-5-
<PAGE>
EXHIBIT 3.3
________________________________________________________________________________
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - CORPORATE OFFICES............................................................................ 1
1.1 REGISTERED OFFICE...................................................................... 1
1.2 OTHER OFFICES.......................................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS.................................................................... 1
2.1 PLACE OF MEETINGS...................................................................... 1
2.2 ANNUAL MEETING......................................................................... 1
2.3 SPECIAL MEETING........................................................................ 3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................................... 3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................................... 3
2.6 QUORUM................................................................................. 4
2.7 ADJOURNED MEETING; NOTICE.............................................................. 4
2.8 VOTING................................................................................. 4
2.9 WAIVER OF NOTICE....................................................................... 5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT
A MEETING.............................................................................. 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING;
GIVING CONSENTS........................................................................ 5
2.12 PROXIES................................................................................ 6
2.13 INSPECTORS OF ELECTION................................................................. 6
ARTICLE III - DIRECTORS.................................................................................. 7
3.1 POWERS................................................................................. 7
3.2 NUMBER OF DIRECTORS.................................................................... 7
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................................... 7
3.4 RESIGNATION AND VACANCIES.............................................................. 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................................... 9
3.6 FIRST MEETINGS......................................................................... 9
3.7 REGULAR MEETINGS....................................................................... 9
3.8 SPECIAL MEETINGS; NOTICE............................................................... 9
3.9 QUORUM.................................................................................10
3.10 WAIVER OF NOTICE.......................................................................10
3.11 ADJOURNED MEETING; NOTICE..............................................................10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING......................................10
3.13 FEES AND COMPENSATION OF DIRECTORS.....................................................11
3.14 APPROVAL OF LOANS TO OFFICERS..........................................................11
3.15 REMOVAL OF DIRECTORS...................................................................11
ARTICLE IV - COMMITTEES..................................................................................12
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
4.1 COMMITTEES OF DIRECTORS................................................................12
4.2 COMMITTEE MINUTES......................................................................12
4.3 MEETINGS AND ACTION OF COMMITTEES......................................................12
ARTICLE V - OFFICERS.....................................................................................13
5.1 OFFICERS...............................................................................13
5.2 THE CHAIRMAN OF THE BOARD..............................................................13
5.3 THE CHIEF EXECUTIVE OFFICER............................................................14
5.4 THE PRESIDENT..........................................................................14
5.5 VICE-PRESIDENTS........................................................................14
5.6 THE SECRETARY..........................................................................15
5.7 THE CHIEF FINANCIAL OFFICER............................................................15
5.8 THE CONTROLLER.........................................................................15
ARTICLE VI - INDEMNITY...................................................................................16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..............................................16
6.2 INDEMNIFICATION OF OTHERS..............................................................16
6.3 INSURANCE..............................................................................16
6.4 EXPENSES...............................................................................17
6.5 NON-EXCLUSIVITY OF RIGHTS..............................................................18
6.6 SURVIVAL OF RIGHTS.....................................................................18
6.7 AMENDMENTS.............................................................................18
ARTICLE VII - RECORDS AND REPORTS........................................................................18
7.1 MAINTENANCE AND INSPECTION OF RECORDS..................................................18
7.2 INSPECTION BY DIRECTORS................................................................19
7.3 VOTING OF STOCKS OWNED BY THE CORPORATION..............................................19
ARTICLE VIII - GENERAL MATTERS...........................................................................19
8.1 CHECKS; DRAFTS; EVIDENCE OF INDEBTEDNESS...............................................19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.......................................20
8.3 STOCK CERTIFICATES.....................................................................20
8.4 SPECIAL DESIGNATION ON CERTIFICATES....................................................21
8.5 LOST CERTIFICATES......................................................................21
8.6 CONSTRUCTION; DEFINITIONS..............................................................22
ARTICLE IX AMENDMENTS...................................................................................22
</TABLE>
-ii-
<PAGE>
BYLAWS
OF
INTERNATIONAL NETWORK SERVICES
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. At the annual meeting,
directors shall be elected and any other proper business may be transacted.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the board of directors, (B) otherwise properly brought before the
-1-
<PAGE>
meeting by or at the direction of the board of directors, or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given notice thereof in writing to the secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than one hundred
twenty (120) calendar days in advance of the date specified in the corporation's
proxy statement released to stockholders in connection with the previous year's
annual meeting of stockholders; provided, however, that in the event that no
annual meeting was held in the previous year or the date of the annual meeting
has been changed by more than thirty (30) days from the date contemplated at the
time of the previous year's proxy statement, notice by the stockholder to be
timely must be so received not later than the close of business on the later of
one hundred twenty (120) calendar days in advance of such annual meeting or ten
(10) calendar days following the date on which public announcement of the date
of the meeting is first made. A stockholder's notice to the secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business, and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholders' meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the board of directors, shall be made pursuant to timely notice
in writing to the secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of
-2-
<PAGE>
proxies for elections of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 2.2. At the request of the board of directors, any
person nominated by a stockholder for election as a director shall furnish to
the secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The chairman
of the meeting shall, if the facts warrants, determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
at the meeting, and the defective nomination shall be disregarded.
2.3 SPECIAL MEETING
---------------
Special meetings of stockholders for any purpose or purposes may be called
at any time by the chairman of the board (if there be such an officer
appointed), by the president or by the board of directors, but, except as
otherwise provided in Section 3.4(c) of these bylaws, such special meetings may
not be called by any other person or persons. Only such business shall be
considered at a special meeting or stockholders' meeting as shall have been
stated in the notice for such meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
matter properly brought before the meeting may be presented at the meeting for
such action). The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees who, at the time of the
notice, the board intends to present for election.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Notice of any meeting of stockholders shall be given either personally or
by mail, telecopy, telegram or other electronic or wireless means. Notices not
personally delivered shall be sent charges prepaid and shall be addressed to the
stockholder at the address of that stockholder appearing on the books of the
corporation or given by the stockholder to the corporation for the purpose of
notice. Notice shall be deemed to have been give at the time when delivered
personally or deposited in the mail or sent by telecopy, telegram or other
electronic or wireless means.
-3-
<PAGE>
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice or report.
2.6 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the holders of a majority of the shares represented at the
meeting and entitled to vote thereat, present in person or represented by proxy,
shall have power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum is present or represented. At
such adjourned meeting at which a quorum is present or represented, any business
may be transacted that might have been transacted at the meeting as originally
noticed.
The stockholders present or represented by proxy at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder. Any holders of shares entitled to vote on any matter
may vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal, other than elections to
office, but, if the stockholder fails to specify the number of shares such
stockholder is voting affirmatively,
-4-
<PAGE>
it will be conclusively presumed that the stockholder's approving vote is with
respect to all shares such stockholder is entitled to vote.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.1 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
The stockholders of the corporation may not take any action by written
consent without a meeting. Any such action must be taken at a duly called
annual or special meeting.
2.1 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any other lawful action, the board of
directors may fix, in advance, a record date, which shall not be more than sixty
(60) nor less than ten (10) days prior to the date of such meeting, nor more
than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(b) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
-5-
<PAGE>
2.1 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(e) of the General Corporation Law of Delaware.
2.1 INSPECTORS OF ELECTION
----------------------
Before any meeting of stockholders, the board of directors shall appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
The number of inspectors shall be either one (1) or three (3). If any person
appointed as inspector fails to appear or fails or refuses to act, then the
chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes or ballots;
(c) hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) count and tabulate all votes;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or vote
with fairness to all stockholders.
The inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical. If
there are three (3) inspectors of election, the decision, act or certificate of
a majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate may be the inspectors of election is prima facie
evidence of the facts stated therein.
-6-
<PAGE>
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be not less than five (5)
nor more than nine (9). The exact number of directors shall be seven (7) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
certificate of incorporation or by an amendment to this bylaw duly adopted by
the vote of a majority of the stock issued and outstanding and entitled to vote
or by resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting (but if any such annual meeting is not held or the directors are
not elected thereat, the directors may be elected at any special meeting of
stockholders held for that purpose). Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified or until
his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
(a) Any director may resign effective upon giving written notice to
the chairman of the board (if there be such an officer appointed), the
president, the secretary or the board of directors of the corporation unless the
notice specifies a later time for the effectiveness of such resignation. When
one or more directors so resigns and the resignation is effective at a future
date, unless otherwise provided in the certificate of incorporation, a majority
of the directors then in office, including those who have so resigned, shall
have power to fill such vacancy or vacancies, the
-7-
<PAGE>
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
(b) Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
(c) If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
(d) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
-8-
<PAGE>
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.6 FIRST MEETINGS
--------------
The board of directors shall hold a regular meeting immediately after the
meeting of stockholders at which it is elected and at the place where such
meeting is held, or at such other place as shall be fixed by the board of
directors, for the purpose of organization, election of officers of the
corporation and the transaction of other business. Notice of such meeting is
hereby dispensed with.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered to each
director personally or by telephone (including a voice messaging system or other
system or technology designed to record and communicate messages), telegram,
facsimile, electronic mail or other electronic means. Alternatively, notice may
be sent by first-class mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone (including a voice messaging system or
other system or technology designed to record and communicate messages),
telegram, facsimile, electronic mail or other electronic means, it shall be
delivered at least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
-9-
<PAGE>
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute, or by the certificate of
incorporation or in these bylaws. If a quorum is not present at any meeting of
the board of directors, then the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.10 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, or consent to holding the meeting or the approval of the
minutes thereof whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.8 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such written consent or
consents shall be filed with the minutes of the proceedings of the board of
directors. Such action by written consent shall have the same force and effect
as a unanimous vote of such directors.
-10-
<PAGE>
3.1 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.
3.1 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.1 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, if and so
long as stockholders of the corporation are entitled to cumulative voting, if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire board of directors,
pursuant to Delaware General Corporation Law Section 141(k)(2).
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the
-11-
<PAGE>
board, but no such committee shall have the power or authority to (i) amend the
certificate of incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), (ii) adopt an agreement of merger or consolidation under Sections
251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution or (v) amend the
bylaws of the corporation; and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjourned meeting and notice), and Section
3.12 (action without a meeting), with such changes in the context of those
bylaws as are necessary to substitute the committee and its members for the
board of directors and its members; provided, however, that the time of regular
meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
-12-
<PAGE>
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall consist of the chief executive
officer, the president, the secretary and the chief financial officer, and each
of them shall be appointed by the board of directors. The corporation may also
have a chairman of the board, one or more vice-presidents, a controller, one or
more assistant secretaries, and such other officers as may be appointed by the
board of directors, or with authorization from the board of directors by the
president. The order of the seniority of the vice-presidents shall be in the
order of their nomination, unless otherwise determined by the board of
directors. Any two or more of such offices may be held by the same person. The
board of directors may appoint, and may empower the president to appoint, such
other officers as the business of the corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
bylaws or as the board of directors may from time to time determine.
All officers of the corporation shall hold office from the date appointed
to the date of the next succeeding regular meeting of the board of directors
following the meeting of shareholders at which the board of directors is
elected, and until their successors are elected; provided that, subject to the
rights, if any, of an officer under any contract of employment, all officers, as
well as any other employee or agent of the corporation, may be removed at any
time at the pleasure of the board of directors, or, except in the case of an
officer chosen by the board of directors, by any officer upon whom such power of
removal may be conferred by the board of directors, and upon the removal,
resignation, death or incapacity of any officer, the board of directors or the
president, in cases where he or she has been vested by the board of directors
with power to appoint, may declare such office vacant and fill such vacancy.
Nothing in these bylaws shall be construed as creating any kind of contractual
right to employment with the corporation.
Any officer may resign at any time by giving written notice to the board of
directors, the president, or the secretary of the corporation, without
prejudice, however, to the rights, if any, of the corporation under any contract
to which such officer is a party. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
The salary and other compensation of the officers shall be fixed from time
to time by resolution of or in the manner determined by the board of directors.
5.2 THE CHAIRMAN OF THE BOARD
-------------------------
The chairman of the board (if there be such an officer appointed) shall,
when present, preside at all meetings of the board of directors and shall
perform all the duties commonly incident to that
-14-
<PAGE>
office. The chairman of the board shall have authority to execute in the name of
the corporation bonds, contracts, deeds, leases and other written instruments to
be executed by the corporation (except where by law the signature of the
president is required), and shall perform such other duties as the board of
directors may from time to time determine.
5.3 THE CHIEF EXECUTIVE OFFICER
---------------------------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer of the corporation shall, subject to the control of the board
of directors, have general supervision, direction, and control of the business
and the officers of the corporation. He shall preside at all meetings of the
shareholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the chief executive officer of a
corporation, and shall have such other powers and duties as may be prescribed by
the board of directors or these bylaws.
5.4 THE PRESIDENT
-------------
The president of the corporation shall exercise and perform such powers and
duties as may from time to time be assigned to him by the board of directors or
as may be prescribed by these bylaws. The president shall have authority to
execute in the name of the corporation bonds, contracts, deeds, leases and other
written instruments to be executed by the corporation. In the absence of the
chief executive officer, he shall preside at all meetings of the shareholders
and, in the absence or nonexistence of a chairman of the board or the chief
executive officer, at all meetings of the board of directors and shall perform
such other duties as the board of directors may from time to time determine.
5.5 VICE-PRESIDENTS
---------------
The vice-presidents (if there be such officers appointed), in the order of
their seniority (unless otherwise established by the board of directors), may
assume and perform the duties of the president in the absence or disability of
the president or whenever the office of the president is vacant. The vice-
presidents shall have such titles, perform such other duties, and have such
other powers as the board of directors, the president or these bylaws may
designate from time to time.
5.6 THE SECRETARY
-------------
The secretary shall record or cause to be recorded, and shall keep or cause
to be kept, at the principal executive office and such other place as the board
of directors may order, a book of minutes of actions taken at all meetings of
directors and committees thereof and of shareholders, with the time and place of
holding, whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings
thereof.
-14-
<PAGE>
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent, a share register or
a duplicate share register in a form capable of being converted into written
form, showing the names of the shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the board of directors and committees thereof
required by these bylaws or by law to be given, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
by these bylaws.
The president may direct any assistant secretary to assume and perform the
duties of the secretary in the absence or disability of the secretary, and each
assistant secretary shall perform such other duties and have such other powers
as the board of directors or the president may designate from time to time.
5.7 THE CHIEF FINANCIAL OFFICER
---------------------------
The chief financial officer shall also be the treasurer of the Company and
shall keep and maintain, or cause to be kept and maintained, adequate and
correct accounts of the properties and business transactions of the corporation.
The books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the chief executive officer, president and directors,
whenever they request it, an account of all of the chief financial officer's
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
5.8 THE CONTROLLER
--------------
The controller (if there be such an officer appointed) shall be responsible
for the establishment and maintenance of accounting and other systems required
to control and account for the assets of the corporation and provide safeguards
therefor, and to collect information required for management purposes, and shall
perform such other duties and have such other powers as the board of directors
or the president may designate from time to time. The president may direct any
assistant controller to assume and perform the duties of the controller, in the
absence or disability of the controller, and each assistant controller shall
perform such other duties and have such other powers as the board of directors,
the chairman of the board (if there be such an officer appointed) or the
president may designate from time to time.
-15-
<PAGE>
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation; provided, however, that the corporation may modify the
extent of such indemnification by individual contracts with its directors and
executive officers and, provided, further, that the corporation shall not be
required to indemnify any director or officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized in
advance by the board of directors of the corporation, (iii) such indemnification
is provided by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the General Corporation Law of Delaware or (iv)
such indemnification is required to be made pursuant to an individual contract.
For purposes of this Section 6.1, a "director" or "officer" of the corporation
includes any person (i) who is or was a director or officer of the corporation,
(ii) who is or was serving at the request of the corporation as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was a director or officer of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2 and 6.4, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him
-16-
<PAGE>
or her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.4 EXPENSES
--------
The corporation shall advance to any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, prior to the final disposition of the proceeding, promptly
following request therefor, all expenses incurred by any director or officer in
connection with such proceeding, upon receipt of an undertaking by or on behalf
of such person to repay said amounts if it should be determined ultimately that
such person is not entitled to be indemnified under this bylaw or otherwise;
provided, however, that the corporation shall not be required to advance
expenses to any director or officer in connection with any proceeding (or part
thereof) initiated by such person unless the proceeding was authorized in
advance by the board of directors of the corporation.
The corporation may advance to any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was an employee or agent (other than
directors or officers) of the corporation prior to the final disposition of the
proceeding, promptly following request therefor, all expenses incurred by any
employee or agent (other than directors or officers) in connection with such
proceeding, upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it should be determined ultimately that such person is not
entitled to be indemnified under this bylaw or otherwise; provided, however,
that the corporation shall not advance expenses to any employee or agent (other
than directors or officers) in connection with any proceeding (or part thereof)
initiated by such person unless the proceeding was authorized in advance by the
board of directors of the corporation.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 6.5, no advance shall be made by the corporation to an employee, agent
or officer of the corporation (except by reason of the fact that such person is
or was a director of the corporation in which event this paragraph shall not
apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
-17-
<PAGE>
6.5 NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by this bylaw shall not be exclusive of
any other right which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, bylaws, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding office.
The corporation is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
General Corporation Law of Delaware.
6.6 SURVIVAL OF RIGHTS
------------------
The rights conferred on any person by this bylaw shall continue as to a
person who has ceased to be a director, officer, employee or other agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
6.7 AMENDMENTS
----------
Any repeal or modification of this bylaw shall only be prospective and
shall not affect the rights under this bylaw in effect at the time of the
alleged occurrence of any action or omission to act that is the cause of any
proceeding against any agent of the corporation.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
-18-
<PAGE>
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 VOTING OF STOCKS OWNED BY THE CORPORATION
-----------------------------------------
All stock of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized to do so by
resolution of the Board of Directors, or in the absence of such authorization,
by the Chairman of the Board (if there be such an officer appointed), the Chief
Executive Officer, the President or any Vice-President, or by any other person
authorized to do so by the Chairman of the Board, the President or any Vice
President.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS; DRAFTS; EVIDENCE OF INDEBTEDNESS
----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
-19-
<PAGE>
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
In its discretion, the board of directors may determine the method and
designate the signatory officer or officers or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation. Unless so authorized or
ratified by the board of directors or within the agency power of an officer,
agent or employee , no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES
------------------
Every holder of shares in the corporation shall be entitled to have a
certificate signed in the name of the corporation by the chairman of the board
(if there be such officer appointed) or the president or a vice-president and by
the treasurer or the secretary or any assistant secretary, certifying the number
of shares and the class or series of shares owned by the shareholder. Any of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
Any such certificate shall also contain such legends or other statements as
may be required by the Corporate Securities Law of 1968, federal or other state
securities laws, and any agreement between the corporation and the issuee of the
certificate.
Certificates for shares may be issued prior to full payment, under such
restrictions and for such purposes as the board of directors or these bylaws may
provide; provided, however, that the certificate issued to represent any such
partly paid shares shall state on the face thereof the total amount of the
consideration to be paid therefor, the amount remaining unpaid and the terms of
payment.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of
-21-
<PAGE>
stock; provided, however, that, except as otherwise provided in Section 202 of
the General Corporation Law of Delaware, in lieu of the foregoing requirements
there may be set forth on the face or back of the certificate that the
corporation shall issue to represent such class or series of stock a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
8.5 LOST CERTIFICATES
-----------------
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and canceled at the same time; provided,
however, that a new certificate will be issued without the surrender and
cancellation of the old certificate if (1) the old certificate is lost,
apparently destroyed or wrongfully taken; (2) the request for the issuance of
the new certificate is made within a reasonable time after the owner of the old
certificate has notice of its loss, destruction, or theft; (3) the request for
the issuance of a new certificate is made prior to the receipt of notice by the
corporation that the old certificate has been acquired by a bona fide purchaser;
(4) the owner of the old certificate files a sufficient indemnity bond with or
provides other adequate security to the corporation; and (5) the owner satisfies
any other reasonable requirement imposed by the corporation.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
-21-
<PAGE>
AMENDMENT TO THE BYLAWS OF
INTERNATIONAL NETWORK SERVICES
WHEREAS, Article III, Section 3.8 of the Company's Bylaws provides that if
notice of a special meeting of the board of directors is delivered personally or
by telephone (including a voice messaging system or other system or technology
designed to record and communicate messages), telegram, facsimile, electronic
mail or other electronic means, it shall be delivered at least forty-eight (48)
hours before the time of the holding of the meeting;
WHEREAS, the Board believes that it is in the best interest of the Company
that the Bylaws of the Company be amended to shorten the number of hours for
such notice to six hours before the time of the holding of the meeting;
NOW THEREFORE BE IT:
RESOLVED: That Article III, Section 3.8 of the Company's Bylaws shall be
- --------
amended and restated in its entirety to read as follows:
"3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered to each
director personally or by telephone (including a voice messaging system or other
system or technology designed to record and communicate messages), telegram,
facsimile, electronic mail or other electronic means. Alternatively, notice may
be sent by first-class mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone (including a voice messaging system or
other system or technology designed to record and communicate messages),
telegram, facsimile, electronic mail or other electronic means, it shall be
delivered at least six (6) hours before the time of the holding of the meeting.
Any oral notice given personally or by telephone may be communicated either to
the director or to a person at the office of the director who the person giving
the notice has reason to believe will promptly communicate it to the director.
The notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation."
-22-
<PAGE>
EXHIBIT 4.2
[LOGO OF INS]
INTERNATIONAL NETWORK SERVICES
COMMON STOCK COMMON STOCK
[NUMBER] [SHARES]
INS
INCORPORATED UNDER SEE REVERSE FOR
THE LAWS OF THE STATEMENTS RELATING
STATE OF CALIFORNIA TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS,
IF ANY
CUSIP 460053 10 1
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF
INTERNATIONAL NETWORK SERVICES
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile signatures of the Corporation's duly authorized
officers.
State of Incorporation changed to Delaware
Dated:
/s/ Kevin J. Laughlin COUNTERSIGNED AND REGISTERED:
- -------------------------------- CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
SECRETARY TRANSFER AGENT and REGISTRAR
/s/ Donald K. McKinney BY
- -------------------------------- -------------------------------
CHAIRMAN OF THE BOARD Authorized Signature
AND CHIEF EXECUTIVE OFFICER
<PAGE>
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Articles of
Incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its corporate headquarters.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT -- _______________ Custodian _______________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _____________________________________
(State)
UNIF TRF MIN ACT -- _______________ Custodian (until age ____ ) ____________
(Cust) (Minor)
under Uniform Transfers
to Minors Act _____________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - ---------------------------------------
| |
- - ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________________
X __________________________________________________
X __________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By ____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM,
PURSUANT TO S.E.C. RULE 17AD-15.
<PAGE>
Exhibit 4.4
STOCK OPTION AGREEMENT dated as of
August 9, 1999 (the "Agreement"), by and
between INTERNATIONAL NETWORK SERVICES, a
Delaware corporation ("Issuer"), and LUCENT
TECHNOLOGIES INC., a Delaware corporation
("Grantee").
RECITALS
A. Grantee, Intrepid Merger Inc., a Delaware corporation and a wholly
owned subsidiary of Grantee ("Sub"), and Issuer have entered into an Agreement
and Plan of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; defined terms used but not defined herein
have the meanings set forth in the Merger Agreement), providing for, among other
things, the merger of Sub with and into Issuer, with Issuer as the surviving
corporation in the Merger and becoming a wholly owned subsidiary of Grantee; and
B. As a condition and inducement to Grantee's willingness to enter
into the Merger Agreement, Grantee has requested that Issuer agree, and Issuer
has agreed, to grant Grantee the Option (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, Issuer
and Grantee agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth
----------------
herein, Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase up to 11,407,457 (as adjusted as set forth herein) shares (the "Option
Shares") of Common Stock, par value $0.001 per share ("Issuer Common Stock"), of
Issuer at a purchase price of $53.91 (as adjusted as set forth herein) per
Option Share (the "Purchase Price").
2. Exercise of Option. (a) Grantee may exercise the Option, with
-------------------
respect to any or all of the Option Shares at any time or times, subject to the
provisions of Section 2(c), after the occurrence of any event as a result of
which Grantee is unconditionally entitled to receive the Termination Fee
pursuant to Section 5.09(b) of the Merger Agreement (a "Purchase Event");
provided, however, that (i) except as provided in the last sentence of this
- -------- -------
Section 2(a), the Option will terminate and be of no further force and effect
upon the earliest to occur of (A) the
<PAGE>
2
Effective Time, (B) 15 months after the first occurrence of a Purchase Event,
and (C) termination of the Merger Agreement in accordance with its terms prior
to the occurrence of a Purchase Event, unless, in the case of clause (C),
Grantee has the right to receive a Termination Fee following such termination
upon the occurrence of certain events, in which case the Option will not
terminate until the later of (x) 15 business days following the time such
Termination Fee becomes unconditionally payable and (y) the expiration of the
period in which Grantee has such right to receive a Termination Fee, and (ii)
any purchase of Option Shares upon exercise of the Option will be subject to
compliance with the HSR Act and the obtaining or making of any consents,
approvals, orders, notifications, filings or authorizations, the failure of
which to have obtained or made would have the effect of making the issuance of
Option Shares to Grantee illegal (the "Regulatory Approvals"). Notwithstanding
the termination of the Option, Grantee will be entitled to purchase the Option
Shares if it has exercised the Option in accordance with the terms hereof prior
to the termination of the Option and such termination of the Option will not
affect any rights hereunder which by their terms do not terminate or expire
prior to or as of such date.
(b) In the event that Grantee is entitled to and wishes to exercise
the Option, it will send to Issuer a written notice (an "Exercise Notice"; the
date of which being herein referred to as the "Notice Date") to that effect
which Exercise Notice also specifies the number of Option Shares, if any,
Grantee wishes to purchase pursuant to this Section 2(b), the number of Option
Shares, if any, with respect to which Grantee wishes to exercise its Cash-Out
Right (as defined herein) pursuant to Section 6(c), the denominations of the
certificate or certificates evidencing the Option Shares which Grantee wishes to
purchase pursuant to this Section 2(b) and a date (an "Option Closing Date"),
subject to the following sentence, not earlier than seven business days nor
later than 20 business days from the Notice Date for the closing of such
purchase (an "Option Closing"). Any Option Closing will be at an agreed
location and time in New York, New York on the applicable Option Closing Date or
at such later date as may be necessary so as to comply with the first sentence
of Section 2(a).
(c) Notwithstanding anything to the contrary contained herein, any
exercise of the Option and purchase of Option Shares shall be subject to
compliance with applicable laws and regulations, which may prohibit the purchase
of all the Option Shares specified in the Exercise Notice without first
obtaining or making certain Regulatory Approvals. In
<PAGE>
3
such event, if the Option is otherwise exercisable and Grantee wishes to
exercise the Option, the Option may be exercised in accordance with Section 2(b)
and Grantee shall acquire the maximum number of Option Shares specified in the
Exercise Notice that Grantee is then permitted to acquire under the applicable
laws and regulations, and if Grantee thereafter obtains the Regulatory Approvals
to acquire the remaining balance of the Option Shares specified in the Exercise
Notice, then Grantee shall be entitled to acquire such remaining balance. Issuer
agrees to use its reasonable efforts to assist Grantee in seeking the Regulatory
Approvals.
In the event (i) Grantee receives official notice that a Regulatory
Approval required for the purchase of any Option Shares will not be issued or
granted or (ii) such Regulatory Approval has not been issued or granted within
six months of the date of the Exercise Notice, Grantee shall have the right to
exercise its Cash-Out Right pursuant to Section 6(c) with respect to the Option
Shares for which such Regulatory Approval will not be issued or granted or has
not been issued or granted.
3. Payment and Delivery of Certificates. (a) At any Option Closing,
-------------------------------------
Grantee will pay to Issuer in immediately available funds by wire transfer to a
bank account designated in writing by Issuer an amount equal to the Purchase
Price multiplied by the number of Option Shares to be purchased at such Option
Closing plus the amount of any transfer, stamp or other similar taxes or charges
imposed in connection therewith.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), Issuer will deliver to
Grantee a certificate or certificates representing the Option Shares to be
purchased at such Option Closing, which Option Shares will be free and clear of
all liens, claims, charges and encumbrances of any kind whatsoever. If at the
time of issuance of Option Shares pursuant to an exercise of the Option
hereunder, Issuer shall have issued any securities similar to rights under a
stockholder rights plan, then each Option Share issued pursuant to such exercise
will also represent such a corresponding right with terms substantially the same
as and at least as favorable to Grantee as are provided under any such
stockholder rights plan then in effect.
<PAGE>
4
(c) Certificates for the Option Shares delivered at an Option Closing
will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF AUGUST 9,
1999, A COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF INTERNATIONAL
NETWORK SERVICES AT ITS PRINCIPAL EXECUTIVE OFFICES."
It is understood and agreed that (i) the reference to restrictions arising under
the Securities Act in the above legend will be removed by delivery of substitute
certificate(s) without such reference if such Option Shares have been registered
pursuant to the Securities Act, such Option Shares have been sold in reliance on
and in accordance with Rule 144 under the Securities Act or Grantee has
delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion
of counsel in form and substance reasonably satisfactory to Issuer and its
counsel, to the effect that such legend is not required for purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this Agreement
in the above legend will be removed by delivery of substitute certificate(s)
without such reference if the Option Shares evidenced by certificate(s)
containing such reference have been sold or transferred in compliance with the
provisions of this Agreement under circumstances that do not require the
retention of such reference.
4. Representations and Warranties of Issuer. Issuer hereby represents
-----------------------------------------
and warrants to Grantee as follows:
Authorized Stock. Issuer has taken all necessary corporate and other
-----------------
action to authorize and reserve and, subject to the expiration or
termination of any required waiting period under the HSR Act, to permit it
to issue, and, at all times from the date hereof until the obligation to
deliver Option Shares upon the exercise of the Option terminates, shall
have reserved for issuance, upon exercise of the Option, shares of Issuer
Common Stock necessary for Grantee to exercise the Option, and Issuer will
take all necessary corporate action to authorize and reserve for issuance
all additional shares of Issuer Common Stock or other securities which may
be issued pursuant to Section 6
<PAGE>
5
upon exercise of the Option. The shares of Issuer Common Stock to be issued
upon due exercise of the Option, including all additional shares of Issuer
Common Stock or other securities which may be issuable upon exercise of the
Option or any other securities which may be issued pursuant to Section 6,
upon issuance pursuant hereto, will be duly and validly issued, fully paid
and nonassessable, and will be delivered free and clear of all liens,
claims, charges and encumbrances of any kind or nature whatsoever,
including without limitation any preemptive rights of any stockholder of
Issuer.
5. Representations and Warranties of Grantee. Grantee hereby
------------------------------------------
represents and warrants to Issuer that:
Purchase Not for Distribution. Any Option Shares or other securities
------------------------------
acquired by Grantee upon exercise of the Option will not be transferred or
otherwise disposed of except in a transaction registered, or exempt from
registration, under the Securities Act.
6. Adjustment upon Changes in Capitalization, Etc. (a) In the event
-----------------------------------------------
of any change in Issuer Common Stock by reason of a stock dividend, split-up,
merger, recapitalization, combination, exchange of shares, or similar
transaction, the type and number of shares or securities subject to the Option,
and the Purchase Price thereof, will be adjusted appropriately, and proper
provision will be made in the agreements governing such transaction, so that
Grantee will receive upon exercise of the Option the number and class of shares
or other securities or property that Grantee would have received in respect of
Issuer Common Stock if the Option had been exercised immediately prior to such
event or the record date therefor, as applicable. Without limiting the parties'
relative rights and obligations under the Merger Agreement, if the number of
outstanding shares of Issuer Common Stock increases or decreases after the date
of this Agreement (other than pursuant to an event described in the first
sentence of this Section 6(a)), the number of shares of Issuer Common Stock
subject to the Option will be adjusted so that it equals 19.9% of the number of
shares of Issuer Common Stock then issued and outstanding, without giving effect
to any shares subject to or issued pursuant to the Option.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event that Issuer enters into an agreement
(i) to consolidate with or merge into any person, other than Grantee or one of
its subsidiaries, and Issuer will not be the continuing or
<PAGE>
6
surviving corporation in such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its subsidiaries, to merge into Issuer and
Issuer will be the continuing or surviving corporation, but in connection with
such merger, the shares of Issuer Common Stock outstanding immediately prior to
the consummation of such merger will be changed into or exchanged for stock or
other securities of Issuer or any other person or cash or any other property, or
the shares of Issuer Common Stock outstanding immediately prior to the
consummation of such merger will, after such merger, represent less than 50% of
the outstanding voting securities of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its subsidiaries, then, and in each such case, the
agreement governing such transaction will make proper provision so that the
Option will, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
with identical terms appropriately adjusted to acquire the number and class of
shares or other securities or property that Grantee would have received in
respect of Issuer Common Stock if the Option had been exercised immediately
prior to such consolidation, merger, sale, or transfer, or the record date
therefor, as applicable and make any other necessary adjustments.
(c) If, at any time during the period commencing on a Purchase Event
and ending on the termination of the Option in accordance with Section 2,
Grantee sends to Issuer an Exercise Notice indicating Grantee's election to
exercise its right (the "Cash-Out Right") pursuant to this Section 6(c), then
Issuer shall pay to Grantee, on the Option Closing Date, in exchange for the
cancelation of the Option with respect to such number of Option Shares as
Grantee specifies in the Exercise Notice, an amount in cash equal to such number
of Option Shares multiplied by the difference between (i) the average closing
price, for the 10 trading days commencing on the 12th trading day immediately
preceding the Option Closing Date, per share of Issuer Common Stock as reported
on The Nasdaq National Market (or, if not listed on The Nasdaq National Market,
as reported on any other national securities exchange or national securities
quotation system on which the Issuer Common Stock is listed or quoted, as
reported in The Wall Street Journal (Northeast edition), or, if not reported
-----------------------
thereby, any other authoritative source) (the "Closing Price") and (ii) the
Purchase Price. Notwithstanding the termination of the Option, Grantee will be
entitled to exercise its rights under this Section 6(c) if it has
<PAGE>
7
exercised such rights in accordance with the terms hereof prior to the
termination of the Option.
(d) (i) Notwithstanding any other provision of this Agreement, in no
event shall Grantee's Total Profit (as hereinafter defined) plus any Termination
Fee paid to Grantee pursuant to Section 5.09(b) of the Merger Agreement exceed
in the aggregate $150 million and, if the total amount that otherwise would be
received by Grantee would exceed such amount, Grantee, at its election, shall
either (a) reduce the number of shares of Issuer Common Stock subject to the
Option, (b) deliver to Issuer for cancelation shares of Issuer Common Stock
previously purchased by Grantee, (c) pay cash to Issuer or (d) take any action
representing any combination of the preceding clauses (a), (b) and (c), so that
Grantee's actually realized Total Profit, when aggregated with such Termination
Fee so paid to Grantee, shall not exceed $150 million after taking into account
the foregoing actions.
(ii) Notwithstanding any other provision of this Agreement, the Option may
not be exercised for a number of Option Shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below) which, together
with any Termination Fee theretofore paid to Grantee, would exceed $150 million;
provided, that nothing in this sentence shall restrict any exercise of the
- --------
Option permitted hereby on any subsequent date.
(iii) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (A) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to the exercise of the Cash-Out Right under Section 6(c) and (B)(x) the net cash
amounts or the fair market value of any property received by Grantee pursuant to
the sale of Option Shares (or other securities).
(iv) As used herein, the term "Notional Total Profit" with respect to any
number of Option Shares as to which Grantee may propose to exercise the Option
shall be the Total Profit determined as of the date of such proposal assuming
for such purpose that the Option was exercised on such date for such number of
Option Shares and assuming that such Option Shares, together with all other
Option Shares held by Grantee and its affiliates as of such date, were sold for
cash at the closing market price on The Nasdaq National Market (or, if shares of
Issuer Common Stock are not then listed or traded on The Nasdaq National Market,
on any other national securities exchange or national quotation system on which
shares of Issuer Common Stock are so listed
<PAGE>
8
or traded) for shares of Issuer Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
7. Registration Rights. (a) Issuer will, if requested by Grantee in
--------------------
writing at any time and from time to time within two years of the exercise of
the Option, as expeditiously as possible prepare and file up to three
registration statements under the Securities Act if such registration is
necessary in order to permit the sale or other disposition of any or all shares
of securities that have been acquired by or are issuable to Grantee upon
exercise of the Option in accordance with the intended method of sale or other
disposition stated by Grantee, including a "shelf" registration statement under
Rule 415 under the Securities Act or any successor provision, and Issuer will
use its best efforts to qualify such shares or other securities under any
applicable state securities laws. Grantee agrees to cause, and to cause any
underwriters of any sale or other disposition to cause, any sale or other
disposition pursuant to such registration statement to be effected on a widely
distributed basis so that upon consummation thereof no purchaser or transferee
will own beneficially more than 5.0% of the then-outstanding voting power of
Issuer. Issuer will use reasonable efforts to cause each such registration
statement to become effective, to obtain all consents or waivers of other
parties which are required therefor, and to keep such registration statement
effective for such period not in excess of 120 calendar days from the day such
registration statement first becomes effective as may be reasonably necessary to
effect such sale or other disposition. The obligations of Issuer hereunder to
file a registration statement and to maintain its effectiveness may be suspended
for up to 120 calendar days in the aggregate if the Board of Directors of Issuer
shall have determined that the filing of such registration statement or the
maintenance of its effectiveness would require premature disclosure of material
nonpublic information that would materially and adversely affect Issuer or
otherwise interfere with or adversely affect any pending or proposed offering of
securities of Issuer or any other material transaction involving Issuer. Any
registration statement prepared and filed under this Section 7, and any sale
covered thereby, will be at Issuer's expense except for underwriting discounts
or commissions, brokers' fees and the fees and disbursements of Grantee's
counsel related thereto. Grantee will provide all information reasonably
requested by Issuer for inclusion in any registration statement to be filed
hereunder. If, during the time periods referred to in the first sentence of
this Section 7, Issuer effects a registration under the
<PAGE>
9
Securities Act of Issuer Common Stock for its own account or for any other
stockholders of Issuer (other than on Form S-4 or Form S-8, or any successor
form), it will allow Grantee the right to participate in such registration, and
such participation will not affect the obligation of Issuer to effect demand
registration statements for Grantee under this Section 7; provided that, if the
--------
managing underwriters of such offering advise Issuer in writing that in their
opinion the number of shares of Issuer Common Stock requested to be included in
such registration exceeds the number which can be sold in such offering, Issuer
will first reduce the shares requested to be included therein by Grantee before
reducing any other shares intended to be included therein by Issuer. In
connection with any registration pursuant to this Section 7, Issuer and Grantee
will provide each other and any underwriter of the offering with customary
representations, warranties, covenants, indemnification, and contribution in
connection with such registration.
If a requested registration pursuant to this Section 7(a) involves an
underwritten offering, the underwriter or underwriters thereof shall be a
nationally recognized firm or firms selected by Issuer. Notwithstanding anything
else contained in this Section 7(a), each requested registration shall be for a
number of shares of Issuer Common Stock which represent at least one-fourth of
the total number of shares of Issuer Common Stock purchased by Grantee
hereunder.
(b) Notwithstanding Section 7(a), if Issuer receives a written
request (the "Registration Notice") from Grantee requesting that Issuer register
any or all shares of securities that have been acquired by Grantee upon exercise
of the Option (the "Registrable Securities"), Issuer will thereupon have the
option exercisable by written notice delivered to Grantee within ten business
days after receipt of the Registration Notice, to purchase all or any part of
the Registrable Securities for cash at a price (the "Option Price") equal to the
product of (i) the number of Registrable Securities so purchased and (ii) the
per share average of the closing sale prices of Issuer Common Stock on The
Nasdaq National Market (or any other national securities exchange or national
securities quotation system on which the shares of Issuer Common Stock are then
listed or quoted) for the twenty trading days immediately preceding the date of
the Registration Notice. Any such purchase of Registrable Securities by Issuer
hereunder will take place at a closing to be held at the principal executive
offices of Issuer or its counsel at any reasonable date and time designated by
Issuer in such notice within ten business days after delivery of such notice.
The payment for the shares
<PAGE>
10
to be purchased will be made by delivery at the time of such closing of the
Option Price in immediately available funds.
8. Transfers. The Option Shares may not be sold, assigned,
----------
transferred, or otherwise disposed of except (i) in an underwritten public
offering as provided in Section 7 or (ii) to any purchaser or transferee who
would not, to the knowledge of Grantee after reasonable inquiry (which shall
include obtaining a representation from the purchaser or transferee),
immediately following such sale, assignment, transfer or disposal, beneficially
own more than 5.0% of the then-outstanding voting power of the Issuer; provided,
--------
however, that Grantee shall be permitted to sell any Option Shares if such sale
- -------
is made pursuant to a tender or exchange offer that has been approved or
recommended by a majority of the members of the Board of Directors of Issuer
(which majority shall include a majority of directors who were directors as of
the date hereof).
9. Quotation. If Issuer Common Stock or any other securities to be
----------
acquired upon exercise of the Option are then quoted on The Nasdaq National
Market (or any other national securities exchange or national securities
quotation system), Issuer, upon the request of Grantee, will promptly file an
application to have the shares of Issuer Common Stock or other securities to be
acquired upon exercise of the Option quoted on The Nasdaq National Market (and
any such other national securities exchange or national securities quotation
system) and will use reasonable efforts to obtain approval of such quotation as
promptly as practicable.
10. Loss or Mutilation. Upon receipt by Issuer of evidence
-------------------
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancelation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered will constitute an
additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed, or mutilated shall at any time be
enforceable by anyone.
11. Miscellaneous. (a) Expenses. Except as provided in Section 7,
-------------- ---------
each of the parties hereto will bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants, and counsel.
<PAGE>
11
(b) Amendment. This Agreement may not be amended, except by an
----------
instrument in writing signed on behalf of each of the parties.
(c) Extension; Waiver. Any agreement on the part of a party to waive
------------------
any provision of this Agreement, or to extend the time for performance, will be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise will not constitute a waiver of such rights.
(d) Entire Agreement; No Third-Party Beneficiaries. This Agreement,
-----------------------------------------------
the Merger Agreement (including the documents and instruments attached thereto
as exhibits or schedules or delivered in connection therewith), the Stockholder
Agreement and the Confidentiality Agreement (i) constitute the entire agreement,
and supersede all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter of this Agreement, and
(ii) except as provided in Section 8.06 of the Merger Agreement, are not
intended to confer upon any person other than the parties any rights or
remedies.
(e) Governing Law. This Agreement will be governed by, and construed
--------------
in accordance with, the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflict of laws
thereof.
(f) Notices. All notices, requests, claims, demands, and other
--------
communications under this Agreement shall be sent in the manner and to the
addresses set forth in the Merger Agreement.
(g) Assignment. Neither this Agreement, the Option nor any of the
-----------
rights, interests, or obligations under this Agreement may be assigned or
delegated, in whole or in part, by operation of law or otherwise, by Issuer or
Grantee without the prior written consent of the other. Any assignment or
delegation in violation of the preceding sentence will be void. Subject to the
first and second sentences of this Section 11(g), this Agreement will be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
(h) Further Assurances. In the event of any exercise of the Option
-------------------
by Grantee, Issuer and Grantee will execute and deliver all other documents and
instruments and take all other actions that may be reasonably necessary in
<PAGE>
12
order to consummate the transactions provided for by such exercise.
(i) Enforcement. The parties agree that irreparable damage would
------------
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties will be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any Federal court located in the
State of Delaware or in Delaware state court, the foregoing being in addition to
any other remedy to which they are entitled at law or in equity. In addition,
each of the parties hereto (i) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement, (ii) agrees that it will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, and (iii) agrees that it will not bring
any action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a Federal court sitting in the State of
Delaware or a Delaware state court.
(j) Severability. If any term or other provision of this Agreement
-------------
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
<PAGE>
13
IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the day
and year first written above.
INTERNATIONAL NETWORK SERVICES,
by
/s/ John L. Drew
-------------------------
Name: John L. Drew
Title: President and Chief
Executive Officer
LUCENT TECHNOLOGIES INC.,
by
/s/ Patricia F. Russo
-------------------------
Name: Patricia F. Russo
Title: Executive Vice
President, Strategy
and Corporate
Operations
<PAGE>
EXHIBIT 4.5
STOCKHOLDER AGREEMENT dated as of August 9, 1999 (this
"Agreement"), between LUCENT TECHNOLOGIES INC., a Delaware
corporation ("Lucent"), and the stockholders listed on Schedule A
attached hereto (collectively, the "Stockholder").
WHEREAS Lucent, Intrepid Merger Inc., a Delaware corporation and a
wholly owned subsidiary of Lucent ("Sub"), and International Network Services, a
Delaware corporation (the "Company"), propose to enter into an Agreement and
Plan of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; defined terms used but not defined herein
have the meanings set forth in the Merger Agreement), providing for, among other
things, the merger of Sub with and into the Company, upon the terms and subject
to the conditions set forth in the Merger Agreement;
WHEREAS the Stockholder beneficially owns the number of shares of
capital stock of the Company set forth opposite the Stockholder's name on
Schedule A attached hereto (such shares of capital stock of the Company,
together with any other shares of capital stock of the Company acquired by the
Stockholder after the date hereof and during the term of this Agreement
(including through the exercise of any stock options, warrants or similar
instruments), being collectively referred to herein as the "Subject Shares");
and
WHEREAS as a condition to its willingness to enter into the Merger
Agreement, Lucent has requested that the Stockholder enter into this Agreement.
NOW, THEREFORE, to induce Lucent to enter into, and in consideration
of its entering into, the Merger Agreement, and in consideration of the premises
and the representations, warranties and agreements contained herein, the parties
hereto agree as follows:
1. Agreement to Vote Shares. The Stockholder agrees during the term
------------------------
of this Agreement to vote, or cause to be voted, its Subject Shares, in person
or by proxy, (i) in favor of the Merger, the adoption and approval of the Merger
Agreement and the approval of the transactions contemplated by the Merger
Agreement at every meeting of the stockholders of the Company at which such
matters are considered and at every adjournment thereof and (ii) in such manner
as Lucent may direct with respect to all other
<PAGE>
2
proposals submitted to the stockholders of the Company which, directly or
indirectly, in any way relate to the Merger; provided, however, that clause (ii)
-------- -------
of this Section 1 shall not be construed to require any action which would
contravene paragraph 47(c) of Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations.
2. Grant of Irrevocable Proxy. The Stockholder hereby irrevocably
--------------------------
grants to, and appoints, Pamela F. Craven and Jean F. Rankin and any other
individual who shall hereafter be designated by Lucent, and each of them, the
Stockholder's proxy and attorney-in-fact (with full power of substitution), for
and in the name, place and stead of the Stockholder, to vote, or cause to be
voted, the Stockholder's Subject Shares, or grant a consent or approval in
respect of such Subject Shares, at any meeting of stockholders of the Company or
at any adjournment thereof or in any other circumstances upon which their vote,
consent or other approval is sought, in favor of the Merger, the adoption and
approval of the Merger Agreement and the approval of the transactions
contemplated by the Merger Agreement.
3. No Other Grant of Proxy. The Stockholder will not, directly or
-----------------------
indirectly, grant any proxies or powers of attorney with respect to his Subject
Shares to any person in connection with or directly affecting the Merger other
than as set forth in Section 2.
4. Transfers. Other than this Agreement, the Stockholder will not,
---------
nor will the Stockholder permit any entity under the Stockholder's control to,
sell, transfer, pledge, assign or otherwise dispose of (including by gift)
(collectively, "Transfer"), or consent to any Transfer of, any Subject Shares or
any interest therein or enter into any contract, option or other agreement or
arrangement (including any profit sharing or other derivative arrangement) with
respect to the Transfer of, any Subject Shares or any interest therein to any
person, unless prior to any such Transfer the transferee of such Subject Shares
enters into a stockholder agreement with Lucent on terms substantially identical
to the terms of this Agreement; provided, however, that such restriction shall
-------- -------
not be applicable to any of the Subject Shares that have been pledged by the
Stockholder pursuant to a margin loan account prior to the date of this
Agreement.
5. No Voting Trusts. The Stockholder agrees that it will not enter
----------------
into any voting trust or other arrangement or agreement with respect to the
voting of the Subject Shares (and if entered into or executed, such voting trust
or other arrangement or agreement shall not be effective),
<PAGE>
3
or agree, in any manner, to vote the Subject Shares for or against any proposal
in connection with or directly affecting the Merger submitted to the
stockholders of the Company except in furtherance of the proposals as set forth
in Section 1 hereof.
6. No Solicitation. Until the Merger is consummated or the Merger
---------------
Agreement is terminated, the Stockholder shall not, nor shall he permit any
investment banker, attorney or other advisor or representative of the
Stockholder to, directly or indirectly through another person, solicit, initiate
or encourage, or take any other action to facilitate, any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Takeover Proposal.
7. Affiliate Agreement. (a) If, at the time the Merger Agreement is
-------------------
submitted for approval to the stockholders of the Company, the Stockholder is
an "affiliate" of the Company for purposes of Rule 145 under the Securities Act
or for purposes of qualifying the Merger for pooling of interests accounting
treatment under Opinion 16 of the Accounting Principles Board and applicable SEC
rules and regulations, the Stockholder shall deliver to Lucent at least 30 days
prior to the Closing a written agreement substantially in the form attached as
Exhibit A to the Merger Agreement.
(b) The Stockholder shall use reasonable efforts to cause the
transactions contemplated by the Merger Agreement, including the Merger, to be
accounted for as a pooling of interests transaction under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations. The
Stockholder agrees that it shall take no action that would cause such accounting
treatment not to be obtained.
8. Representations and Warranties of the Stockholder. The
-------------------------------------------------
Stockholder hereby represents and warrants to Lucent in respect of himself as
follows:
(a) Authority. The Stockholder has all requisite power and authority
----------
to enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by the
Stockholder and constitutes a valid and binding obligation of the Stockholder
enforceable against the Stockholder in accordance with its terms. The execution
and delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby and compliance with the terms hereof will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time or both) under any provision of, any trust agreement,
<PAGE>
4
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise, license, judgment, order,
notice, decree, statute, law, ordinance, rule or regulation applicable to the
Stockholder or to the Stockholder's property or assets. Except for informational
filings with the SEC, no consent, approval, order or authorization of, or
registration, declaration or filing with any Governmental Entity is required by
or with respect to the Stockholder in connection with the execution and delivery
of this Agreement or the consummation by the Stockholder of the transactions
contemplated hereby.
(b) The Subject Shares. The Stockholder has good and marketable
------------------
title to the Subject Shares, free and clear of all Liens, except for the Subject
Shares that have been pledged by the Stockholder pursuant to a margin loan
account prior to the date of this Agreement.
9. Representations and Warranties of Lucent. Lucent hereby
----------------------------------------
represents and warrants to the Stockholder that Lucent has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Lucent, and the consummation of the transactions contemplated hereby, has
been duly authorized by all necessary corporate action on the part of Lucent.
This Agreement has been duly executed and delivered by Lucent and constitutes a
valid and binding obligation of Lucent enforceable against Lucent in accordance
with its terms. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with the
terms hereof will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time or both) under any provision of, any
trust agreement, loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise, license,
judgment, order, notice, decree, statute, law, ordinance, rule or regulation
applicable to Lucent or to Lucent's property or assets. Except for the
informational filings with the SEC, no consent, approval, order or authorization
of, or registration, declaration or filing with any Governmental Entity is
required by or with respect to Lucent in connection with the execution and
delivery of this Agreement or the consummation by Lucent of the transactions
contemplated hereby.
10. Enforcement. The parties agree that irreparable damage would
-----------
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise
<PAGE>
5
breached. It is accordingly agreed that the parties will be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any Federal court
located in the State of Delaware or in Delaware state court, the foregoing being
in addition to any other remedy to which they are entitled at law or in equity.
In addition, each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, and (iii) agrees that it will not bring
any action relating to this Agreement or any of the transactions contemplated by
this Agreement in any court other than a Federal court sitting in the State of
Delaware or a Delaware state court.
11. Term and Termination. Subject to Section 16(f), the term of this
--------------------
Agreement shall commence on the date hereof and shall terminate upon the earlier
of (i) the Effective Time and (ii) 10 business days after the termination of the
Merger Agreement in accordance with its terms.
12. Certain Events. The Stockholder agrees that this Agreement and
--------------
the obligations hereunder shall attach to the Stockholder's Subject Shares and
shall be binding upon any Person to which legal or beneficial ownership of such
Subject Shares shall pass, whether by operation of law or otherwise, including
the Stockholder's heirs, guardians, administrators or successors. In the event
of any stock split, stock dividend, merger, reorganization, recapitalization
or other change in the capital structure of the Company affecting the Subject
Shares, or the acquisition of additional shares of the Company's capital stock
by the Stockholder, the number of Subject Shares listed on Schedule A beside the
name of the Stockholder shall be adjusted appropriately and this Agreement and
the obligations hereunder shall attach to any additional shares of the Company's
capital stock issued to or acquired by the Stockholder.
13. Stockholder Capacity. No person executing this Agreement who is
--------------------
or becomes during the term hereof a director or officer of the Company makes (or
shall be deemed to have made) any agreement or understanding herein in his or
her capacity as such director or officer. Without limiting the generality of
the foregoing, the Stockholder signs solely in his capacity as the record and/or
beneficial owner, as applicable, of the Stockholder's Subject Shares
<PAGE>
6
and nothing herein shall limit or affect any actions taken by the Stockholder
(or a designee of the Stockholder) in his capacity as an officer or director of
the Company in exercising his rights under the Merger Agreement.
14. Entire Agreement; No Third Party Beneficiaries; Amendment;
---------------------------------------------------------
Waiver. This Agreement (including the documents and instruments referred to
- ------
herein) (i) constitutes the entire agreement and supersedes all prior agreements
and understandings, written or oral, among the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder. This Agreement may
not be amended, supplemented or modified, and no provisions hereof may be
modified or waived, except by an instrument in writing signed by each party to
be charged. No waiver of any provisions hereof by any party shall be deemed a
waiver of any other provisions hereof by any such party, nor shall any such
waiver be deemed a continuing waiver of any provision hereof by such party.
15. Notices. All notices, consents, requests, instructions,
-------
approvals and other communications provided for herein shall be in writing and
shall be deemed to have been duly given if mailed, by first class or registered
mail, three business days after deposit in the United States Mail, or if telexed
or telecopied, sent by telegram, or delivered by hand or reputable overnight
courier, when confirmation is received, in each case as follows:
If to the Stockholder, to the address listed on Schedule A hereto;
If to Lucent, in accordance with Section 8.02 of the Merger Agreement;
or to such other persons or addresses as may be designated in writing by the
party to receive such notice.
16. Miscellaneous. (a) When a reference is made in this Agreement
-------------
to Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Wherever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation".
(b) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws.
<PAGE>
7
(c) If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner and to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
(d) This Agreement may be executed in one or more counterparts, all
of which shall be considered one and the same agreement, and shall become
effective when one or more of the counterparts have been signed by each of the
parties and delivered to the other parties, it being understood that each party
need not sign the same counterpart.
(e) This Agreement shall not be assigned by the Stockholder, on the
one hand, without the prior written consent of Lucent, or by Lucent, on the
other hand, without the prior written consent of the Stockholder, except that
Lucent may assign, in its sole discretion, any or all of its rights, interests
and obligations hereunder to any direct or indirect wholly owned subsidiary of
Lucent; provided that notwithstanding such assignment, Lucent shall remain
liable for performance of its obligations hereunder. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
(f) The obligations of the Stockholder set forth in this Agreement
shall not be effective or binding upon the Stockholder until after such time as
the Merger Agreement is executed and delivered by Lucent, Sub and the Company.
<PAGE>
8
IN WITNESS WHEREOF, Lucent has caused this Agreement to be signed by
its officer thereunto duly authorized and the Stockholder has signed this
Agreement, all as of the date first written above.
LUCENT TECHNOLOGIES INC.,
by
/s/ Patricia F. Russo
---------------------------
Name: Patricia F. Russo
Title: Executive Vice
President, Strategy
and Corporate
Operations
STOCKHOLDERS:
/s/ Donald K. McKinney
---------------------------
Donald K. McKinney
THE MCKINNEY FAMILY TRUST,
by
/s/ Donald K. McKinney
---------------------------
Donald K. McKinney, Trustee
<PAGE>
SCHEDULE A
Number of Percentage of
Outstanding Voting Power of
Stockholder Shares Owned the Company
----------- ------------ -----------
Donald K. McKinney 1,316,999 /1/ 2.28%
Donald K. McKinney, 14,473,465 25.07%
Trustee of the McKinney
Family Trust
- --------------------------
/1/ Includes 416,999 shares subject to options which are exercisable
within 60 days of the date of this Agreement.
<PAGE>
EXHIBIT 4.6
INTERNATIONAL NETWORK SERVICES
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Rights Agent
PREFERRED SHARES RIGHTS AGREEMENT
Dated as of August 26, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Certain Definitions............................................................... 1
Section 2. Appointment of Rights Agent....................................................... 7
Section 3. Issuance of Rights Certificates................................................... 7
Section 4. Form of Rights Certificates....................................................... 9
Section 5. Countersignature and Registration................................................. 10
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates.......................... 10
Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights..................... 11
Section 8. Cancellation and Destruction of Rights Certificates............................... 13
Section 9. Reservation and Availability of Preferred Shares.................................. 13
Section 10. Record Date....................................................................... 15
Section 11. Adjustment of Exercise Price, Number of Shares or Number of Rights................ 15
Section 12. Certificate of Adjusted Exercise Price or Number of Shares........................ 22
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.............. 22
Section 14. Fractional Rights and Fractional Shares........................................... 26
Section 15. Rights of Action.................................................................. 27
Section 16. Agreement of Rights Holders....................................................... 27
Section 17. Rights Certificate Holder Not Deemed a Stockholder................................ 27
Section 18. Concerning the Rights Agent....................................................... 28
Section 19. Merger or Consolidation or Change of Name of Rights Agent......................... 28
Section 20. Duties of Rights Agent............................................................ 29
Section 21. Change of Rights Agent............................................................ 31
Section 22. Issuance of New Rights Certificates............................................... 32
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 23. Redemption........................................................................ 32
Section 24. Exchange.......................................................................... 33
Section 25. Notice of Certain Events.......................................................... 35
Section 26. Notices........................................................................... 35
Section 27. Supplements and Amendments........................................................ 36
Section 28. Successors........................................................................ 36
Section 29. Determinations and Actions by the Board of Directors, etc......................... 36
Section 30. Benefits of this Agreement........................................................ 37
Section 31. Severability...................................................................... 37
Section 32. Governing Law..................................................................... 37
Section 33. Counterparts...................................................................... 38
Section 34. Descriptive Headings.............................................................. 38
</TABLE>
EXHIBITS
Exhibit A Form of Certificate of Designation
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights
ii
<PAGE>
RIGHTS AGREEMENT
Agreement, dated as of August 26, 1999, between International Network
Services, a Delaware corporation, and ChaseMellon Shareholder Services, L.L.C.,
a New Jersey limited liability company.
Effective August 26, 1999 (the "Rights Dividend Declaration Date"), the
Board of Directors of the Company authorized and declared a dividend of one
Preferred Share Purchase Right (a "Right") for each Common Share (as hereinafter
defined) of the Company outstanding as of the Close of Business (as hereinafter
defined) on September 7, 1999 (the "Record Date"), each Right representing the
right to purchase one one-thousandth of a share of Series A Participating
Preferred Stock (as such number may be adjusted pursuant to the provisions of
this Agreement), having the rights, preferences and privileges set forth in the
form of Certificate of Designations of Rights, Preferences and Privileges of
Series A Participating Preferred Stock attached hereto as Exhibit A, upon the
terms and subject to the conditions herein set forth, and further authorized and
directed the issuance of one Right (as such number may be adjusted pursuant to
the provisions of this Agreement) with respect to each Common Share that shall
become outstanding between the Record Date and the earlier of the Distribution
Date and the Expiration Date (as such terms are hereinafter defined), and in
certain circumstances after the Distribution Date.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
-------------------
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the Common Shares then outstanding, but shall not include the
Company, any Subsidiary of the Company or any employee benefit plan of the
Company or of any Subsidiary of the Company, or any Person organized, appointed
or established by the Company for or pursuant to the terms of any such plan,
provided that neither Lucent Technologies Inc. nor any of its Affiliates shall
be deemed to be an Acquiring Person as a result of the execution and delivery of
the Agreement and Plan of Merger (the "Merger Agreement") by and among Lucent
Technologies Inc., Intrepid Merger Inc. and the Company dated as of August 9,
1999, or the "Option Agreement" or the "Stockholder Agreement," each as defined
in the Merger Agreement, the consummation of the Merger (as defined in the
Merger Agreement) or the other transactions contemplated by the Merger
Agreement, the Stockholder Agreement or the Option Agreement. Notwithstanding
the foregoing, no Person shall be deemed to be an Acquiring Person as the result
of an acquisition of Common Shares by the Company which, by reducing the number
of shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 15% or more of the Common Shares of the Company then
outstanding; provided, however, that if a Person shall become the Beneficial
-------- -------
Owner of 15% or more of the Common Shares of the Company then outstanding by
reason of share purchases by the Company and shall, after such share purchases
by the Company, become the Beneficial Owner of
<PAGE>
any additional Common Shares of the Company (other than pursuant to a dividend
or distribution paid or made by the Company on the outstanding Common Shares in
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), then such Person shall be deemed to be an Acquiring Person unless upon
becoming the Beneficial Owner of such additional Common Shares of the Company
such Person does not beneficially own 15% or more of the Common Shares of the
Company then outstanding. Notwithstanding the foregoing, (i) if the Company's
Board of Directors determines in good faith that a Person who would otherwise be
an "Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently (including, without limitation,
because (A) such Person was unaware that it beneficially owned a percentage of
the Common Shares that would otherwise cause such Person to be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph (a),
or (B) such Person was aware of the extent of the Common Shares it beneficially
owned but had no actual knowledge of the consequences of such beneficial
ownership under this Agreement) and without any intention of changing or
influencing control of the Company, and if such Person divested or divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be or
to have become an "Acquiring Person" for any purposes of this Agreement; and
(ii) if, as of the date hereof, any Person is the Beneficial Owner of 15% or
more of the Common Shares outstanding, such Person shall not be or become an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), unless and until such time as such Person shall become the
Beneficial Owner of additional Common Shares (other than pursuant to a dividend
or distribution of Common Shares paid or made by the Company on the outstanding
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), unless, upon becoming the Beneficial Owner of such additional Common
Shares, such Person is not then the Beneficial Owner of 15% or more of the
Common Shares then outstanding.
(b) "Adjustment Fraction" shall have the meaning set forth in Section
11(a)(i) hereof.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of this Agreement.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of Section
13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or
successor law or regulation);
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than
-2-
<PAGE>
the Rights), warrants or options, or otherwise; provided, however, that a Person
-------- -------
shall not be deemed pursuant to this Section 1(d)(ii)(A) to be the Beneficial
Owner of, or to beneficially own, (1) securities tendered pursuant to a tender
or exchange offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange, or (2) securities which a Person or any of such Person's
Affiliates or Associates may be deemed to have the right to acquire pursuant to
any merger or other acquisition agreement between the Company and such Person
(or one or more of its Affiliates or Associates) if such agreement has been
approved by the Board of Directors of the Company prior to there being an
Acquiring Person; or (B) the right to vote pursuant to any agreement,
arrangement or understanding; provided, however, that a Person shall not be
-------- -------
deemed the Beneficial Owner of, or to beneficially own, any security under this
Section 1(d)(ii)(B) if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Exchange Act
and (2) is not also then reportable on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
or any of such Person's Affiliates or Associates has any agreement, arrangement
or understanding, whether or not in writing (other than customary agreements
with and between underwriters and selling group members with respect to a bona
fide public offering of securities) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section 1(d)(ii)(B))
or disposing of any securities of the Company;
provided, however, that in no case shall an officer or director of the Company
- -------- -------
be deemed (x) the Beneficial Owner of any securities beneficially owned by
another officer or director of the Company solely by reason of actions
undertaken by such persons in their capacity as officers or directors of the
Company or (y) the Beneficial Owner of securities held of record by the trustee
of any employee benefit plan of the Company or any Subsidiary of the Company for
the benefit of any employee of the Company or any Subsidiary of the Company,
other than the officer or director, by reason of any influence that such officer
or director may have over the voting of the securities held in the plan.
(e) "Business Day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in New Jersey or California are
authorized or obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00 P.M.,
California time, on such date; provided, however, that if such date is not a
-------- -------
Business Day it shall mean 5:00 P.M., California time, on the next succeeding
Business Day.
(g) "Common Shares" when used with reference to the Company shall
mean the shares of Common Stock of the Company, $. 001 par value. Common Shares
when used with reference to any Person other than the Company shall mean the
capital stock (or equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
-3-
<PAGE>
(h) "Common Stock Equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(i) "Company" shall mean International Network Services, a Delaware
corporation, subject to the terms of Section 13(a)(iii)(C) hereof.
(j) "Current Per Share Market Price" of any security (a "Security"
for purposes of this definition), for all computations other than those made
pursuant to Section 11(a)(iii) hereof, shall mean the average of the daily
closing prices per share of such Security for the thirty (30) consecutive
Trading Days immediately prior to, but not including, such date, and for
purposes of computations made pursuant to Section 11(a)(iii) hereof, the Current
Per Share Market Price of any Security on any date shall be deemed to be the
average of the daily closing prices per share of such Security for the ten (10)
consecutive Trading Days immediately prior to, but not including, such date;
provided, however, that in the event that the Current Per Share Market Price of
- -------- -------
the Security is determined during a period following the announcement by the
issuer of such Security of (i) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such shares or
(ii) any subdivision, combination or reclassification of such Security, and
prior to the expiration of the applicable thirty (30) Trading Day or ten (10)
Trading Day period, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the Current Per Share Market
Price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
sale price or, if such last sale price is not reported, the average of the high
bid and low asked prices in the over-the-counter market, as reported by Nasdaq
or such other system then in use, or, if on any such date the Security is not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Security
selected by the Board of Directors of the Company. If on any such date no market
maker is making a market in the Security, the fair value of such shares on such
date as determined in good faith by the Board of Directors of the Company shall
be used. If the Preferred Shares are not publicly traded, the Current Per Share
Market Price of the Preferred Shares shall be conclusively deemed to be the
Current Per Share Market Price of the Common Shares as determined pursuant to
this Section 1(j), as appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof, multiplied by
1000. If the Security is not publicly held or so listed or traded, Current Per
Share Market Price shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes.
-4-
<PAGE>
(k) "Current Value" shall have the meaning set forth in Section
11(a)(iii) hereof.
(l) "Distribution Date" shall mean the earlier of (i) the Close of
Business on the tenth day after the Shares Acquisition Date (or, if the tenth
day after the Shares Acquisition Date occurs before the Record Date, the Close
of Business on the Record Date) or (ii) the Close of Business on the tenth
Business Day (or such later date as may be determined by action of the Company's
Board of Directors) after the date that a tender or exchange offer by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person
organized, appointed or established by the Company for or pursuant to the terms
of any such plan) is first published or sent or given within the meaning of Rule
14d-2(a) of the General Rules and Regulations under the Exchange Act, if,
assuming the successful consummation thereof, such Person would be an Acquiring
Person. A Distribution Date shall not occur solely by reason of the execution
and delivery of the Merger Agreement, the Option Agreement or the Stockholder
Agreement, the consummation of the Merger or the other transactions contemplated
by the foregoing.
(m) "Equivalent Shares" shall mean Preferred Shares and any other
class or series of capital stock of the Company which is entitled to the same
rights, privileges and preferences as the Preferred Shares.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "Exchange Ratio" shall have the meaning set forth in Section
24(a) hereof.
(p) "Exercise Price" shall have the meaning set forth in Section 4(a)
hereof.
(q) "Expiration Date" shall mean the earliest to occur of: (i) the
Close of Business on the Final Expiration Date, (ii) the Redemption Date, or
(iii) the time at which the Board of Directors orders the exchange of the Rights
as provided in Section 24 hereof.
(r) "Final Expiration Date" shall mean the earlier of August 26,
2009 or the "Effective Time" as defined in the Merger Agreement.
(s) "Nasdaq" shall mean the National Association of Securities
Dealers, Inc., Automated Quotations System.
(t) "Person" shall mean any individual, firm, corporation, limited
liability company or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(u) "Post-Event Transferee" shall have the meaning set forth in
Section 7(e) hereof.
-5-
<PAGE>
(v) "Preferred Shares" shall mean shares of Series A Participating
Preferred Stock, $.001 par value, of the Company.
(w) "Pre-Event Transferee" shall have the meaning set forth in
Section 7(e) hereof.
(x) "Principal Party" shall have the meaning set forth in Section
13(b) hereof.
(y) "Record Date" shall have the meaning set forth in the recitals at
the beginning of this Agreement.
(z) "Redemption Date" shall have the meaning set forth in Section
23(a) hereof.
(aa) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(bb) "Rights" shall have the meaning set forth in the recitals at the
beginning of this Agreement.
(cc) "Rights Agent" shall mean ChaseMellon Shareholder Services,
L.L.C. or its successor or replacement as provided in Sections 19 and 21 hereof.
(dd) "Rights Certificate" shall mean a certificate substantially in
the form attached hereto as Exhibit B.
(ee) "Rights Dividend Declaration Date" shall have the meaning set
forth in the recitals at the beginning of this Agreement.
(ff) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iii) hereof.
(gg) "Section 13 Event" shall mean any event described in clause (i),
(ii) or (iii) of Section 13(a) hereof.
(hh) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(ii) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such;
provided that, if such Person is determined not to have become an Acquiring
- -------------
Person pursuant to Section 1(a) hereof, then no Shares Acquisition Date shall be
deemed to have occurred.
(jj) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(kk) "Subsidiary" of any Person shall mean any corporation or other
entity of which an amount of voting securities sufficient to elect a majority of
the directors or Persons having
-6-
<PAGE>
similar authority of such corporation or other entity is beneficially owned,
directly or indirectly, by such Person, or any corporation or other entity
otherwise controlled by such Person.
(ll) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
(mm) "Summary of Rights" shall mean a summary of this Agreement
substantially in the form attached hereto as Exhibit C.
(nn) "Total Exercise Price" shall have the meaning set forth in
Section 4(a) hereof.
(oo) "Trading Day" shall mean a day on which the principal national
securities exchange on which a referenced security is listed or admitted to
trading is open for the transaction of business or, if a referenced security is
not listed or admitted to trading on any national securities exchange, a
Business Day.
(pp) A "Triggering Event" shall be deemed to have occurred upon any
Person becoming an Acquiring Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable, upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and shall in no event
be liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Issuance of Rights Certificates.
-------------------------------
(a) Until the Distribution Date, (i) the Rights will be evidenced
(subject to the provisions of Sections 3(b) and 3(c) hereof) by the certificates
for Common Shares registered in the names of the holders thereof (which
certificates shall also be deemed to be Rights Certificates) and not by separate
Rights Certificates and (ii) the Rights will be transferable only in connection
with the transfer of Common Shares. Until the earlier of the Distribution Date
or the Expiration Date, the surrender for transfer of certificates for Common
Shares shall also constitute the surrender for transfer of the Rights associated
with the Common Shares represented thereby. As soon as practicable after the
Distribution Date, the Company will promptly notify the Rights Agent thereof,
and the Company shall prepare and execute, the Rights Agent will countersign,
and the Company will send or cause to be sent (and the Rights Agent, if
requested to do so and (to the extent necessary) provided with a list of the
holders of the Common Shares, will send) by first-class, postage-prepaid mail,
to each record holder of Common Shares as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Company, a Rights Certificate evidencing one Right for each Common Share so
held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per Common Share has been made pursuant to
Section 11
-7-
<PAGE>
hereof, then at the time of distribution of the Rights Certificates, the Company
shall make the necessary and appropriate rounding adjustments (in accordance
with Section 14(a) hereof) so that Rights Certificates representing only whole
numbers of Rights are distributed and cash is paid in lieu of any fractional
Rights. As of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates and may be transferred by the transfer of the
Rights Certificates as permitted hereby, separately and apart from any transfer
of Common Shares, and the holders of such Rights Certificates as listed in the
records of the Company or any transfer agent or registrar for the Rights shall
be the record holders thereof.
(b) On the Record Date or as soon as practicable thereafter, the Company
will send a copy of the Summary of Rights by first-class, postage-prepaid mail,
to each record holder of Common Shares as of the Close of Business on the Record
Date, at the address of such holder shown on the records of the Company's
transfer agent and registrar. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with the Summary of Rights. Until the Distribution Date (or, if
earlier, the Expiration Date), the surrender for transfer of any certificate for
Common Shares outstanding on the Record Date, with or without a copy of the
Summary of Rights, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Unless the Board of Directors by resolution adopted at or before the
time of the issuance of any Common Shares specifies to the contrary, Rights
shall be issued in respect of all Common Shares that are issued after the Record
Date but prior to the earlier of the Distribution Date or the Expiration Date
or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date. Certificates representing such Common Shares shall also be
deemed to be certificates for Rights, and shall bear the following legend:
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN
RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN INTERNATIONAL NETWORK
SERVICES AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS THE RIGHTS AGENT,
DATED AS OF AUGUST 26, 1999, (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH
ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL EXECUTIVE OFFICES OF INTERNATIONAL NETWORK SERVICES.
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH
RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE
EVIDENCED BY THIS CERTIFICATE. INTERNATIONAL NETWORK SERVICES WILL MAIL TO
THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT
CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. UNDER CERTAIN
CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD
BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR ANY AFFILIATE
OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT),
-8-
<PAGE>
WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT
HOLDER, MAY BECOME NULL AND VOID.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Shares represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby.
(d) In the event that the Company purchases or acquires any Common
Shares after the Record Date but prior to the Distribution Date, any Rights
associated with such Common Shares shall be deemed canceled and retired so that
the Company shall not be entitled to exercise any Rights associated with the
Common Shares which are no longer outstanding.
Section 4. Form of Rights Certificates.
---------------------------
(a) The Rights Certificates (and the forms of election to purchase
Common Shares and of assignment to be printed on the reverse thereof) shall be
substantially in the form of Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate (but which do not affect the
rights, duties or responsibilities of the Rights Agent) and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or automated
quotation system, on which the Rights may from time to time be listed or
included, or to conform to usage. Subject to the provisions of Section 11 and
Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated
as of the Record Date (or in the case of Rights issued with respect to Common
Shares issued by the Company after the Record Date, as of the date of issuance
of such Common Shares) and on their face shall entitle the holders thereof to
purchase such number of one-thousandths of a Preferred Share as shall be set
forth therein at the price set forth therein (such exercise price per one one-
thousandth of a Preferred Share being hereinafter referred to as the "Exercise
Price" and the aggregate Exercise Price of all Preferred Shares issuable upon
exercise of one Right being hereinafter referred to as the "Total Exercise
Price"), but the number and type of securities purchasable upon the exercise of
each Right and the Exercise Price shall be subject to adjustment as provided
herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Company's Board of Directors has determined
is part of an agreement,
-9-
<PAGE>
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6
or Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, shall contain (to the
extent feasible and to the extent the Rights Agent has been notified thereof)
the following legend:
THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY
OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED
IN SECTION 7(e) OF THE RIGHTS AGREEMENT.
Section 5. Countersignature and Registration.
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its Chief
Financial Officer, its President or any Vice President, either manually or by
facsimile signature, and by the Secretary or an Assistant Secretary of the
Company, either manually or by facsimile signature, and shall have affixed
thereto the Company's seal (if any) or a facsimile thereof. The Rights
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Rights
Certificates on behalf of the Company had not ceased to be such officer of the
Company; and any Rights Certificate may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Rights Certificate,
shall be a proper officer of the Company to sign such Rights Certificate,
although at the date of the execution of this Rights Agreement any such person
was not such an officer.
(b) Following the Distribution Date and receipt by the Rights Agent
of all relevant information, the Rights Agent will keep or cause to be kept, at
its office designated for such purposes, books for registration and transfer of
the Rights Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates and the date of
each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
- ----------------------------------------------------------------------
(a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at
any time after the Close of Business on the Distribution Date, and at or prior
to the Close of Business on the Expiration Date, any Rights Certificate or
Rights Certificates may be transferred, split up, combined
-10-
<PAGE>
or exchanged for another Rights Certificate or Rights Certificates, entitling
the registered holder to purchase a like number of one-thousandths of a
Preferred Share (or, following a Triggering Event, other securities, cash or
other assets, as the case may be) as the Rights Certificate or Rights
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Rights Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the office of
the Rights Agent designated in Section 26 hereof. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have properly completed and signed the certificate contained in the form
of assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company or
the Rights Agent shall reasonably request. Thereupon the Rights Agent shall,
subject to Sections 7(e), 14 and 24 hereof, countersign and deliver to the
person entitled thereto a Rights Certificate or Rights Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights Certificates. The Rights
Agent shall have no duty or obligation under this Section unless and until it is
satisfied that all such taxes and/or charges have been paid.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security satisfactory to them, and, at the Company's request, reimbursement
to the Company and the Rights Agent of all reasonable expenses incidental
thereto, and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will make and deliver a new Rights
Certificate of like tenor to the Rights Agent for delivery to the registered
holder in lieu of the Rights Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights.
-------------------------------------------------------------
(a) Subject to Sections 7(e), 23(b) and 24(b) hereof, the registered
holder of any Rights Certificate may exercise the Rights evidenced thereby
(except as otherwise provided herein) in whole or in part at any time after the
Distribution Date and prior to the Close of Business on the Expiration Date by
surrender of the Rights Certificate, with the form of election to purchase on
the reverse side thereof duly executed, to the Rights Agent at the office of the
Rights Agent designated in Section 26 hereof, together with payment of the
Exercise Price for each one-thousandth of a Preferred Share (or, following a
Triggering Event, other securities, cash or other assets as the case may be) as
to which the Rights are exercised.
(b) The Exercise Price for each one-thousandth of a Preferred Share
issuable pursuant to the exercise of a Right shall initially be Three Hundred
Dollars ($300.00), shall be subject to adjustment from time to time as provided
in Sections 11 and 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
-11-
<PAGE>
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Exercise Price for the number of one-thousandths of a Preferred
Share (or, following a Triggering Event, other securities, cash or other assets
as the case may be) to be purchased and an amount equal to any applicable tax or
governmental charge required to be paid by the holder of such Rights Certificate
in accordance with Section 9(e) hereof, the Rights Agent shall, subject to
Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares (or make available, if the Rights Agent is the
transfer agent for the Preferred Shares) a certificate or certificates for the
number of one-thousandths of a Preferred Share (or, following a Triggering
Event, other securities, cash or other assets as the case may be) to be
purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests or (B) if the Company shall have elected to
deposit the total number of one-thousandths of a Preferred Share (or, following
a Triggering Event, other securities, cash or other assets as the case may be)
issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one-thousandths of a Preferred Share (or, following a Triggering
Event, other securities, cash or other assets as the case may be) as are to be
purchased (in which case certificates for the Preferred Shares (or, following a
Triggering Event, other securities, cash or other assets as the case may be)
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company hereby directs the depositary agent to comply
with such request, (ii) when appropriate, requisition from the Company the
amount of cash to be paid in lieu of issuance of fractional shares in accordance
with Section 14 hereof, (iii) after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt thereof,
deliver such cash to or upon the order of the registered holder of such Rights
Certificate. The payment of the Exercise Price (as such amount may be reduced
(including to zero) pursuant to Section 11(a)(iii) hereof) and an amount equal
to any applicable transfer tax required to be paid by the holder of such Rights
Certificate in accordance with Section 9(e) hereof, may be made in cash or by
certified bank check, cashier's check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue securities of the
Company other than Preferred Shares, pay cash and/or distribute other property
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such other securities, cash and/or other property are
available for distribution by the Rights Agent, if and when necessary to comply
with this Agreement.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his or her duly authorized assigns, subject to the provisions of Section 6 and
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such
-12-
<PAGE>
(a "Post-Event Transferee"), (iii) a transferee of an Acquiring Person (or of
any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Company's Board of Directors has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e) (a "Pre-Event Transferee") or (iv) any subsequent
transferee receiving transferred Rights from a Post-Event Transferee or a Pre-
Event Transferee, either directly or through one or more intermediate
transferees, shall become null and void without any further action and no holder
of such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
notify the Rights Agent when this Section 7(e) applies and shall use all
reasonable efforts to ensure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but neither the Company nor the Rights
Agent shall have any liability to any holder of Rights Certificates or to any
other Person as a result of the Company's failure to make any determinations
with respect to an Acquiring Person or any of such Acquiring Person's
Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall, in
addition to having complied with the requirements of Section 7(a) above, have
(i) properly completed and signed the certificate contained in the form of
election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company or the Rights Agent shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights
---------------------------------------------------
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any Rights Certificate purchased or acquired by the Company otherwise
than upon the exercise thereof. The Rights Agent shall deliver all canceled
Rights Certificates to the Company, or shall, at the written request of the
Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Preferred Shares.
------------------------------------------------
(a) The Company covenants and agrees that it will use its best efforts to
cause to be reserved and kept available out of its authorized and unissued
Preferred Shares not reserved for another purpose (and, following the occurrence
of a Triggering Event, out of its authorized and
-13-
<PAGE>
unissued Common Shares and/or other securities), the number of Preferred Shares
(and, following the occurrence of the Triggering Event, Common Shares and/or
other securities) that will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) If the Company shall hereafter list any of its Preferred Shares
on any exchange, then so long as the Preferred Shares (and, following the
occurrence of a Triggering Event, Common Shares and/or other securities)
issuable and deliverable upon exercise of the Rights may be listed on such
exchange, the Company shall use its best efforts to cause, from and after such
time as the Rights become exercisable (but only to the extent that the Company's
Board of Directors determines that it is reasonably likely that the Rights will
be exercised), all shares reserved for such issuance to be listed on such
exchange upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a
Triggering Event in which the consideration to be delivered by the Company upon
exercise of the Rights is described in Section 11(a)(ii) or Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act with respect to
the securities purchasable upon exercise of the Rights on an appropriate form,
(ii) cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities and (B) the Expiration Date. The Company
may temporarily suspend, for a period not to exceed ninety (90) days after the
date set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating, and notify the Rights Agent,
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement and notification to the Rights Agent at such time as the
suspension is no longer in effect. The Company will also take such action as may
be appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction, unless the requisite qualification
in such jurisdiction shall have been obtained, or an exemption therefrom shall
be available, and until a registration statement has been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares (or other
securities of the Company) delivered upon exercise of Rights shall, at the time
of delivery of the certificates for such securities (subject to payment of the
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all taxes and governmental charges which may be payable
in respect of the original issuance or delivery of the Rights Certificates or of
any Preferred Shares (or other securities) upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax or
-14-
<PAGE>
charge which may be payable in respect of any transfer or delivery of Rights
Certificates to a person other than, or the issuance or delivery of certificates
or depositary receipts for the Preferred Shares (or other securities of the
Company) in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares (or other
securities of the Company) upon the exercise of any Rights until any such tax or
charge shall have been paid (any such tax or charge being payable by the holder
of such Rights Certificate at the time of surrender) or until it has been
established to the Company's satisfaction that no such tax is due.
Section 10. Record Date. Each Person in whose name any certificate for a
-----------
number of one-thousandths of a Preferred Share (or other securities) is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of the Preferred Shares (or other securities) represented
thereby on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Exercise Price with respect to which the Rights have been exercised (and any
applicable taxes or governmental charges) was made; provided, however, that if
-------- -------
the date of such surrender and payment is a date upon which the transfer books
of the Company are closed, such Person shall be deemed to have become the record
holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the transfer books of the Company are open.
Prior to the exercise of the Rights evidenced thereby, the holder of a Rights
Certificate shall not be entitled to any rights of a holder of Preferred Shares
(or other securities) for which the Rights shall be exercisable, including,
without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Exercise Price, Number of Shares or Number of
-----------------------------------------------------------
Rights. The Exercise Price, the number and kind of shares or other property
- ------
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) Anything in this Agreement to the contrary notwithstanding,
in the event the Company shall at any time after the date of this Agreement (A)
declare a dividend on the Preferred Shares payable in Preferred Shares, (B)
subdivide the outstanding Preferred Shares, (C) combine the outstanding
Preferred Shares (by reverse stock split or otherwise) into a smaller number of
Preferred Shares, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), then, in each such event, except as otherwise
provided in this Section 11 and Section 7(e) hereof: (1) the Exercise Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification shall be adjusted so that
the Exercise Price thereafter shall equal the result obtained by dividing the
Exercise Price in effect immediately prior to such time by a fraction (the
"Adjustment Fraction"), the numerator of which shall be the total number of
Preferred Shares (or shares of capital stock issued in such reclassification of
the Preferred Shares) outstanding immediately following such time and the
denominator of which shall be the total number of
-15-
<PAGE>
Preferred Shares outstanding immediately prior to such time; provided, however,
-------- -------
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of the
Company issuable upon exercise of such Right; and (2) the number of one-
thousandths of a Preferred Share (or share of such other capital stock) issuable
upon the exercise of each Right shall equal the number of one-thousandths of a
Preferred Share (or share of such other capital stock) as was issuable upon
exercise of a Right immediately prior to the occurrence of the event described
in clauses (A)-(D) of this Section 11(a)(i), multiplied by the Adjustment
Fraction; provided, however, that, no such adjustment shall be made pursuant to
this Section 11(a)(i) to the extent that there shall have simultaneously
occurred an event described in clause (A), (B), (C) or (D) of Section 11(n) with
a proportionate adjustment being made thereunder. Each Common Share that shall
become outstanding after an adjustment has been made pursuant to this Section
11(a)(i) shall have associated with it the number of Rights, exercisable at the
Exercise Price and for the number of one-thousandths of a Preferred Share (or
shares of such other capital stock) as one Common Share has associated with it
immediately following the adjustment made pursuant to this Section 11(a)(i).
(ii) Subject to Section 24 of this Agreement, in the event a
Triggering Event shall have occurred, then promptly following such Triggering
Event each holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive for each Right, upon exercise thereof in
accordance with the terms of this Agreement and payment of the Exercise Price in
effect immediately prior to the occurrence of the Triggering Event, in lieu of a
number of one-thousandths of a Preferred Share, such number of Common Shares of
the Company as shall equal the result obtained by multiplying the Exercise Price
in effect immediately prior to the occurrence of the Triggering Event by the
number of one-thousandths of a Preferred Share for which a Right was exercisable
(or would have been exercisable if the Distribution Date had occurred)
immediately prior to the first occurrence of a Triggering Event, and dividing
that product by 50% of the Current Per Share Market Price for Common Shares on
the date of occurrence of the Triggering Event; provided, however, that the
Exercise Price and the number of Common Shares of the Company so receivable upon
exercise of a Right shall be subject to further adjustment as appropriate in
accordance with Section 11(e) hereof to reflect any events occurring in respect
of the Common Shares of the Company after the occurrence of the Triggering
Event.
(iii) In lieu of issuing Common Shares in accordance with
Section 11(a)(ii) hereof, the Company may, if the Company's Board of Directors
determines that such action is necessary or appropriate and not contrary to the
interest of holders of Rights and, in the event that the number of Common Shares
which are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights, or
if any necessary regulatory approval for such issuance has not been obtained by
the Company, the Company shall: (A) determine the excess of (1) the value of the
Common Shares issuable upon the exercise of a Right (the "Current Value") over
(2) the Exercise Price (such excess, the "Spread") and (B) with respect to each
Right, make adequate provision to substitute for such Common Shares, upon
exercise of the Rights, (1) cash, (2) a reduction in the Exercise Price, (3)
other equity securities of the Company (including, without limitation, shares or
units of shares of any series of preferred stock which the Company's Board of
-16-
<PAGE>
Directors has deemed to have the same value as Common Shares (such shares or
units of shares of preferred stock are herein called "Common Stock
Equivalents")), except to the extent that the Company has not obtained any
necessary stockholder or regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary stockholder or regulatory approval for such issuance, (5)
other assets or (6) any combination of the foregoing, having an aggregate value
equal to the Current Value, where such aggregate value has been determined by
the Company's Board of Directors based upon the advice of a nationally
recognized investment banking firm selected by the Company's Board of Directors;
provided, however, if the Company shall not have made adequate provision to
- -------- -------
deliver value pursuant to clause (B) above within thirty (30) days following the
later of (x) the first occurrence of a Triggering Event and (y) the date on
which the Company's right of redemption pursuant to Section 23(a) expires (the
later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger
Date"), then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Exercise Price, Common
Shares (to the extent available), except to the extent that the Company has not
obtained any necessary stockholder or regulatory approval for such issuance, and
then, if necessary, cash, which shares and/or cash have an aggregate value equal
to the Spread. If the Company's Board of Directors shall determine in good faith
that it is likely that sufficient additional Common Shares could be authorized
for issuance upon exercise in full of the Rights or that any necessary
regulatory approval for such issuance will be obtained, the thirty (30) day
period set forth above may be extended to the extent necessary, but not more
than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that
the Company may seek stockholder approval for the authorization of such
additional shares or take action to obtain such regulatory approval (such
period, as it may be extended, the "Substitution Period"). To the extent that
the Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e) hereof, that such action shall apply uniformly
to all outstanding Rights and (y) may suspend the exercisability of the Rights
until the expiration of the Substitution Period in order to seek any
authorization of additional shares, to take any action to obtain any required
regulatory approval and/or to decide the appropriate form of distribution to be
made pursuant to such first sentence and to determine the value thereof. In the
event of any such suspension, the Company shall issue a public announcement
stating that the exercisability of the Rights has been temporarily suspended, as
well as promptly notify the Rights Agent thereof and issue a public announcement
at such time as the suspension is no longer in effect. For purposes of this
Section 11(a)(iii), the value of the Common Shares shall be the Current Per
Share Market Price of the Common Shares on the Section 11(a)(ii) Trigger Date
and the value of any Common Stock Equivalent shall be deemed to have the same
value as the Common Shares on such date.
(b) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the issuance of rights, options or warrants to
all holders of Preferred Shares entitling such holders (for a period expiring
within forty-five (45) calendar days after such record date) to subscribe for or
purchase Preferred Shares or Equivalent Shares or securities convertible into
Preferred Shares or Equivalent Shares at a price per share (or having a
conversion price per share, if a security convertible into Preferred Shares or
Equivalent Shares) less than the then Current Per Share Market Price of the
Preferred Shares or Equivalent Shares on such record date, then, in each
-17-
<PAGE>
such case, the Exercise Price to be in effect after such record date shall be
determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares and Equivalent Shares (if any) outstanding on such record date,
plus the number of Preferred Shares or Equivalent Shares, as the case may be,
which the aggregate offering price of the total number of Preferred Shares or
Equivalent Shares, as the case may be, to be offered or issued (and/or the
aggregate initial conversion price of the convertible securities to be offered
or issued) would purchase at such current market price, and the denominator of
which shall be the number of Preferred Shares and Equivalent Shares (if any)
outstanding on such record date, plus the number of additional Preferred Shares
or Equivalent Shares, as the case may be, to be offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible); provided, however, that in no event shall the
-------- -------
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Company's
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the holders
of the Rights. Preferred Shares and Equivalent Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights, options or warrants are
not so issued, the Exercise Price shall be adjusted to be the Exercise Price
which would then be in effect if such record date had not been fixed.
(c) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the making of a distribution to all holders of
the Preferred Shares or of any class or series of Equivalent Shares (including
any such distribution made in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend, if any, or
a dividend payable in Preferred Shares) or subscription rights, options or
warrants (excluding those referred to in Section 11(b)), then, in each such
case, the Exercise Price to be in effect after such record date shall be
determined by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the Current Per Share
Market Price of a Preferred Share or an Equivalent Share on such record date,
less the fair market value per Preferred Share or Equivalent Share (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to a Preferred
Share or Equivalent Share, as the case may be, and the denominator of which
shall be such Current Per Share Market Price of a Preferred Share or Equivalent
Share on such record date; provided, however, that in no event shall the
-------- -------
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. Such adjustments shall be made successively whenever such
a record date is fixed, and in the event that such distribution is not so made,
the Exercise Price shall be adjusted to be the Exercise Price which would have
been in effect if such record date had not been fixed.
-18-
<PAGE>
(d) Anything herein to the contrary notwithstanding, no adjustment in
the Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Exercise Price; provided, however,
-------- -------
that any adjustments which by reason of this Section 11(d) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a Common Share or other share or one
hundred-thousandth of a Preferred Share, as the case may be. Notwithstanding the
first sentence of this Section 11(d), any adjustment required by this Section 11
shall be made no later than the earlier of (i) three (3) years from the date of
the transaction which requires such adjustment or (ii) the Expiration Date.
(e) If as a result of an adjustment made pursuant to Section 11(a) or
13(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock other than Preferred Shares, thereafter
the number of such other shares so receivable upon exercise of any Right and, if
required, the Exercise Price thereof, shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Shares contained in Sections 11(a),
11(b), 11(c), 11(d), 11(f), 11(g), 11(h), 11(i), 11(j), 11(k) and 11(l), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(f) All Rights originally issued by the Company subsequent to any
adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(g) Unless the Company shall have exercised its election as provided
in Section 11(h), upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of Preferred Shares
(calculated to the nearest one hundred-thousandth of a share) obtained by (i)
multiplying (x) the number of Preferred Shares covered by a Right immediately
prior to this adjustment, by (y) the Exercise Price in effect immediately prior
to such adjustment of the Exercise Price, and (ii) dividing the product so
obtained by the Exercise Price in effect immediately after such adjustment of
the Exercise Price.
(h) The Company may elect on or after the date of any adjustment of
the Exercise Price as a result of the calculations made in Section 11(b) or (c)
to adjust the number of Rights, in substitution for any adjustment in the number
of Preferred Shares purchasable upon the exercise of a Right. Each of the Rights
outstanding after such adjustment of the number of Rights shall be exercisable
for the number of one-thousandths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one hundred-thousandth) obtained by dividing
the Exercise Price in effect immediately prior to adjustment of the Exercise
Price by the Exercise Price in effect immediately after adjustment of the
Exercise Price. The Company shall make a public announcement (and prompt notice
thereof to the
-19-
<PAGE>
Rights Agent) of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Exercise
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten (10) days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(h), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Exercise Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(i) Irrespective of any adjustment or change in the Exercise Price or
the number of Preferred Shares issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may continue to express
the Exercise Price per one one-thousandth of a Preferred Share and the number of
one-thousandths of a Preferred Share which were expressed in the initial Rights
Certificates issued hereunder.
(j) Before taking any action that would cause an adjustment reducing
the Exercise Price below the par or stated value, if any, of the number of one-
thousandths of a Preferred Share issuable upon exercise of the Rights, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue as
fully paid and nonassessable shares such number of one-thousandths of a
Preferred Share at such adjusted Exercise Price.
(k) In any case in which this Section 11 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer (with prompt notice of such
election to the Rights Agent) until the occurrence of such event the issuing to
the holder of any Right exercised after such record date of the number of one-
thousandths of a Preferred Share and other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the number of one-
thousandths of a Preferred Share and other capital stock or securities of the
Company, if any, issuable upon such exercise on the basis of the Exercise Price
in effect prior to such adjustment; provided, however, that the Company shall
-------- -------
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares (fractional or otherwise)
upon the occurrence of the event requiring such adjustment.
(l) Anything in this Section 11 to the contrary notwithstanding,
prior to the Distribution Date, the Company shall be entitled to make such
reductions in the Exercise Price, in addition to those adjustments expressly
required by this Section 11, as and to the extent that it in its
-20-
<PAGE>
sole discretion shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred or Common Shares, (ii) issuance
wholly for cash of any Preferred or Common Shares at less than the current
market price, (iii) issuance wholly for cash of Preferred or Common Shares or
securities which by their terms are convertible into or exchangeable for
Preferred or Common Shares, (iv) stock dividends or (v) issuance of rights,
options or warrants referred to in this Section 11, hereafter made by the
Company to holders of its Preferred or Common Shares shall not be taxable to
such stockholders.
(m) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or
permit to be taken) any action if at the time such action is taken it is
reasonably foreseeable that such action will diminish substantially or otherwise
eliminate the benefits intended to be afforded by the Rights.
(n) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Common Shares payable in Common Shares,
(B) subdivide the outstanding Common Shares, (C) combine the outstanding Common
Shares (by reverse stock split or otherwise) into a smaller number of Common
Shares, or (D) issue any shares of its capital stock in a reclassification of
the Common Shares (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), then, in each such event, except as otherwise provided in Section
11(a) and Section 7(e) hereof: (1) each Common Share (or shares of capital stock
issued in such reclassification of the Common Shares) outstanding immediately
following such time shall have associated with it the number of Rights as were
associated with one Common Share immediately prior to the occurrence of the
event described in clauses (A)-(D) above; (2) the Exercise Price in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that the
Exercise Price thereafter shall equal the result obtained by multiplying the
Exercise Price in effect immediately prior to such time by a fraction, the
numerator of which shall be the total number of Common Shares outstanding
immediately prior to the event described in clauses (A)-(D) above, and the
denominator of which shall be the total number of Common Shares outstanding
immediately after such event; provided, however, that in no event shall the
-------- -------
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of such Right; and (3) the number of one-thousandths of a Preferred
Share (or shares of such other capital stock) issuable upon the exercise of each
Right outstanding after such event shall equal the number of one-thousandths of
a Preferred Share (or shares of such other capital stock) as were issuable with
respect to one Right immediately prior to such event. Each Common Share that
shall become outstanding after an adjustment has been made pursuant to this
Section 11(n) shall have associated with it the number of Rights, exercisable at
the Exercise Price and for the number of one-thousandths of a Preferred Share
(or shares of such other capital stock) as one Common Share has associated with
it immediately following the adjustment made pursuant to this Section 11(n). If
an event occurs which would require an adjustment under both this Section 11(n)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(n)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
-21-
<PAGE>
Section 12. Certificate of Adjusted Exercise Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts and computations accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Rights Certificate in accordance with Section 26 hereof.
Notwithstanding the foregoing sentence, the failure of the Company to make such
certification or give such notice shall not affect the validity of such
adjustment or the force or effect of the requirement for such adjustment. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment contained therein and shall have no duty with respect to and
shall not be deemed to have knowledge of such adjustment unless and until it
shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
--------------------------------------------------------------
Power.
- -----
(a) In the event that, following a Triggering Event, directly or
indirectly:
(i) the Company shall consolidate with, or merge with and into,
any other Person (other than a wholly-owned Subsidiary of the Company in a
transaction the principal purpose of which is to change the state of
incorporation of the Company and which complies with Section 11(m) hereof);
(ii) any Person shall consolidate with the Company, or merge with
and into the Company and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such merger,
all or part of the Common Shares shall be changed into or exchanged for stock or
other securities of any other Person (or the Company); or
(iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company or one or more of its wholly
owned Subsidiaries in one or more transactions, each of which individually (and
together) complies with Section 11(m) hereof),
then, concurrent with and in each such case,
(A) each holder of a Right (except as provided in Section
7(e) hereof) shall thereafter have the right to receive, upon the exercise
thereof at a price equal to the Total Exercise Price applicable immediately
prior to the occurrence of the Section 13 Event in accordance with the terms of
this Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable Common Shares of the Principal Party (as
hereinafter defined), free of any liens, encumbrances, rights of first refusal
or other adverse claims, as shall be equal to the result obtained by dividing
such Total Exercise Price by 50% of the Current Per Share Market Price of the
Common Shares of such Principal Party on the date of consummation of such
Section 13 Event, provided, however, that the Exercise Price and the number of
------------------
Common Shares of
-22-
<PAGE>
such Principal Party so receivable upon exercise of a Right shall be subject to
further adjustment as appropriate in accordance with Section 11(e) hereof;
(B) such Principal Party shall thereafter be liable for,
and shall assume, by virtue of such Section 13 Event, all the obligations and
duties of the Company pursuant to this Agreement;
(C) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event;
(D) such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of its Common Shares)
in connection with the consummation of any such transaction as may be necessary
to ensure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be, in relation to its Common Shares thereafter deliverable
upon the exercise of the Rights;
(E) upon the subsequent occurrence of any consolidation,
merger, sale or transfer of assets or other extraordinary transaction in respect
of such Principal Party, each holder of a Right shall thereupon be entitled to
receive, upon exercise of a Right and payment of the Total Exercise Price as
provided in this Section 13(a), such cash, shares, rights, warrants and other
property which such holder would have been entitled to receive had such holder,
at the time of such transaction, owned the Common Shares of the Principal Party
receivable upon the exercise of such Right pursuant to this Section 13(a), and
such Principal Party shall take such steps (including, but not limited to,
reservation of shares of stock) as may be necessary to permit the subsequent
exercise of the Rights in accordance with the terms hereof for such cash,
shares, rights, warrants and other property; and
(F) For purposes hereof, the "earning power" of the Company
and its Subsidiaries shall be determined in good faith by the Company's Board of
Directors on the basis of the operating earnings of each business operated by
the Company and its Subsidiaries during the three fiscal years preceding the
date of such determination (or, in the case of any business not operated by the
Company or any Subsidiary during three full fiscal years preceding such date,
during the period such business was operated by the Company or any Subsidiary).
(b) For purposes of this Agreement, the term "Principal Party" shall
mean:
(i) in the case of any transaction described in clause (i) or
(ii) of Section 13(a) hereof: (A) the Person that is the issuer of the
securities into which the Common Shares are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the Common
Shares of which have the greatest aggregate market value of shares outstanding,
or (B) if no securities are so issued, (x) the Person that is the other party to
the merger, if such Person survives said merger, or, if there is more than one
such Person, the Person the Common Shares of which have the greatest aggregate
market value of shares outstanding or (y) if the Person
-23-
<PAGE>
that is the other party to the merger does not survive the merger, the Person
that does survive the merger (including the Company if it survives) or (z) the
Person resulting from the consolidation; and
(ii) in the case of any transaction described in clause (iii) of
Section 13(a) hereof, the Person that is the party receiving the greatest
portion of the assets or earning power transferred pursuant to such transaction
or transactions, or, if more than one Person that is a party to such transaction
or transactions receives the same portion of the assets or earning power so
transferred and each such portion would, were it not for the other equal
portions, constitute the greatest portion of the assets or earning power so
transferred, or if the Person receiving the greatest portion of the assets or
earning power cannot be determined, whichever of such Persons is the issuer of
Common Shares having the greatest aggregate market value of shares outstanding;
provided, however, that in any such case described in the foregoing clause
- ------------------
(b)(i) or (b)(ii), if the Common Shares of such Person are not at such time or
have not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which are and have been so
registered, the term "Principal Party" shall refer to such other Person, or (2)
if such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Shares of which are and have been so registered, the term "Principal
Party" shall refer to whichever of such Persons is the issuer of Common Shares
having the greatest aggregate market value of shares outstanding, or (3) if such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly by the same Person, the
rules set forth in clauses (1) and (2) above shall apply to each of the owners
having an interest in the venture as if the Person owned by the joint venture
was a Subsidiary of both or all of such joint venturers, and the Principal Party
in each such case shall bear the obligations set forth in this Section 13 in the
same ratio as its interest in such Person bears to the total of such interests.
(c) The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized Common Shares that
have not been issued or reserved for issuance to permit the exercise in full of
the Rights in accordance with this Section 13 and unless prior thereto the
Company and such issuer shall have executed and delivered to the Rights Agent a
supplemental agreement confirming that such Principal Party shall, upon
consummation of such Section 13 Event, assume this Agreement in accordance with
Sections 13(a) and 13(b) hereof, that all rights of first refusal or preemptive
rights in respect of the issuance of Common Shares of such Principal Party upon
exercise of outstanding Rights have been waived, that there are no rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights and that such transaction shall not result in a default by such Principal
Party under this Agreement, and further providing that, as soon as practicable
after the date of such Section 13 Event, such Principal Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, use its best efforts to cause
such registration statement to become effective as soon as
-24-
<PAGE>
practicable after such filing and use its best efforts to cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the Expiration Date, and
similarly comply with applicable state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the Rights on a
national securities exchange or to meet the eligibility requirements for
quotation on Nasdaq and list (or continue the listing of) the Rights and the
securities purchasable upon exercise of the Rights on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such Principal Party which comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act.
In the event that at any time after the occurrence of a Triggering Event
some or all of the Rights shall not have been exercised at the time of a
transaction described in this Section 13, the Rights which have not theretofore
been exercised shall thereafter be exercisable in the manner described in
Section 13(a) (without taking into account any prior adjustment required by
Section 11(a)(ii)).
(d) In case the "Principal Party" for purposes of Section 13(b)
hereof has provision in any of its authorized securities or in its certificate
of incorporation or by-laws or other instrument governing its corporate affairs,
which provision would have the effect of (i) causing such Principal Party to
issue (other than to holders of Rights pursuant to Section 13 hereof), in
connection with, or as a consequence of, the consummation of a Section 13 Event,
Common Shares or Equivalent Shares of such Principal Party at less than the then
Current Per Share Market Price thereof or securities exercisable for, or
convertible into, Common Shares or Equivalent Shares of such Principal Party at
less than the then Current Per Share Market Price, or (ii) providing for any
special payment, tax or similar provision in connection with the issuance of the
Common Shares of such Principal Party pursuant to the provisions of Section 13
hereof, then, in such event, the Company hereby agrees with each holder of
Rights that it shall not consummate any such transaction unless prior thereto
the Company and such Principal Party shall have executed and delivered to the
Rights Agent a supplemental agreement providing that the provision in question
of such Principal Party shall have been canceled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect in connection with or as a consequence of, the consummation of
the proposed transaction.
(e) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, effect or permit to occur any Section 13 Event, if
(i) at the time or immediately after such Section 13 Event there are any rights,
warrants or other instruments or securities outstanding or agreements in effect
which would substantially diminish or otherwise eliminate the benefits intended
to be afforded by the Rights, (ii) prior to, simultaneously with or immediately
after such Section 13 Event, the stockholders of the Person who constitutes, or
would constitute, the "Principal Party" for purposes of Section 13(b) hereof
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates or Associates or (iii) the form or nature of organization
of the Principal Party would preclude or limit the exercisability of the Rights.
-25-
<PAGE>
(f) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the current market
value of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable, as determined pursuant to the second sentence of
Section 1(j) hereof.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions that are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions that are
integral multiples of one one-thousandth of a Preferred Share). Interests in
fractions of Preferred Shares in integral multiples of one one-thousandth of a
Preferred Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided, that such agreement shall provide that the
--------
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the Preferred
Shares represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-thousandth of a Preferred
Share, the Company shall pay to the registered holders of Rights Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of a Preferred Share. For purposes
of this Section 14(b), the current market value of a Preferred Share shall be
one thousand times the closing price of a Common Share (as determined pursuant
to the second sentence of Section 1(j) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares
upon the exercise or exchange of Rights. In lieu of such fractional Common
Shares, the Company shall pay to the registered holders of Rights Certificates
at the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the current market value of a Common Share. For purposes
of this Section 14(c), the current market value of a Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 1(j) hereof) for the Trading Day immediately prior to the date of
such exercise.
(d) The holder of a Right by the acceptance of the Right expressly
waives his or her right to receive any fractional Rights or any fractional
shares (other than fractions that are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of a Right.
-26-
<PAGE>
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his or her own behalf and for
his or her own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
his or her right to exercise the Rights evidenced by such Rights Certificate in
the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right, by
---------------------------
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with the appropriate forms
and certificates fully executed; and
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the Person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Shares certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder,
--------------------------------------------------
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose to be the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until
-27-
<PAGE>
the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
---------------------------
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the preparation, delivery, administration,
execution and any amendment of this Agreement and the exercise and performance
of its duties hereunder. The Company also agrees to indemnify the Rights Agent
for, and to hold it harmless against, any loss, liability, damage, judgment,
fine, penalty, claim, demand, settlement, cost or expense, incurred without
gross negligence, bad faith or willful misconduct on the part of the Rights
Agent, for any action taken, suffered or omitted by the Rights Agent in
connection with the acceptance and administration of this Agreement, including,
without limitation, the costs and expenses of defending against any claim of
liability in the premises. In no event will the Rights Agent be liable for
special, punitive, indirect, incidental or consequential loss or damage of any
kind whatsoever, even if the Rights Agent has been advised of the possibility of
such loss or damage.
(b) The Rights Agent shall be authorized to rely on, shall be
protected and shall incur no liability for, or in respect of any action taken,
suffered or omitted by it in connection with, its administration of this
Agreement in reliance upon any Rights Certificate or certificate for the
Preferred Shares or Common Shares or for other securities of the Company,
instrument of assignment or transfer, power of attorney, endorsement, affidavit,
letter, notice, direction, consent, certificate, statement or other paper or
document reasonably believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
(a) Any Person into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any Person succeeding to the
shareholder services business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such Person would be eligible for
-----------------
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
-28-
<PAGE>
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes only the
----------------------
duties and obligations expressly imposed by this Agreement (and no implied
duties or obligations) upon the following terms and conditions, by all of which
the Company and the holders of Rights Certificates, by their acceptance thereof,
shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the advice or opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent and the
Rights Agent shall incur no liability for or on account of, any action taken,
omitted or suffered by it in good faith and in accordance with such advice or
opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of Current Per Share Market Price) be proved or established by the
Company prior to taking, omitting to take or suffering any action hereunder,
such fact or matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deemed to be conclusively proved and established
by a certificate signed by any one of the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, the Chief Financial
Officer, the Secretary or any Assistant Secretary of the Company and delivered
to the Rights Agent; and such certificate shall be full authorization and
protection to the Rights Agent and the Rights Agent shall incur no liability for
or on account of any action taken, omitted or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not have any liability for, nor be under
any responsibility in respect of the validity of this Agreement or the execution
and delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Rights Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it be responsible for any change in the
exercisability of the Rights, a transfer to an Acquiring
-29-
<PAGE>
Person or any adjustment in the terms of the Rights (including the manner,
method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Rights
Certificates after receipt by the Rights Agent of a certificate furnished
pursuant to Section 12 describing such change or adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Chief Financial Officer, the Secretary or any Assistant
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken, omitted or suffered by it in good faith in accordance with
instructions of any such officer or for any delay in acting while waiting for
those instructions. Any application by the Rights Agent for written instructions
from the Company may, at the option of the Rights Agent, set forth in writing
any action proposed to be taken or omitted by the Rights Agent under this Rights
Agreement and the date on and/or after which such action shall be taken or such
omission shall be effective. The Rights Agent shall not be liable for any action
taken or suffered by, or omission of, the Rights Agent in accordance with a
proposal included in any such application on or after the date specified in such
application (which date shall not be less than five (5) Business Days after the
date any officer of the Company actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written instructions in response to such
application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, affiliate, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company or any other Person
-30-
<PAGE>
resulting from any such act, default, neglect or misconduct, absent gross
negligence, bad faith or willful misconduct.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
it believes that repayment of such funds or adequate indemnification against
such risk or liability is not assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Preferred Shares and the Common Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Preferred
Shares and the Common Shares by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his or her Rights
Certificate for inspection by the Company), then the registered holder of any
Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be (i) a Person organized and doing
business under the laws of the United States or of any state of the United
States, in good standing, which is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $50 million or (ii) an
affiliate of such Person. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Preferred Shares and the Common Shares, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
-31-
<PAGE>
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
-----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Exercise Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company outstanding at the
date hereof or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
-------- -------
shall be issued and this sentence shall be null and void ab initio if, and to
---------
the extent that, such issuance or this sentence would create a significant risk
of or result in material adverse tax consequences to the Company or the Person
to whom such Rights Certificate would be issued or would create a significant
risk of or result in such options' or employee plans' or arrangements' failing
to qualify for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
----------
(a) The Company may, at its option and with the approval of the Board
of Directors, at any time prior to the Close of Business on the earlier of (i)
the tenth day following the Shares Acquisition Date (or such later date as may
be determined by action the Company's Board of Directors and publicly announced
by the Company) and (ii) the Close of Business on the Final Expiration Date,
redeem all but not less than all the then outstanding Rights at a redemption
price of $0. 01 per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being herein referred to as the "Redemption Price") and the
Company may, at its option, pay the Redemption Price either in Common Shares
(based on the Current Per Share Market Price thereof at the time of redemption)
or cash. Such redemption of the Rights by the Company may be made effective at
such time, on such basis and with such conditions as the Company's Board of
Directors in its sole discretion may establish. The date on which the Board of
Directors elects to make the redemption effective shall be referred to as the
"Redemption Date."
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption; provided,
--------
however, that the failure to give or any defect in, any such notice shall not
- -------
affect the validity of such redemption. Within ten (10) days after the action of
the Board of Directors ordering the redemption
-32-
<PAGE>
of the Rights, the Company shall give notice of such redemption to the Rights
Agent and the holders of the then outstanding Rights by (in the case of notice
to holders) mailing such notice to all such holders at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Shares. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in any manner other
than that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. Exchange.
--------
(a) Subject to applicable laws, rules and regulations, and subject to
subsection 24(c) below, the Company may, at its option, by action of its Board
of Directors, at any time after the occurrence of a Triggering Event, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become null and void pursuant to the provisions of
Section 7(e) hereof) for Common Shares at an exchange ratio of one Common Share
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Company's Board of Directors shall not be empowered to effect such exchange
at any time after any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or any such Subsidiary, or any
Person organized, appointed or established by the Company for or pursuant to the
terms of any such plan), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors ordering
the exchange of any Rights pursuant to Section 24(a) and without any further
action and without any notice, the right to exercise such Rights shall terminate
and the only right thereafter of the holders of such Rights shall be to receive
that number of Common Shares equal to the number of such Rights held by such
holder multiplied by the Exchange Ratio. The Company shall give public notice of
any such exchange (with prompt notice thereof to the Rights Agent); provided,
--------
however, that the failure to give, or any defect in, such notice shall not
- -------
affect the validity of such exchange. The Company shall mail a notice of any
such exchange to all of the holders of such Rights at their last addresses as
they appear upon the registry books of the Rights Agent. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of exchange will state the method
by which the exchange of the Common Shares for Rights will be effected and, in
the event of any partial exchange, the number of Rights which will be exchanged.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.
-33-
<PAGE>
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with Section 24(a), the Company shall
either take such action as may be necessary to authorize additional Common
Shares for issuance upon exchange of the Rights or alternatively, at the option
of the Board of Directors, with respect to each Right (i) pay cash in an amount
equal to the Current Value (as hereinafter defined), in lieu of issuing Common
Shares in exchange therefor, or (ii) issue debt or equity securities or a
combination thereof, having a value equal to the Current Value, in lieu of
issuing Common Shares in exchange for each such Right, where the value of such
securities shall be determined by a nationally recognized investment banking
firm selected by majority vote of the Board of Directors, or (iii) deliver any
combination of cash, property, Common Shares and/or other securities having a
value equal to the Current Value in exchange for each Right. For purposes of
this Section 24(c) only, the "Current Value" shall mean the product of the
Current Per Share Market Price of Common Shares on the date of the occurrence of
the event described above in subparagraph (a), multiplied by the number of
Common Shares for which the Right otherwise would be exchangeable if there were
sufficient shares available. To the extent that the Company determines that some
action need be taken pursuant to clauses (i), (ii) or (iii) of this Section
24(c), the Board of Directors may temporarily suspend the exercisability of the
Rights for a period of up to sixty (60) days following the date on which the
event described in Section 24(a) shall have occurred, in order to seek any
authorization of additional Common Shares and/or to decide the appropriate form
of distribution to be made pursuant to the above provision and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement (with prompt notice thereof to the Rights Agent) stating
that the exercisability of the Rights has been temporarily suspended.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable, an amount in cash equal to the same fraction
of the current market value of a whole Common Share (as determined pursuant to
the second sentence of Section 1(j) hereof).
(e) The Company may, at its option, by majority vote of its Board of
Directors, at any time before any Person has become an Acquiring Person,
exchange all or part of the then outstanding Rights for rights of substantially
equivalent value, as determined reasonably and with good faith by the Board of
Directors, based upon the advice of one or more nationally recognized investment
banking firms.
(f) Immediately upon the action of the Board of Directors ordering
the exchange of any Rights pursuant to subsection 24(e) of this Section 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of rights in exchange therefor as has been
determined by the Board of Directors in accordance with subsection 24(e) above.
The Company shall give public notice of any such exchange (with prompt notice
thereof to the Rights Agent); provided, however, that the failure to give, or
-------- -------
any defect in, such notice shall not affect the validity
-34-
<PAGE>
of such exchange. The Company shall mail a notice of any such exchange to all of
the holders of such Rights at their last addresses as they appear upon the
registry books of the transfer agent for the Common Shares of the Company. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the Rights will be effected.
Section 25. Notice of Certain Events.
------------------------
(a) In case the Company shall propose to effect or permit to occur
any Triggering Event or Section 13 Event, the Company shall give notice thereof
to the Rights Agent and to each holder of Rights in accordance with Section 26
hereof at least twenty (20) days prior to occurrence of such Triggering Event or
such Section 13 Event.
(b) In case any Triggering Event or Section 13 Event shall occur,
then, in any such case, the Company shall as soon as practicable thereafter give
to the Rights Agent and to each holder of a Rights Certificate, in accordance
with Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Sections 11(a)(ii) and 13 hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
-------
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
International Network Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Attention: Susan H. Thornton, Esq.
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Elizabeth R. Flint, Esq.
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Rights Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660-2108
-35-
<PAGE>
Attention: General Counsel
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the occurrence of a
--------------------------
Distribution Date, the Company may supplement or amend this Agreement in any
respect without the approval of any holders of Rights and the Rights Agent
shall, subject to the restrictions contained in this paragraph if the Company
so directs, execute such supplement or amendment. From and after the
occurrence of a Distribution Date, the Company and the Rights Agent may from
time to time supplement or amend this Agreement without the approval of any
holders of Rights in order to (i) cure any ambiguity, (ii) correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, (iii) shorten or lengthen any
time period hereunder or (iv) to change or supplement the provisions hereunder
in any manner that the Company may deem necessary or desirable and that shall
not adversely affect the interests of the Rights Agent or the holders of
Rights (other than an Acquiring Person or an Affiliate or Associate of an
Acquiring Person); provided, this Agreement may not be supplemented or amended
--------
to lengthen, pursuant to clause (iii) of this sentence, (A) a time period
relating to when the Rights may be redeemed at such time as the Rights are not
then redeemable or (B) any other time period unless such lengthening is for
the purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights (other than an Acquiring Person or an
Affiliate or Associate of an Acquiring Person). Notwithstanding the foregoing,
any amendment or supplement to this Agreement which purports to (i) include
Lucent Technologies Inc. or any of its Affiliates in the definition of
Acquiring Person, (ii) provide that a Distribution Date, Stock Acquisition
Date or Triggering Event shall occur solely by reason of the execution and
delivery of the Merger Agreement, the Option Agreement or the Stockholder
Agreement or the consummation of the Merger or the other transactions
contemplated by the foregoing agreements, (iii) change the 15% threshold
within the definition of Acquiring Person or (iv) amend or supplement the
provisions of this sentence shall be null and void without the prior written
consent of Lucent Technologies Inc.; provided that such prior written consent
--------
shall not be required at any time after the termination of the Merger
Agreement. Upon the delivery of a certificate from an appropriate officer of
the Company that states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, and, if requested by the Rights
Agent, an opinion of counsel, and provided such supplement or amendment does
not change or increase the Rights Agent's duties, liabilities or obligations,
the Rights Agent shall execute such supplement or amendment. Prior to the
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Shares.
Section 28. Successors. All the covenants and provisions of this Agreement
----------
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc. For
---------------------------------------------------------
all purposes of this Agreement, any calculation of the number of Common Shares
outstanding at any particular
-36-
<PAGE>
time, including for purposes of determining the particular percentage of such
outstanding Common Shares of which any Person is the Beneficial Owner, shall be
made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General
Rules and Regulations under the Exchange Act. The Board of Directors of the
Company shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board, or the Company, or as may be necessary or advisable in the administration
of this Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement and (ii) make all determinations
deemed necessary or advisable for the administration of this Agreement
(including a determination to redeem or not redeem the Rights or to amend the
Agreement). All such actions, calculations, interpretations and determinations
(including, for purposes of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent, the holders of
the Rights Certificates and all other Persons and (y) not subject the Board to
any liability to the holders of the Rights. The Rights Agent shall always be
entitled to assume that the Company's Board of Directors acted in good faith and
shall be fully protected and incur no liability in reliance thereon.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 31. Severability. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
- -------- -------
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Company's Board of
Directors.
Section 32. Governing Law. This Agreement and each Right and each Rights
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
-37-
<PAGE>
Section 33. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[Remainder of page intentionally left blank]
-38-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal as of the day and year first above written.
"COMPANY" INTERNATIONAL NETWORK SERVICES
By: /s/ Kevin J. Laughlin
________________________________
Name: Kevin J. Laughlin
______________________________
Title: Vice President, Finance and
Chief Financial Officer
_____________________________
"RIGHTS AGENT" CHASEMELLON SHAREHOLDER SERVICES,
L.L.C.
By: /s/ Asa Drew
________________________________
Name: Asa Drew
______________________________
Title: Assistant Vice President
_____________________________
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF DESIGNATIONS OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES A PARTICIPATING PREFERRED STOCK
OF INTERNATIONAL NETWORK SERVICES
The undersigned, Kevin J. Laughlin, does hereby certify:
1. That he is the duly elected and acting Vice President, Finance
and Chief Financial Officer of International Network Services, a Delaware
corporation (the "Corporation").
2. That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the said Corporation, the said Board of
Directors effective on August 7, 1999 adopted the following resolution creating
a series of 150,000 shares of Preferred Stock designated as Series A
Participating Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the corporation by the Restated Certificate of Incorporation, as amended, the
Board of Directors does hereby provide for the issue of a series of Preferred
Stock of the Corporation and does hereby fix and herein state and express the
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions of such series of Preferred Stock
as follows:
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Participating Preferred Stock." The Series A
Participating Preferred Stock shall have a par value of $.001 per share, and the
number of shares constituting such series shall be 150,000.
Section 2. Proportional Adjustment. In the event the Corporation shall at
-----------------------
any time after the issuance of any share or shares of Series A Participating
Preferred Stock (i) declare any dividend on Common Stock of the Corporation
("Common Stock") payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Corporation shall
simultaneously effect a proportional adjustment to the number of outstanding
shares of Series A Participating Preferred Stock.
Section 3. Dividends and Distributions.
---------------------------
(a) Subject to the prior and superior right of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Participating Preferred Stock with respect to dividends, the holders
of shares of Series A Participating Preferred Stock shall be entitled to receive
when, as and if declared by the Board of Directors out of funds legally
available for such purpose, quarterly dividends payable in cash on the last day
of January, April, July and October in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance
<PAGE>
of a share or fraction of a share of Series A Participating Preferred Stock, in
an amount per share (rounded to the nearest cent) equal to 1,000 times the
aggregate per share amount of all cash dividends, and 1,000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Participating Preferred Stock.
(b) The Corporation shall declare a dividend or distribution on the
Series A Participating Preferred Stock as provided in paragraph (a) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(c) Dividends shall begin to accrue on outstanding shares of Series A
Participating Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Participating Preferred
Stock, unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A Participating
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
shares of Series A Participating Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
Section 4. Voting Rights. The holders of shares of Series A Participating
-------------
Preferred Stock shall have the following voting rights:
(a) Each share of Series A Participating Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a vote of
the stockholders of the Corporation.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series A Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(c) Except as required by law, holders of Series A Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
-2-
<PAGE>
Section 5. Certain Restrictions.
--------------------
(a) The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for consideration
any shares of Common Stock after the first issuance of a share or fraction of a
share of Series A Participating Preferred Stock unless concurrently therewith it
shall declare a dividend on the Series A Participating Preferred Stock as
required by Section 3 hereof.
(b) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Participating Preferred Stock as provided in Section 3
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Participating
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Participating Preferred Stock;
(ii) declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with Series A Participating Preferred
Stock, except dividends paid ratably on the Series A Participating Preferred
Stock and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Participating Preferred
Stock;
(iv) purchase or otherwise acquire for consideration any shares
of Series A Participating Preferred Stock, or any shares of stock ranking on a
parity with the Series A Participating Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(c) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 5, purchase or otherwise acquire such shares at such time and in
such manner.
-3-
<PAGE>
Section 6. Reacquired Shares. Any shares of Series A Participating
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein and, in the Restated Certificate of Incorporation, as then amended.
Section 7. Liquidation, Dissolution or Winding Up. Upon any liquidation,
--------------------------------------
dissolution or winding up of the Corporation, the holders of shares of Series A
Participating Preferred Stock shall be entitled to receive an aggregate amount
per share equal to 1,000 times the aggregate amount to be distributed per share
to holders of shares of Common Stock plus an amount equal to any accrued and
unpaid dividends on such shares of Series A Participating Preferred Stock.
Section 8. Consolidation, Merger, etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share equal to 1,000 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged.
Section 9. No Redemption. The shares of Series A Participating Preferred
-------------
Stock shall not be redeemable.
Section 10. Ranking. The Series A Participating Preferred Stock shall
-------
rankj unior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 11. Amendment. The Restated Certificate of Incorporation of the
---------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preference or special rights of the Series A
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Participating Preferred Stock, voting separately as a class.
Section 12. Fractional Shares. Series A Participating Preferred Stock
-----------------
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Participating Preferred Stock.
-4-
<PAGE>
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Designation of
Rights, Preferences and Privileges in accordance with the foregoing resolution
and the provisions of Delaware law and to take such actions as they may deem
necessary or appropriate to carry out the intent of the foregoing resolution."
He further declares under penalty of perjury that the matters set forth in
the foregoing Certificate of Designation are true and correct to his knowledge.
Executed at Sunnyvale, California on August 26, 1999.
____________________________________
Kevin J. Laughlin, Vice President,
Finance and Chief Financial Officer
<PAGE>
EXHIBIT B
---------
FORM OF RIGHTS CERTIFICATE
Certificate No. R- _________ Rights
NOT EXERCISABLE AFTER THE EARLIER OF (i) AUGUST 26, 2009 (ii) THE DATE
TERMINATED BY THE COMPANY, (iii) THE DATE THE COMPANY EXCHANGES THE RIGHTS
PURSUANT TO THE RIGHTS AGREEMENT OR (iv) THE "EFFECTIVE TIME," AS DEFINED
IN THE MERGER AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE
OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED
BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT
HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. THE RIGHTS REPRESENTED BY
THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS
OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING
PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY,
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL
AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH RIGHTS
AGREEMENT.
_____________________
* The portion of the legend in bracket shall be inserted only if applicable and
shall replace the preceding sentence.
<PAGE>
RIGHTS CERTIFICATE
INTERNATIONAL NETWORK SERVICES
This certifies that ______________________________, or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement dated as of August 26, 1999 (the "Rights Agreement"),
between International Network Services, a Delaware corporation (the "Company"),
and ChaseMellon Shareholder Services, L.L.C. ( the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to 5:00 P.M., New York time, on
August 26, 2009 at the office of the Rights Agent designated for such purposes,
or at the office of its successor as Rights Agent, one one-thousandth (1/1,000)
of a fully paid non-assessable share of Series A Participating Preferred Stock,
$.001 par value, (the "Preferred Shares"), of the Company, at an Exercise Price
of Three Hundred Dollars ($300.00) per one-thousandth of a Preferred Share (the
"Exercise Price"), upon presentation and surrender of this Rights Certificate
with the Form of Election to Purchase and related Certificate duly executed.
The number of Rights evidenced by this Rights Certificate (and the number of
one-thousandths of a Preferred Share which may be purchased upon exercise
hereof) set forth above are the number and Exercise Price as of August 7, 1999
based on the Preferred Shares as constituted at such date. As provided in the
Rights Agreement, the Exercise Price and the number and kind of Preferred Shares
or other securities which may be purchased upon the exercise of the Rights
evidenced by this Rights Certificate are subject to modification and adjustment
upon the happening of certain events.
This Rights Certificate is subject to all of the terms, covenants and
restrictions of the Rights Agreement, which terms, covenants and restrictions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the office of the Rights Agent.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Rights Certificate (i) may be redeemed by the Company, at its
option, at a redemption price of $0.01 per Right or (ii) may be exchanged by the
Company in whole or in part for Common Shares, substantially equivalent rights
or other consideration as determined by the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purposes,
may be exchanged for another Rights Certificate or Rights Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate amount of securities as the Rights evidenced by the Rights Certificate
or Rights Certificates surrendered shall have entitled such holder to purchase.
If this Rights Certificate
-2-
<PAGE>
shall be exercised in part, the holder shall be entitled to receive upon
surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
No fractional portion of less than one one-thousandth of a Preferred
Share will be issued upon the exercise of any Right or Rights evidenced hereby
but in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of ___________________.
ATTEST: INTERNATIONAL NETWORK SERVICES
_________________________________ By:_____________________________
__________________, Secretary
Its:____________________________
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES,
L.L.C., as Rights Agent
By:______________________________
Its:_____________________________
-3-
<PAGE>
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate)
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers
unto
________________________________________________________________________________
(Please print name and address of transferee)
________________________________________________________________________________
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _______________, 19____
___________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor institution (a bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person, or an
Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated: _______________, 19____
______________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor institution (a bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise the Rights Certificate)
To: International Network Services
The undersigned hereby irrevocably elects to exercise ________________
Rights represented by this Rights Certificate to purchase the number of one-
thousandths of a Preferred Share issuable upon the exercise of such Rights and
requests that certificates for such number of one-thousandths of a Preferred
Share issued in the name of:
Please insert social security
or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated: ___________________ , 19____
_________________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor institution (a bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of any such Person.
Dated: _______________, 19____
_______________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor institution (a bank,
stockbroker, savings and loan association or credit union with membership in an
approved signature guarantee medallion program) pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
NOTICE
------
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT C
---------
STOCKHOLDER RIGHTS PLAN
INTERNATIONAL NETWORK SERVICES
Summary of Rights
-----------------
<TABLE>
<S> <C>
Distribution and The Board of Directors has declared a dividend of one Right for
- ---------------- each share of International Network Services Common Stock
Transfer of Rights; outstanding. Prior to the Distribution Date referred to below, the
- ------------------- Rights will be evidenced by and trade with the certificates for the
Rights Certificate: Common Stock. After the Distribution Date, International Network
- ------------------ Services (the "Company") will mail Rights certificates to the
Company's stockholders and the Rights will become transferable
apart from the Common Stock.
Distribution Date: Rights will separate from the Common Stock and become exercisable
- ----------------- following (a) the tenth day (or such later date as may be
determined by the Company's Board of Directors) after a person or
group acquires beneficial ownership of 15% or more of the Company's
Common Stock or (b) the tenth business day (or such later date as
may be determined by the Company's Board of Directors) after a
person or group announces a tender or exchange offer, the
consummation of which would result in ownership by a person or
group of 15% or more of the Company's Common Stock.
Notwithstanding the foregoing, the rights will not separate from
the Common Stock and become exercisable solely as a result of the
consummation of the transactions contemplated by the Agreement and
Plan of Merger among the Company, Lucent Technologies Inc. and
Intrepid Merger Inc. dated as of August 9, 1999 (the "Merger
Agreement"), the Stockholder Agreement or the Option Agreement, each
as defined in the Merger Agreement or as a result of the execution
and delivery of any of the foregoing agreements.
Preferred Stock After the Distribution Date, each Right will entitle the holder to
- --------------- purchase for $300.00 (the "Exercise Price"), a fraction of a share
Purchasable Upon of the Company's Preferred Stock with economic terms similar to
- ---------------- that of one share of the Company's Common Stock.
Exercise of Rights:
- ------------------
Flip-In: If an acquiror (an "Acquiring Person") obtains 15% or more of the
- ------- Company's Common Stock then each Right (other than Rights owned by
an Acquiring Person or its affiliates) will entitle the holder
thereof to purchase, for the Exercise Price, a number of shares of
the Company's Common Stock having a then current market value of
</TABLE>
<PAGE>
<TABLE>
<S> <C>
twice the Exercise Price. Neither Lucent Technologies Inc. nor any
of its Affiliates shall be deemed to be an Acquiring Person for any
purpose hereunder as a result of the execution and delivery of the
Merger Agreement, the Stockholder Agreement or the Option
Agreement, or the consummation of any of the transactions
contemplated thereunder.
Flip-Over: If, after an Acquiring Person obtains 15% or more of the Company's
- --------- Common Stock, (a) the Company merges into another entity, (b) an
acquiring entity merges into the Company or (c) the Company sells
more than 50% of the Company's assets or earning power, then each
----
Right (other than Rights owned by an Acquiring Person or its
affiliates) will entitle the holder thereof to purchase, for the
Exercise Price, a number of shares of Common Stock of the person
engaging in the transaction having a then current market value of
twice the Exercise Price.
Exchange Provision: At any time after the date an Acquiring Person obtains 15% or more
- ------------------- of the Company's Common Stock and prior to the acquisition by the
Acquiring Person of 50% of the outstanding Common Stock, the
Company's Board of Directors may exchange the Rights (other than
Rights owned by the Acquiring Person or its affiliates), in whole
or in part, for shares of Common Stock of the Company at an
exchange ratio of one share of Common Stock per Right (subject to
adjustment).
Redemption of Rights will be redeemable at the Company's option for $0.01 per
- ------------- Right at any time on or prior to the tenth day (or such later date
the Rights: as may be determined by the Company's Board of Directors) public
- ---------- announcement that a Person has acquired beneficial ownership of 15%
or more of the Company's Common Stock (other than actions taken by
Lucent Technologies Inc. or any of its Affiliates pursuant to the
Merger Agreement, Stockholder Agreement or the Option Agreement)
(the "Shares Acquisition Date").
Expiration of The Rights expire on the earliest of (a) August 26, 2009, (b)
- ------------- exchange or redemption of the Rights as described above or (c) the
the Rights: effectiveness of the merger contemplated by the Merger Agreement.
- ----------
Amendment of The terms of the Rights and the Rights Agreement may be amended in
- ------------ any respect without the consent of the Rights holders on or prior
Terms of Rights: to the Distribution Date; thereafter, the terms of the Rights and
- --------------- the Rights Agreement may be amended without the consent of the
Rights holders in order to cure any ambiguities or to make changes
</TABLE>
<PAGE>
<TABLE>
<S> <C>
which do not adversely affect the interests of the Rights Agent or
the Rights holders (other than the Acquiring Person). Notwithstanding
the foregoing, the terms of the Rights and the Rights Agreement may not
be amended without the prior written consent of Lucent Technologies Inc.
to provide (i) that the Rights Agreement is applicable to the transactions
contemplated by the Merger Agreement, the Option Agreement or the
Stockholder Agreement, (ii) that Lucent Technologies Inc. or any of its
affiliates is included within the definition of "Acquiring Person", (iii)
that a "Distribution Date" or a "Triggering Event" shall occur solely by
reason of the execution of the Merger Agreement, the Option Agreement or
the Stockholder Agreement or the consummation of the transactions contemplated
thereunder, or (iv) that the Acquiring Person threshold is other than 15%.
Voting Rights: Rights will not have any voting rights.
- -------------
Anti-Dilution Rights will have the benefit of certain customary anti-dilution
- ------------- provisions.
Provisions:
- ----------
Taxes: The Rights distribution should not be taxable for federal income
- ----- tax purposes. However, following an event which renders the Rights
exercisable or upon redemption of the Rights, stockholders may
recognize taxable income.
</TABLE>
The foregoing is a summary of certain principal terms of the Stockholder Rights
Plan only and is qualified in its entirety by reference to the detailed terms of
the Rights Agreement dated as of August 26, 1999, between the Company and the
Rights Agent.
THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT BETWEEN THE COMPANY AND THE
RIGHTS AGENT DATED AS OF August 26, 1999.
<PAGE>
EXHIBIT 10.8
INTERNATIONAL NETWORK SERVICES
1998 NONSTATUTORY STOCK OPTION PLAN
(Amended and Restated July 23, 1999)
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.
--------
<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;
(ii) 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 12,550,000 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 the
number of issued shares of Common Stock
-7-
<PAGE>
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.
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.
-9-
<PAGE>
INTERNATIONAL NETWORK SERVICES
1998 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number __________________________
Date of Grant __________________________
Vesting Commencement Date __________________________
Exercise Price per Share $_________________________
Total Number of Shares Granted __________________________
Total Exercise Price $_________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: __________________________
Vesting Schedule:
----------------
Subject to the Optionee continuing to be a Service Provider on such dates,
this Option shall vest and become exercisable in accordance with the following
schedule:
[25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48th of the Shares subject to the Option shall
vest upon the last day of each month thereafter.]
<PAGE>
Termination Period:
------------------
This Option may be exercised for _____ [days/months] after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants to
---------------
the Optionee named in the Notice of Grant attached as Part I of this Agreement
(the "Optionee") an option (the "Option") to purchase the number of Shares, as
set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price"), subject to the terms and conditions
of the Plan, which is incorporated herein by reference. Subject to Section
14(b) of the Plan, in the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Secretary of the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
-----------------
any of the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
-2-
<PAGE>
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to this
----------------
Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
---------------------
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for at
---------------------
least one year, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES
-3-
<PAGE>
AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD,
FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT
ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE INTERNATIONAL NETWORK SERVICES
_____________________________________ _____________________________________
Signature By
_____________________________________ _____________________________________
Print Name Title
____________________________________
Residence Address
____________________________________
-4-
<PAGE>
EXHIBIT A
---------
INTERNATIONAL NETWORK SERVICES
1998 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
International Network Services
1213 Innsbruck Drive
Sunnyvale, CA 94089
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, 199__, the
------------------
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of International Network Services (the "Company")
under and pursuant to the 1998 Nonstatutory Stock Option Plan (the "Plan") and
the Stock Option Agreement dated _____________, 19___ (the "Option Agreement").
The purchase price for the Shares shall be $_____________, as required by the
Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser has
----------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement
<PAGE>
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Purchaser with
respect to the subject matter hereof, and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER INTERNATIONAL NETWORK SERVICES
_____________________________________ _____________________________________
Signature By
_____________________________________ _____________________________________
Print Name Title
_____________________________________
Date Received
Address:____________________________ Address: 1213 Innsbruck Drive
- ------- ------- Sunnyvale, CA 94089
____________________________
_____________________________
-2-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-21075, 333-68121 and 333-70445) and Form S-3
(No. 333-69151) of International Network Services of our report dated July 23,
1999 (except Note 10 which is dated as of August 9, 1999) relating to the
consolidated financial statements and financial statement schedule, which
appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers
San Jose, California
August 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> JUL-01-1998 APR-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 24,818 0
<SECURITIES> 28,297 0
<RECEIVABLES> 82,607 0
<ALLOWANCES> (4,645) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 144,765 0
<PP&E> 38,535 0
<DEPRECIATION> (17,046) 0
<TOTAL-ASSETS> 223,236 0
<CURRENT-LIABILITIES> 59,883 0
<BONDS> 0 0
0 0
0 0
<COMMON> 120,280 0
<OTHER-SE> 43,073 0
<TOTAL-LIABILITY-AND-EQUITY> 223,236 0
<SALES> 0 0
<TOTAL-REVENUES> 315,089 94,143
<CGS> 0 0
<TOTAL-COSTS> 271,701 78,398
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 46,490 16,660
<INCOME-TAX> 21,037 6,668
<INCOME-CONTINUING> 25,453 9,992
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 25,453 9,992
<EPS-BASIC> 0.47 0.18
<EPS-DILUTED> 0.41 0.16
</TABLE>
