<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 1999
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MCK COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3661 06-1555163
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
313 WASHINGTON STREET
NEWTON, MASSACHUSETTS 02458
(617) 454-6100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
STEVEN J. BENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MCK COMMUNICATIONS, INC.
313 WASHINGTON STREET
NEWTON, MASSACHUSETTS 02458
(617) 454-6100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. EGAN III, P.C. MICHAEL A. CONZA, ESQ.
JOHN B. STEELE, ESQ. TESTA, HURWITZ & THIBEAULT LLP
MCDERMOTT, WILL & EMERY 125 HIGH STREET
28 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109-1775 (617) 248-7000
(617) 535-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
- ------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value per share..................... $61,920,600 $17,214
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 24, 1999
[LOGO]
SHARES
COMMON STOCK
MCK Communications, Inc. is offering shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We have applied to have the common stock approved for quotation on
the Nasdaq National Market under the symbol "MCKC." The estimated initial public
offering price will be between $ and $ per share.
------------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to MCK............................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MCK and certain of our stockholders have granted the underwriters a 30-day
option to purchase up to additional shares of common stock to cover
over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 1999.
------------------------------
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST
The date of this prospectus is , 1999
<PAGE> 3
[MCK LOGO]
A leading supplier of remote voice access products that extend the full range of
features and applications of PBX systems to branch offices and telecommuters
over data networks.
CPE DEVICES
SINGLE-USER EXTENDERS provide corporate PBX connectivity
over data networks to telecommuters and remote call center
agents. Single-user models include:
[picture of a MCK product (a small black box) and a telephone]
- EXTender 1000+. An integrated access device that supports both PBX voice
and PC data connectivity over a single traditional telephone line.
- EXTender 3000 Series. Integrated access devices that support both PBX
voice and PC data over an ISDN line. The EXTender 3000 is available in
three data network configurations.
- EXTender 3200 for IDSL. An integrated access device, currently in beta
testing, that delivers voice and PC data over an IDSL network.
- IP EXTender 4000. This unit, currently in beta testing, delivers PBX
voice over IP networks. The product requires an external network
termination device such as a router, DSL modem or cable modem.
MULTI-USER EXTENDERS are CPE devices that deliver PBX functionality to a single
branch location.
- Branch Office EXTender 6000. Each unit works with a
customer's existing data networking equipment to
provide simultaneous voice connectivity to the
corporate PBX for up to 8 employees located in a
branch office. A 4-port daughter card, scheduled for
release, will enable this product to support 12
simultaneous users. [picture of a MCK product (a small black box)]
CORPORATE PBX GATEWAY PRODUCTS
PBX GATEWAYS, located at the corporate PBX site, interface
with the line side of the PBX and create seamless
extensions of voice, PBX signaling information and PBX
applications to our remote CPE products. These products
include:
- PBXtender. This unit is a high density PBX gateway
product that can support up to 24-ports per chassis.
This product supports the EXTender 1000+ and the
EXTender 3000 series. [picture of MCK product (a small black box)]
- Branch Office EXTender 6000. This unit, located at the corporate PBX
site, seamlessly extends the functionality of the corporate PBX to a
Branch Office EXTender 6000 located in a remote office.
- PBXgateway IP. This unit, currently in beta testing, seamlessly extends
the functionality of the corporate PBX to a variety of our IP CPE
devices, including the Branch Office EXTender 6000, EXTender 3200 for
ISDL and the IP EXTender 4000. The PBXgateway IP can support up to 12
simultaneous users across any of these CPE devices over multiple types of
networks, including DSL and IP networks.
<PAGE> 4
Edgar description for Interior Fold-out Page:
(MCK LOGO)
CAPTION: EXTENDING THE CORPORATE PBX TO REMOTE LOCATIONS OVER MANY NETWORKS
Selected Examples
The page is divided into three sections, labeled "Corporate location" on
the left, "Multi-user locations" in the center and "Single-user locations" on
the right. The diagram shows a large corporate office with a PBX connected to a
PBXgateway IP and PBXtender. The PBXgateway IP connects to a network termination
devices which connects directly, or through the Internet, to public and private
networks. The PBXtender and a non-MCK data server independently connect to
public and private networks. At the multi-user location, the diagram shows a
network termination device that connects to public and private networks,
specifically ATM, DDS, DSL, Frame and T-1. A Branch Office EXTender 6000
connects to a network termination device and multiple telephone sets connect to
the Branch Office EXTender 6000. In another multi-user location, a network
termination device connects to public and private networks over a fiber network
connection. Two Branch Office EXTender 6000s and an IP EXTender 4000 connect to
this network termination device to show a campus LAN. Multiple telephone sets
connect to the Branch Office EXTender 6000s and one telephone set connects to
the EXTender 4000. At the single-user location, the diagram shows three
single-user locations: (i) a telephone set and a personal computer connected to
an EXTender 1000+; (ii) a telephone set and personal computer connected to an
EXTender 3000, and (iii) a telephone set and personal computer connected to an
EXTender 4000 which is connected to a network termination device; each connected
to public and private networks over a traditional telephone network, ISDN and
cable or DSL networks, respectively.
<PAGE> 5
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Note on Forward Looking Statements.......................... 13
Use of Proceeds............................................. 13
The Company................................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Consolidated Financial Data........................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 26
Management.................................................. 43
Certain Transactions........................................ 50
Principal Stockholders...................................... 52
Description of Capital Stock................................ 53
Shares Eligible for Future Sale............................. 56
Underwriting................................................ 58
Legal Matters............................................... 59
Experts..................................................... 59
Where You Can Find More Information......................... 60
Index to Consolidated Financial Statements.................. F-1
</TABLE>
----------------------------
We own or have rights to trademarks that we use in conjunction with the
sale of our products. EXTender, MCK, MCK EXTender, PBXtender, PBXgateway, RVP
and Telebridge are our trademarks. All other trade names and trademarks used in
this prospectus are the property of their respective owners.
i
<PAGE> 6
(This page intentionally left blank)
<PAGE> 7
PROSPECTUS SUMMARY
This is only a summary and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and our financial
statements and the notes thereto included elsewhere in this prospectus. Unless
otherwise indicated, this prospectus assumes that the underwriters have not
exercised their option to purchase additional shares and that all shares of
convertible preferred stock have been automatically converted into shares of
common stock, and all common stock share information has been adjusted to
reflect a for-one stock split of the common stock effected as a dividend on
, 1999 and the filing of our amended and restated certificate of
incorporation.
MCK COMMUNICATIONS, INC.
MCK Communications is a leading provider of remote voice access products
that enable corporations to seamlessly extend the features and applications of
private branch exchanges, or PBXs, from the corporate office to remote branch
offices and telecommuters over wide area networks, or WANs. Our EXTender
products cost-effectively deliver a unified, enterprise-wide voice network by
enabling the PBX to function as a corporate voice server that transmits
packetized voice and PBX signaling information to remote locations over
corporations' existing data networks. In addition, our products reduce the total
cost of ownership by leveraging corporations' current investment in voice and
data equipment, and streamline network administration through the utilization of
industry standard network management techniques.
Large corporations are increasingly shifting towards a decentralized
business model of distributed work forces with multiple branch offices and
numerous telecommuters in order to realize the competitive advantages of being
located near key customers, suppliers and partners and to attract qualified
employees. We believe Fortune 5000 businesses maintain approximately 1.6 million
branch offices. According to the Gartner Group, the number of telecommuters
worldwide is expected to grow from 35 million in 1998 to 140 million in 2003.
As corporations decentralize, they seek to extend their voice and data
networks across multiple locations due to their dependence upon company-wide
communications to facilitate internal collaboration, provide superior customer
service and maintain efficiency and productivity. Advances in data networking
technologies have enabled cost-effective, high-speed remote data access and
communications over local and wide area networks, including virtual private
networks, through the deployment of interoperable equipment from multiple
vendors. In contrast, PBX-based voice networks, which are known for their
reliability and functionality in centralized environments, have not been
efficiently extended from corporate locations to branch offices and
telecommuters due to technical signaling limitations and cost constraints. As a
result, corporations have had to deploy separate voice networks for each remote
location, limiting the effectiveness of corporate communications and increasing
the burden on systems administrators.
Furthermore, in order to lower costs and simplify network administration,
corporations are increasingly demanding that distributed voice and data services
be offered over one centrally-managed corporate communications infrastructure.
This convergence of voice and data is made possible by the packetization of
voice and advances in Quality of Service which enable the transmission of voice
over private managed data networks and public data networks such as the
Internet. Thus, solutions for the remote voice marketplace must offer a
centrally-managed interface to corporate PBX systems and have the capability of
packetizing and transmitting PBX voice over both traditional circuit-based data
networks and emerging packet networks.
Our remote voice access solutions enable corporations to realize the
following key benefits:
- Full-Featured Remote Voice Access. Our solutions seamlessly provide PBX
features and applications to branch office employees and telecommuters
over existing data networks.
- Digital Line Extension Technology. Our solutions utilize our proprietary
hardware and software interfaces to extract voice and PBX signaling
information from PBX digital line cards, where the rich features and
applications of PBXs reside, for transmission across WANs.
1
<PAGE> 8
- Packet Voice Architecture. Utilizing our proprietary Remote Voice
Protocol, or RVP, software platform, we packetize voice and PBX signaling
information extracted from PBX digital line cards for transmission over
data networks to remote locations.
- Lower Cost Solution. Our solutions enable corporations to lower costs,
including network transmission, network management, equipment and
infrastructure costs.
- Compatibility with Leading PBX Manufacturers. Our solutions are
compatible with the proprietary PBX protocols of Alcatel, Lucent, NEC and
Nortel Networks, whose products collectively have a market share of
approximately 65% in the U.S. PBX market.
Our objective is to become the leading provider of remote voice access
solutions to Fortune 5000 businesses for their branch offices and telecommuters.
Key components of our strategy include:
- maintaining our technology leadership in the remote voice access
marketplace;
- establishing our Gateway products as platforms for new voice
applications;
- expanding our distribution, marketing and technology relationships;
- working with broadband equipment vendors and next generation service
providers; and
- targeting Fortune 5000 corporations.
We primarily sell our products through an indirect distribution system
including the following channels: original equipment manufacturers and private
label partners, incumbent local exchange carriers, systems integrators and
distributors, telecom and datacom value-added resellers and broadband service
providers. We support our sales channels with our own internal sales
professionals as well as marketing programs, educational programs, and field and
telephone technical support.
Our principal executive offices are at 313 Washington Street, Newton,
Massachusetts 02458 and our telephone number at that address is (617) 454-6100.
Information contained on our web site at www.mck.com does not constitute part of
this prospectus.
THE OFFERING
Common stock offered by MCK............. shares
Common stock to be outstanding after the
offering................................ shares(1)
Use of proceeds......................... We expect to use the net proceeds
to redeem our outstanding
redeemable preferred stock, to
repay our subordinated
indebtedness, and for working
capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.................................. MCKC
- ---------------
(1) Based on the number of shares outstanding as of September 30, 1999.
Excludes:
- shares issuable upon exercise of outstanding options at a weighted
average exercise price of $ per share; and
- additional shares of common stock reserved for future issuance under
our 1999 Stock Option and Grant Plan. See "Management -- Executive
Compensation," "-- 1996 Stock Option Plan" and "-- 1999 Stock Option and
Grant Plan."
2
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The as adjusted consolidated balance sheet data summarized below reflects
the conversion of our convertible preferred stock into shares of
common stock upon the completion of this offering and the application of the net
proceeds from the sale of shares of common stock issued hereby at
an assumed offering price of $ per share after deducting the underwriting
discounts and commissions and our estimated offering expenses. The number of
shares used to compute basic and diluted earnings per share gives effect to the
for stock split of our common stock effected on
, 1999, and such information for the years ended April 30, 1995
and 1996 gives effect to the recapitalization that occurred during the year
ended April 30, 1997 as if it had occurred at the beginning of each fiscal year.
See Note 11 of Notes to Consolidated Financial Statements for an explanation of
the number of shares used in computing per share data.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED APRIL 30, JULY 31,
----------------------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 1,810 $ 5,339 $ 5,921 $ 7,876 $14,270 $3,116 $4,523
Cost of goods sold.................... 796 2,423 2,313 2,800 5,390 1,188 1,690
------- ------- ------- ------- ------- ------ ------
Gross profit.......................... 1,014 2,916 3,608 5,076 8,880 1,928 2,832
Operating expenses:
Research and development............ 266 344 815 1,758 3,349 751 964
Sales and marketing................. -- 576 1,145 2,191 3,889 779 1,347
General and administrative.......... 626 319 607 1,485 1,617 391 494
Transaction-related charges......... -- -- 493 -- -- -- --
------- ------- ------- ------- ------- ------ ------
Total operating expenses........ 892 1,239 3,060 5,434 8,854 1,922 2,805
------- ------- ------- ------- ------- ------ ------
Income (loss) from operations......... 122 1,677 547 (358) 26 6 28
Other income (expense)................ 12 7 (343) (595) (207) (129) (95)
------- ------- ------- ------- ------- ------ ------
Income (loss) before provision for
income taxes........................ 134 1,684 205 (953) (181) (123) (68)
Provision for income taxes............ 13 652 302 -- -- -- --
------- ------- ------- ------- ------- ------ ------
Net income (loss)..................... $ 121 $ 1,032 $ (97) $ (953) $ (181) $ (123) $ (68)
======= ======= ======= ======= ======= ====== ======
Dividends on preferred stock.......... -- -- 1,144 1,380 2,163 443 601
------- ------- ------- ------- ------- ------ ------
Net income (loss) applicable to common
shares.............................. $ 121 $ 1,032 $(1,241) $(2,333) $(2,344) $ (566) $ (669)
======= ======= ======= ======= ======= ====== ======
Basic and diluted net income (loss)
per common share....................
Shares used in computing basic and
diluted net income (loss) per common
share...............................
Pro forma basic and diluted net income
(loss) per share....................
Shares used in computing pro forma
basic and diluted net income (loss)
per share...........................
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents........................................ $ 3,596
Working capital............................................. 5,621
Total assets................................................ 9,813
Long-term debt.............................................. 2,654
Redeemable preferred stock.................................. 24,003
Redeemable convertible preferred stock...................... 4,799
Total common stockholders' deficit.......................... (24,750)
</TABLE>
3
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
WE DERIVE ALMOST ALL OF OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS AND OUR
REVENUES MAY DECLINE SIGNIFICANTLY IF ANY MAJOR CUSTOMER CANCELS OR DELAYS A
PURCHASE OF OUR PRODUCTS
We have historically derived the majority of our revenues from a small
number of customers, most of whom resell our products to end users. Our business
would be seriously harmed if we do not generate as much revenue as expected from
these customers or if any of these customers cease purchasing our products,
particularly Lucent. For the fiscal year April 30, 1999, Lucent accounted for
46.7% of our revenues, and our ten largest customers, including Lucent,
accounted for 78.7% of our revenues. None of these large customers is obligated
to purchase additional products or services. Accordingly, we cannot be certain
that present or future customers will not terminate their purchasing
arrangements with us or significantly reduce or delay their orders. Any
termination, change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and size of future purchases by our largest
customers and, in particular:
- the product requirements of these customers;
- the financial and operational success of these customers; and
- the success of the underlying products and services that our products
support.
The loss of any one of our major customers or the delay of significant
orders from such customers, even if only temporary, could reduce or delay our
recognition of revenues, harm our reputation in the industry and reduce our
ability to accurately predict cash flow, and, as a consequence, could materially
adversely affect our business, financial condition and results of operations.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN RELATIONSHIPS WITH KEY PBX VENDORS
Our success will depend to a significant degree upon our relationships with
leading PBX vendors, including those with Alcatel, Lucent, NEC and Nortel
Networks. The PBX systems sold by these vendors account for approximately 65% of
the U.S. market for corporate PBX sales, and approximately 99% of our revenues
for fiscal year 1999 were attributable to products which interoperate with PBX
systems offered by these vendors. We may not have access in the future to the
proprietary protocols for the major PBX systems marketed by those vendors, which
access may be essential to ensure the continued interoperability of our
products. Moreover, there is no assurance that we will be able to develop
products that interoperate with PBX systems offered by other vendors.
Additionally, the standards for IP telephony equipment and data networks are
evolving and there is no assurance that our products will be compatible with any
new technology standards that may emerge. If we are unable to provide our
customers with interoperable solutions, they may make purchases from vendors who
provide the requisite product interoperability. This could seriously harm our
business, financial condition and results of operations.
In addition, we currently have varying distribution, marketing and
development arrangements with the PBX vendors noted above. These relationships
are not exclusive and there is no assurance that we will continue to enjoy the
support and cooperation that we have historically experienced from these parties
or
4
<PAGE> 11
their distribution channels. Moreover, it is possible that the PBX vendors may
seek to offer broader product lines and solutions that are competitive with our
products.
UNLESS WE ARE ABLE TO KEEP PACE WITH THE RAPIDLY CHANGING PRODUCT REQUIREMENTS
OF OUR CUSTOMERS, WE WILL NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
The telecommunications market is characterized by rapid technological
advances, evolving industry standards, changes in end-user requirements,
frequent new product introductions and evolving offerings by telecommunications
service providers. We believe our future success will largely depend on our
ability to anticipate or adapt to such changes and to offer, on a timely basis,
products that meet customer demands. Our failure to produce technologically
competitive products in a cost-effective manner or on a timely basis would
seriously harm our business, financial condition and results of operations.
INTENSE COMPETITION IN THE MARKET FOR REMOTE VOICE SOLUTIONS COULD PREVENT US
FROM INCREASING OR SUSTAINING REVENUE AND PREVENT US FROM ACHIEVING OR
SUSTAINING PROFITABILITY
The market for remote voice solutions is highly competitive. If we are
unable to compete effectively in this market, our revenues and future
profitability would be materially adversely affected. Many of our current and
potential competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources, more established distribution
channels and stronger relationships with service providers. For instance, in
June 1999 Nortel Networks announced its intention to develop new products which
will compete directly with our products. Moreover, our competitors may foresee
the course of market developments more accurately than we do and could in the
future develop new technologies that compete with our products or even render
our products obsolete. Realizing and maintaining technological advantages over
our competitors will require a continued high level of investment in research
and development, sales and marketing and customer support. Due to the
opportunities in and the rapidly evolving nature of the market in which we
compete, additional competitors with significant market presence and financial
resources, including large communications equipment manufacturers, may enter our
market, thereby further intensifying competition. We may not have sufficient
resources to continue to make the investments or achieve the technological
advances necessary to compete successfully with existing competitors or new
competitors.
Increased competition is likely to result in price reductions, reduced
gross margins, longer sales cycles and loss of market share, any of which would
seriously harm our business and results of operations. We cannot be certain that
we will be able to compete successfully against current or future competitors or
that competitive pressures will not seriously harm our business.
FUTURE CONSOLIDATION IN THE COMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE
COMPETITION THAT COULD HARM OUR BUSINESS
The markets in which we compete are characterized by increasing
consolidation both within the communications sector and by companies combining
or acquiring communications assets, as exemplified by the acquisitions of Ascend
by Lucent and Diamond Lane by Nokia. We may not be able to compete successfully
in an increasingly consolidated industry. Increased competition and
consolidation in our industry could require that we reduce the prices of our
products and may result in our loss of market share, which would materially
adversely affect our business, financial condition and results of operations.
Additionally, because we are now, and may in the future be, dependent on certain
strategic relationships with third parties in our industry, any consolidation
involving these parties could reduce the demand for our products and otherwise
harm our business prospects.
FLUCTUATIONS IN OUR QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO FALL
Our quarterly operating results have varied in the past and are likely to
vary in the future. It is possible that our revenues and operating results may
be below the expectations of securities analysts and investors in future
quarters. If we fail to meet or surpass the expectations of securities analysts
or investors,
5
<PAGE> 12
the market price of our common stock will most likely fall. Fluctuations in our
quarterly results could be caused by a number of factors, including, but not
limited to:
- the timing and amount of, or cancellation or rescheduling of, orders for
our products, particularly large orders from our key customers;
- our ability to develop, introduce, ship and support new products and
product enhancements, and manage product transitions;
- new product introductions and announcements, and reductions in the prices
of products offered by our competitors;
- our ability to sustain our technology relationships, particularly with
the major PBX manufacturers and service providers;
- availability and changes in the prices of components provided by third
parties;
- our ability to attain and maintain production volumes and quality levels
for our products;
- the mix of products sold and the mix of distribution channels through
which they are sold;
- fluctuations in demand for our products;
- costs relating to possible acquisitions and integration of technologies
or businesses;
- telecommunications market conditions and economic conditions generally;
- our ability to hire, train, integrate and retain new personnel; and
- changes in the level of our operating expenses.
Given that any one or more of these or other factors could have an adverse
effect on our business, the prediction of future quarterly results is difficult
and uncertain. In addition, some of our operating expenses are relatively fixed
in advance of any particular quarter. As a result, we may not be able to reduce
our operating costs in response to unanticipated reductions in our revenues or
the demand for our products.
OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS AND SUPPLIERS COULD RESULT IN
PRODUCT DELIVERY DELAYS
We currently use two independent manufacturers, Celestica and Electronic
Manufacturing Group, to manufacture all of our products. We are also
contemplating using an additional manufacturer to manufacture our multi-user
products. Our reliance on independent manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products and components in required volumes, we will have to
identify acceptable alternative manufacturers, which could take in excess of six
months. Furthermore, the use of a new manufacturer may cause significant
interruptions in supply if the new manufacturer has difficulty manufacturing
products to our specifications. Further, the introduction of a new manufacturer
may increase the variance in the quality of our products. In addition, we rely
upon third-party suppliers of specialty components and intellectual property
used in our products. It is possible that a component needed to complete the
manufacture of our products may not be available to us at acceptable prices or
on a timely basis, if at all. Inadequate supplies of components, or the loss of
intellectual property rights, could affect our ability to deliver products to
our customers. Any significant interruption in the supply of our products would
result in the reduction of product sales to customers, which in turn could have
a material adverse effect on our business, financial condition and results of
operations.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
PROVIDE ADEQUATE CUSTOMER SUPPORT
Our ability to continue to grow and to retain current and future customers
depends in part upon the quality of our customer support operations. We have
recently entered into an arrangement with a third-
6
<PAGE> 13
party customer support firm to provide some of our customer support functions.
Failure to offer adequate customer support, either directly or through third
parties, or failure to properly integrate third-party services into our customer
support framework could materially and adversely affect our reputation and cause
demand for our products to decline.
WE ARE DEPENDENT ON MARKET ACCEPTANCE OF OUR PRODUCTS
Market acceptance of our products is critical to our future success.
Factors that may affect the market acceptance of our products include:
- continued market acceptance of PBX technology;
- the performance, price and total cost of ownership of our products;
- the availability and price of competing products and technologies; and
- the efforts and success of our indirect distribution channels.
Many of these factors are beyond our control. We may experience failure or
delays in market acceptance of our products. Failure of our existing or future
products to maintain and achieve meaningful levels of market acceptance would
materially adversely affect our business, financial condition and results of
operations.
BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE DERIVED FROM SALES OF A SMALL
NUMBER OF PRODUCTS, OUR FUTURE OPERATING RESULTS WILL BE DEPENDENT ON SALES OF
THESE PRODUCTS
We currently derive substantially all of our revenues from our product
family of remote voice access equipment, and we expect that this concentration
will continue in the foreseeable future. The market may not continue to demand
our products, and we may not be successful in marketing any new or enhanced
products. Any reduction in the demand for our products or our failure to
successfully develop or market new or enhanced products could materially
adversely affect our operating results and cause the price of our common stock
to decline. In addition, our branch office products have only recently been
introduced to the market, and we are expecting that these products will account
for a substantial portion of our revenues for the foreseeable future. Factors
that could affect sales of our products include:
- the demand for remote access voice solutions;
- the successful development, introduction and market acceptance of new and
enhanced products that address customer requirements;
- product introductions or announcements by our competitors;
- price competition in our industry; and
- technological change.
IF WE FAIL TO DEVELOP AND EXPAND OUR INDIRECT DISTRIBUTION CHANNELS, OUR
BUSINESS COULD SUFFER
Our product distribution strategy focuses primarily on continuing to
develop and expand our indirect distribution channels, maintain our
relationships with large PBX vendors and telecommunications service providers,
and expand our field sales organization. If we fail to develop and cultivate
relationships with significant indirect distribution channels, or if these
distribution channels are not successful in their sales efforts, our product
sales may decrease and our operating results may suffer. Many of our indirect
distribution channels also sell products that compete with our products, and
none of our strategic or reseller arrangements are exclusive. In addition, our
operating results will likely fluctuate significantly depending on the timing
and amount of orders from our indirect distribution channels. We cannot assure
you that our indirect distribution channels will market our products effectively
or continue to devote the resources necessary to provide us with effective
sales, marketing and technical support.
7
<PAGE> 14
In order to support and develop leads for our indirect distribution
channels, we plan to significantly expand our field sales staff. We cannot
assure you that this internal expansion will be successfully completed, that the
cost of this expansion will not exceed the revenues generated or that our
expanded sales and support staff will be able to compete successfully against
the significantly more extensive and well-funded sales and marketing operations
of many of our current or potential competitors. Our inability to effectively
develop and expand our distribution channels or manage the expansion of our
sales and support staff would adversely affect our ability to grow and increase
revenues.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
There has previously not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. The trading price of our
common stock could be subject to wide fluctuations in response to factors such
as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- general technology or economic trends;
- revenues and operating results failing to meet or surpass the
expectations of securities analysts or investors in any quarter;
- changes in general market conditions;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
- additions or departures of key personnel;
- the demand for our common stock;
- the number of market makers for our common stock;
- sales of a large number of shares of our common stock in the public
market after this offering or the perception that such sales could occur;
and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market
and technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices are
substantially above historical levels. These trading prices may not be
sustained. These broad market and industry factors may materially adversely
affect the market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would materially adversely affect our business, financial condition and
results of operations.
SALES TO CUSTOMERS BASED OUTSIDE THE UNITED STATES HAVE HISTORICALLY ACCOUNTED
FOR A SIGNIFICANT PORTION OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN
INTERNATIONAL OPERATIONS
International sales represented 18.3% of our revenues for the fiscal year
ended April 30, 1999, and 13.5% of our revenues for the fiscal quarter ended
July 31, 1999. We expect sales to international markets
8
<PAGE> 15
to increase as a percentage of revenues in the future. International sales are
subject to a number of risks, including:
- changes in foreign government regulations and communications standards;
- export license requirements;
- currency fluctuations, tariffs and taxes;
- other trade barriers;
- difficulty in collecting accounts receivable;
- difficulty in managing foreign operations; and
- political and economic instability.
If the relative value of the U.S. dollar in comparison to the currency of
our foreign customers should increase, the resulting effective price increase of
our products to these foreign customers could result in decreased sales. In
addition, to the extent that our customers may be impacted by general economic
downturns, the ability of these customers to purchase our products could be
adversely affected. Payment cycles for international customers are typically
longer than those for customers in the United States. We cannot assure you that
foreign markets for our products will not develop more slowly than currently
anticipated.
We anticipate that our non-Canadian, foreign sales will generally be
invoiced in U.S. dollars, and we do not currently plan to engage in foreign
currency hedging transactions. As we expand our international operations,
however, we may allow payment in foreign currencies, and exposure to losses in
foreign currency transactions may increase. We may choose to limit any currency
exposure through the purchase of forward foreign exchange contracts or other
hedging strategies. We cannot assure you that any currency hedging strategy we
may adopt would be successful in avoiding exchange related losses.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR ABILITY TO COMPETE
Our success and ability to compete is dependent in part upon our
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
We rely on a combination of copyright, trademark, trade secret and other
intellectual property laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
no patents. Despite our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Attempts may be
made to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
protect our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our products is difficult. Some of
our contractual arrangements provide third parties with access to our source
code and other intellectual property upon the occurrence of specified events.
Such access could enable these third parties to use our intellectual property
and source code to develop and manufacture competing products, which would
adversely affect our performance and ability to compete. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our future
operating results.
CLAIMS ALLEGING INFRINGEMENT OF A THIRD PARTY'S INTELLECTUAL PROPERTY COULD
RESULT IN SIGNIFICANT EXPENSE TO US AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert
9
<PAGE> 16
patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business, and this risk may increase as
the number of entrants in our market increases and the functionality of our
products is enhanced and overlaps with the products of other companies. Any
claims against us or any purchaser or user of our products asserting that our
products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could have a material adverse effect on our
business, financial condition or results of operations. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment
delays, disrupt our relationships with our customers or require us to enter into
royalty or licensing agreements, any of which could have a material adverse
effect upon our operating results. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. Legal
action claiming patent infringement may be commenced against us. We cannot
assure you that we would prevail in such litigation given the complex technical
issues and inherent uncertainties in patent litigation. In the event a claim
against us is successful and we cannot obtain a license to the relevant
technology on acceptable terms, license a substitute technology or redesign our
products to avoid infringement, our business, financial condition and results of
operations would be materially adversely affected.
IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
Our products have in the past contained, and may in the future contain,
undetected or unresolved errors when first introduced or as new versions are
released. Despite extensive testing, errors, defects or failures may be found in
our current or future products or enhancements after commencement of commercial
shipments. If this happens, we may experience delay in or loss of market
acceptance and sales, product returns, diversion of development resources,
injury to our reputation or increased service and warranty costs, any of which
could have a material adverse effect on our business, financial condition and
results of operations. For example, a defect in our EXTender 3000E product
caused us to cease shipments of that product for a period of time to enable us
to correct the defect. Moreover, because our products are designed to provide
critical communications services, we may receive significant liability claims.
Our agreements with customers typically contain provisions intended to limit our
exposure to liability claims. These limitations may not, however, preclude all
potential claims resulting from a defect in one of our products. Although we
maintain product liability insurance covering certain damages arising from the
implementation and use of our products, our insurance may not cover any claims
sought against us. Liability claims could require us to spend significant time
and money in litigation or to pay significant damages. As a result, any such
claims, whether or not successful, could seriously damage our reputation and our
business.
WE MAY HAVE DIFFICULTY IDENTIFYING THE SOURCE OF THE PROBLEM WHEN THERE IS A
PROBLEM IN A NETWORK
Our products must successfully integrate with products from other vendors,
such as traditional telephone systems. As a result, when problems occur in a
network, it may be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by our products or
another vendor's products, may result in the delay or loss of market acceptance
of our products and any necessary revisions may force us to incur significant
expenses. The occurrence of some of these types of problems may seriously harm
our business, financial condition and results of operations.
WE CONTINUE TO SIGNIFICANTLY EXPAND OUR OPERATIONS AND OUR FAILURE TO MANAGE
GROWTH COULD HARM OUR BUSINESS AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
We have significantly expanded our operations, including the number of our
employees, the breadth of our product offerings and the geographic scope of our
activities. At July 31, 1999, we employed 80 employees. During the twelve months
ended July 31, 1999, we hired 28 new employees and we expect the number of our
employees to increase significantly in the future. Further significant expansion
will likely be necessary to address potential growth in our customer base and
market opportunities. In addition, substantially all of our senior management
have been with us for approximately two years. Any failure to
10
<PAGE> 17
manage growth effectively could harm our business and adversely affect our
financial condition and operating results. We cannot assure you that we will be
able to do any of the following activities, which we believe are essential to
successfully manage the anticipated growth of our operations:
- improve our existing and implement new operations, financial and
management information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
IF WE LOSE KEY PERSONNEL, WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE OUR
BUSINESS
Our success depends to a significant degree upon the continued
contributions of our senior sales, engineering and management personnel, many of
whom perform important management functions and would be difficult to replace.
Specifically, we believe that our future success is highly dependent on Steven
J. Benson and other senior management personnel. The loss of the services of any
key personnel, particularly senior management and engineers, could materially
adversely affect our business, financial condition and results of operations.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES
We have experienced growth in revenues and expansion of our operations,
which has placed significant demands on our management, engineering staff and
facilities. Continued growth will also require us to hire more engineering,
sales and administrative personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives and we may experience
constraints that will adversely affect our ability to satisfy customer demand in
a timely fashion or to support our customers and operations. We have at times
experienced, and continue to experience, difficulty in recruiting qualified
personnel. Recruiting qualified personnel is an intensely competitive and
time-consuming process. New sales personnel and marketing personnel will require
training and take time to achieve full productivity. In addition, the design and
installation of telephony solutions can be complex. Accordingly, we need highly
trained professional services and customer support personnel. We cannot be
certain that we will successfully attract and retain additional qualified
personnel. In addition, our key person life insurance policy, covering some of
our key employees, may be insufficient to cover the costs associated with the
loss of one of these employees.
IF WE OR OUR KEY SUPPLIERS OR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS MAY BE SEVERELY DISRUPTED AND OUR RESULTS OF OPERATIONS MAY BE
MATERIALLY ADVERSELY AFFECTED
The Year 2000 problem creates a risk for us. Although most of our products
do not incorporate internal clocks, if our remaining products or our internal
computer systems do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on our operations. The risk
exists primarily in four areas:
- potential warranty or other claims from our customers, which may result
in significant expense to us;
- failures of systems we use to run our business, which could disrupt our
business operations;
- failures of systems used by our suppliers and contract manufacturers,
which could delay or affect the quality of our products; and
11
<PAGE> 18
- the potential for failures of our products, particularly our central
office-based systems, due to Year 2000 problems associated with products
manufactured by other equipment vendors used in conjunction with our
products, which may require that we incur significant unexpected
expenses.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and
evaluation of the information systems used to run our business. We intend to
upgrade or replace systems which are identified as non-compliant. For the Year
2000 non-compliance issues identified to date, the cost of remediation is not
expected to be material to our operating results. If implementation of
replacement systems is delayed, however, or if significant new non-compliance
issues are identified, our business, financial condition or results of
operations could be materially adversely affected.
We intend to contact our critical suppliers and contract manufacturers to
determine whether their operations and the products and services they provide
are Year 2000 compliant. Where practicable, we will attempt to mitigate our
risks with respect to the failure of our suppliers and contract manufacturers to
be prepared for any Year 2000 problems. However, failures remain a possibility
and could have a material adverse effect on our business, financial condition or
results of operations.
In addition, litigation regarding Year 2000 compliance issues is expected
to escalate. For these reasons, the impact of customer claims could have a
material adverse effect on our business, financial condition or results of
operations.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own shares, or
approximately % of the outstanding shares of common stock ( % if the
underwriters' over-allotment option is exercised in full). These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential acquiror from
attempting to obtain control of us, which in turn could have a material adverse
effect on the market price of the common stock or prevent our stockholders from
realizing a premium over the market prices for their shares of common stock. For
information about the ownership of common stock by our executive officers,
directors and principal stockholders please refer to "Principal Stockholders."
A PORTION OF THE PROCEEDS FROM THE OFFERING WILL BENEFIT OUR EXISTING
STOCKHOLDERS AND WILL NOT BE AVAILABLE TO FUND WORKING CAPITAL OR CAPITAL
EXPENDITURES
Approximately $27.3 million of the estimated $ million in net
proceeds from the offering will be used to redeem our outstanding redeemable
preferred stock and retire our subordinated debt. See "Use of Proceeds" and
"Certain Transactions."
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred stock without
further stockholder approval, which provisions could adversely affect the
holders of our common stock.
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<PAGE> 19
NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding the
growth in the number of branch offices and telecommuters. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us and described in the preceding pages and elsewhere in this
prospectus.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the common stock
will be approximately $ million, at an assumed initial offering price
of $ per share and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by us in connection with the
offering. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $ million. We
expect to use substantially all of these estimated net proceeds as follows:
- make a mandatory redemption payment with respect to our Series A
Redeemable Preferred Stock upon consummation of the offering in an
aggregate amount of approximately $19.0 million, which represents a
redemption payment of approximately $15.0 million plus accrued dividends
on the preferred stock, which amounted to approximately $4.0 million as
of September 30, 1999;
- make a mandatory redemption payment with respect to our Series C
Redeemable Preferred Stock upon consummation of the offering in an
aggregate amount of approximately $3.2 million, which represents a
redemption payment of approximately $2.9 million plus accrued dividends
on the preferred stock, which amounted to approximately $300,000 as of
September 30, 1999;
- make a mandatory redemption payment with respect to the Series E
Redeemable Preferred Stock of our subsidiary, MCK Telecommunications,
upon consummation of the offering in an aggregate amount of approximately
$2.6 million, which represents a redemption payment of approximately $2.0
million plus accrued dividends on the preferred stock which amounted to
approximately $600,000 as of September 30, 1999;
- repay $2.5 million in principal amount of the subordinated indebtedness
held by certain of the holders of the Series A Redeemable Preferred
Stock, which debt bears interest at a rate of 12.5% annually, and which
must be repaid upon the completion of this offering; and
- working capital and general corporate purposes.
THE COMPANY
We are a Delaware corporation and were formed in August 1999. Our indirect
subsidiary, MCK Telecommunications, was incorporated in Canada in 1989. As a
result of our June 1996 recapitalization, MCK Telecommunications became a
wholly-owned subsidiary of MCK Communications, Inc., a Nevada corporation. As a
result of a migratory merger effected in August 1999, the Nevada corporation
became our wholly-owned subsidiary.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not currently anticipate paying any cash dividends
in the foreseeable future. Future dividends, if any, will be determined by our
Board of Directors.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of July 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of redeemable convertible preferred stock into shares of common
stock; and
- on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering at an assumed initial public offering price of
$ per share, after deduction of estimated underwriting discounts
and commissions and our estimated offering expenses and the use of net
proceeds as described in "Use of Proceeds."
The adjusted information set forth below is unaudited and should be read in
conjunction with our Consolidated Financial Statements and Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Subordinated debt...........................................
Series A redeemable preferred stock, $0.001 par value per
share: shares authorized, issued and outstanding, actual
and pro forma; no shares authorized, issued or outstanding
pro forma as adjusted.....................................
Series B redeemable convertible preferred stock, $0.001 par
value per share; shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted..........
Series C redeemable preferred stock, $0.001 par value per
share; shares authorized, issued and outstanding, actual
and pro forma; no shares authorized, issued or
outstanding, pro forma as adjusted........................
Series D redeemable convertible preferred stock, $0.001 par
value per share; shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma as adjusted........................
Series E redeemable preferred stock of subsidiary, $0.001
par value per share; shares authorized, issued and
outstanding, actual and pro forma; no shares authorized,
issued or outstanding, pro forma as adjusted..............
Common stockholders' deficit:
Common stock, $.001 par value, shares authorized;
shares issued and outstanding, actual;
shares authorized, shares issued and
outstanding, pro forma; and shares authorized,
shares issued and outstanding, pro forma as
adjusted..................................................
Paid-in capital.............................................
Accumulated deficit.........................................
Accumulated other comprehensive income......................
Notes receivable from officers..............................
Total common stockholders' deficit.....................
Total capitalization..............................
</TABLE>
The table above excludes as of July 31, 1999 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $ per share under our 1996 Stock Option Plan and
additional shares of common stock available for future grant under our
1999 Stock Option and Grant Plan. See "Management -- Executive Compensation,"
"-- 1996 Stock Option Plan" and "-- 1999 Stock Option and Grant Plan."
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<PAGE> 21
DILUTION
As of July 31, 1999, we had a pro forma net tangible book deficit of $24.7
million, or $ per share. Pro forma net tangible book deficit per share is
equal to our total tangible assets less total liabilities, divided by the number
of outstanding shares of our common stock, after giving effect to the conversion
of all outstanding shares of our convertible preferred stock into common stock.
Without taking into account any other changes in pro forma net tangible book
value after July 31, 1999, other than to give effect to our receipt of the
estimated net proceeds from the sale of the shares of common
stock offered hereby at an assumed initial public offering price of $ per
share and after deducting the estimated underwriting discounts and commissions
and the estimated expenses relating to this offering, our pro forma net tangible
book value as of July 31, 1999 would have been $ , or $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ per
share to new investors. If the initial public offering price is higher or lower
than $ per share, the dilution to new stockholders will be higher or lower,
respectively. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book deficit per share as of July 31,
1999...................................................... $
Increase per share attributable to new investors............
----
Pro forma net tangible book value per share after the
offering..................................................
----
Dilution per share to new investors.........................
====
</TABLE>
The following table summarizes, as of July 31, 1999, on the pro forma basis
described above, the difference between the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by the existing stockholders and by new public investors purchasing shares
from us before deducting underwriting discounts and commissions and estimated
offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... % $ % $
New investors............................
-------- ----- ------ -----
Total.......................... 100.0% $ 100.0%
======== ===== ====== =====
</TABLE>
The foregoing computations are based on the number of common shares
outstanding as of July 31, 1999 and exclude:
- shares of common stock subject to outstanding options at July 31,
1999 at a weighted average exercise price of $ per share;
- additional shares available for future grant under our 1999 Stock
Option and Grant Plan.
To the extent stock is issued upon the exercise of stock options or granted
under our stock option plans, there will be further dilution to new investors.
See "Management -- 1996 Stock Option Plan" and "-- 1999 Stock Option and Grant
Plan" and Note 8 of Notes to Consolidated Financial Statements included
elsewhere in this prospectus.
15
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The consolidated statements of
operations data for the fiscal years ended April 30, 1998 and 1999, and the
consolidated balance sheets data at April 30, 1998 and 1999, are derived from
our consolidated financial statements which have been audited by Ernst & Young,
LLP, independent auditors, and are included in this prospectus. The consolidated
statement of operations data for the fiscal year ended April 30, 1997 are
derived from our consolidated financial statements which have been audited by
PricewaterhouseCoopers, LLP, independent auditors, and are included in this
prospectus. The consolidated statements of operations data for the fiscal years
ended April 30, 1995 and 1996, and the consolidated balance sheet data at April
30, 1995, 1996 and 1997 are derived from our audited consolidated financial
statements which are not included in this prospectus. The selected consolidated
financial data for the three months ended July 31, 1998 and 1999 and at July 31,
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus that include, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and results of
operations for those periods. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED APRIL 30, JULY 31,
--------------------------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 1,810 $ 5,339 $ 5,921 $ 7,876 $14,270 $3,116 $4,523
Cost of goods sold............................ 796 2,423 2,313 2,800 5,390 1,188 1,690
--------- --------- ------- ------- ------- ------ ------
Gross profit.................................. 1,014 2,916 3,608 5,076 8,880 1,928 2,832
Operating expenses:
Research and development.................... 266 344 815 1,758 3,349 751 964
Sales and marketing......................... -- 576 1,145 2,191 3,889 779 1,347
General and administrative.................. 626 319 607 1,485 1,617 391 494
Transaction-related charges................. -- -- 493 -- -- -- --
--------- --------- ------- ------- ------- ------ ------
Total operating expenses.................. 892 1,239 3,060 5,434 8,854 1,922 2,805
--------- --------- ------- ------- ------- ------ ------
Income (loss) from operations................. 122 1,677 547 (358) 26 6 28
Other income (expense)........................ 12 7 (343) (595) (207) (129) (95)
--------- --------- ------- ------- ------- ------ ------
Income (loss) before provision for income
taxes....................................... 134 1,684 205 (953) (181) (123) (68)
Provision for income taxes.................... 13 652 302 -- -- -- --
========= ========= ======= ======= ======= ====== ======
Net income (loss)............................. $ 121 $ 1,032 $ (97) $ (953) $ (181) $ (123) $ (68)
========= ========= ======= ======= ======= ====== ======
Dividends on preferred stock.................. -- -- 1,144 1,380 2,163 443 601
Net income (loss) applicable to common
shares...................................... $ 121 $ 1,032 $(1,241) $(2,333) $(2,344) $ (566) $ (669)
========= ========= ======= ======= ======= ====== ======
Basic and diluted net income (loss) per
share.......................................
Shares used in computing basic and diluted net
income (loss) per share.....................
Pro forma basic and diluted net income (loss)
per share...................................
Shares used in computing pro forma basic and
diluted net income (loss) per share.........
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------------------------- JULY 31,
1995 1996 1997 1998 1999 1999
---- ------ -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents......................... $ 42 $ 1 $ 3,228 $ 1,867 $ 3,285 $ 3,596
Working capital.............................. 335 (97) 4,965 3,545 5,578 5,621
Total assets................................. 726 3,148 6,517 5,665 9,428 9,813
Long-term debt............................... 31 57 5,000 5,000 2,500 2,654
Redeemable preferred stock................... -- 500 16,291 17,538 23,501 24,003
Redeemable convertible preferred stock....... -- -- 1,778 1,911 4,704 4,799
Total common stockholders' equity
(deficit).................................. 427 (207) (17,568) (20,050) (24,040) (24,750)
</TABLE>
16
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
MCK Communications is a leading provider of remote voice access products
that enable corporations to distribute the full range of features and
applications of PBX systems to branch offices and telecommuters over data
networks. Our technology makes it possible for corporations to build a unified
voice network by enabling the PBX to act like a corporate voice server that
delivers packetized voice to remote locations over the same wide area network,
or WAN, used for remote data connectivity. We market and distribute our products
through an international network of original equipment manufacturers, or OEMs,
and private label partners, incumbent local exchange carriers, or ILECs, systems
integrators and distributors, telecom and datacom value-added resellers, or
VARs, broadband service providers and, to a lesser extent, through direct sales.
We are headquartered in Newton, Massachusetts and have a development center in
Calgary, Canada.
From our inception in 1989 through 1993, we were a small company based in
Calgary, Canada that designed and marketed a number of niche, voice products
targeted at the oil industry. Commencing in 1993, we altered our business focus
and began developing remote voice access solutions by leveraging the technology
derived from this initial business. These efforts led to the development of our
EXTender product line. During the period from 1993 through 1995, our operating
activities related primarily to establishing a research and development
organization, developing and testing prototype designs, and developing OEM
relationships. We shipped our first remote voice access product, the EXTender
1000, in February 1995. In June 1996, Summit Partners acquired a majority of our
stock pursuant to a leveraged recapitalization. In June 1997, we recruited a new
chief executive officer and moved our headquarters to Newton, Massachusetts.
Since then we recruited the rest of our management team, focused our research
and development efforts on developing additional remote voice access products
and product enhancements, created a product validation laboratory, built
international indirect sales channels, developed additional technology
relationships, and established our sales, marketing and customer support
organizations. We began shipments of the EXTender 3000 and Branch Office
EXTender 6000 in December 1997 and April 1999, respectively.
Through the fiscal year ended April 30, 1999, our revenues consisted
primarily of product sales of our single-user remote voice access products and,
to a lesser degree, our digital-to-analog converter products. In fiscal 1999,
Lucent accounted for approximately 46.7% of our revenues. In April 1999, we
released our first multi-user remote voice access product, the Branch Office
EXTender 6000, and we are presently developing additional remote voice access
products that operate over broadband networks. For the foreseeable future, we
anticipate that substantially all of our revenues will be attributable to sales
of our remote voice access products, with sales of digital-to-analog converters
representing a decreasing percentage of our revenues. Among our remote voice
access products, we believe that the multi-user products and next generation
single-user products will represent a substantial and increasing percentage of
our revenues, while the sales of our existing single-user products may decline
as a percentage of our revenues. Going forward, we expect to generate service
and maintenance revenues. Service revenues will be recognized as the services
are performed. Maintenance revenues will be deferred and recognized over the
period of the contract. We do not expect maintenance or service revenues to be a
significant portion of our revenues. Periodically, we have received
non-recurring engineering fees, although such fees have not been material to
date.
We recognize product revenues upon shipment to the customer. We routinely
analyze and establish, as necessary, reserves at the time of shipment for
product returns and allowances, which amounts to date have not been significant.
As of July 31, 1999, our backlog was $1.4 million. This compares to $350,000 at
the same time last year. We expect to ship the entire backlog during the current
fiscal year. We believe
17
<PAGE> 24
backlog is not an indicator of future success and our contracts generally allow
customers to cancel orders prior to shipment with little or no liability.
Our cost of goods sold consists primarily of purchased finished products
from Celestica, one of our two contract manufacturers, and purchased
subassemblies that we buy from our other contract manufacturer. We incur
additional costs to test, assemble and prepare these subassemblies for shipment
to our customers. Cost of goods sold also includes certain manufacturing
overhead costs, primarily facilities and related depreciation. In August 1999,
we began offering maintenance and support services to our distribution channels
and end users through Vital Network Services, a third-party support provider. We
expense services provided by Vital Network Services as they are performed.
Research and development expenses consist primarily of salaries and related
personnel costs and contract engineering, purchased software and prototype
expenses related to the design, development, enhancement and testing of our
remote voice access products. As of July 31, 1999, all research and development
costs have been expensed as incurred. We intend to increase our investment in
research and development, which is critical to achieving our product objectives.
We will also increase our expenditures on our product validation laboratory to
test the interoperability of our products with PBXs and other products. This
competency is becoming increasingly critical to our business as we develop
additional products that function over data networks in conjunction with
third-party data equipment. We expect research and development expenses to
increase significantly in the future as we continue to develop new products and
enhance existing products.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales, marketing and support
of products as well as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect distribution system
that includes the following channels: OEMs and private label partners, ILECs,
systems integrators and distributors, telecom and datacom VARs and broadband
service providers. Our sales force and marketing efforts are primarily directed
at developing brand awareness and supporting our indirect distribution channels.
We intend to pursue sales and marketing campaigns aggressively and increase our
sales force headcount and, therefore, expect these expenses to increase in the
future.
General and administrative expenses consist primarily of salaries and
related personnel expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. As we add
personnel and incur additional costs related to the growth of our business and
our becoming a public company, we expect that general and administrative
expenses will also increase. Furthermore, we expect to add office space in our
current building in Newton, Massachusetts or move our corporate headquarters to
new office space in the next 6 to 12 months.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of revenues.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
APRIL 30, JULY 31,
------------------------- -------------------
1997 1998 1999 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 39.1 35.6 37.8 38.1 37.4
----- ----- ----- ----- -----
Gross margin................................. 60.9 64.4 62.2 61.9 62.6
Operating expenses:
Research and development................... 13.8 22.3 23.5 24.1 21.3
Sales and marketing........................ 19.3 27.8 27.3 25.0 29.8
General and administrative................. 10.3 18.9 11.3 12.6 10.9
Transaction-related charges................ 8.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 51.7 69.0 62.0 61.7 62.0
----- ----- ----- ----- -----
</TABLE>
18
<PAGE> 25
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
APRIL 30, JULY 31,
------------------------- -------------------
1997 1998 1999 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Income (loss) from operations................ 9.2 (4.5) 0.2 0.2 0.6
Other expense, net........................... (5.8) (7.6) (1.5) (4.1) (2.1)
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes...................................... 3.5 (12.1) (1.3) (3.9) (1.5)
Provision for income taxes................... (5.1) -- -- -- --
----- ----- ----- ----- -----
Net loss..................................... (1.6)% (12.1)% (1.3)% (3.9)% (1.5)%
===== ===== ===== ===== =====
</TABLE>
Three months ended July 31, 1998 and 1999
Revenues. Revenues increased from $3.1 million for the three months ended
July 31, 1998 to $4.5 million for the three months ended July 31, 1999, an
increase of $1.4 million or 45.1%. This increase was primarily due to the
release of our first multi-user product in April 1999, which accounted for
approximately $1.7 million or 37.6% of revenues. We expect revenues from our
current single-user products to decrease as a percentage of revenues as we grow
our sales of our multi-user products and our next generation single-user
products.
Cost of goods sold. Our cost of goods sold increased from $1.2 million for
the three months ended July 31, 1998 to $1.7 million for the three months ended
July 31, 1999, an increase of $502,000 or 42.3%. This increase was primarily
related to the increase in volume of units shipped. Gross margin increased from
61.9% for the three months ended July 31, 1998 to 62.6% for the three months
ended July 31, 1999. The increase in gross margin was primarily attributable to
the introduction of our first multi-user product, which has a higher gross
margin than our other products.
Research and development. Research and development expenses increased from
$751,000 for the three months ended July 31, 1998 to $964,000 for the three
months ended July 31, 1999, an increase of $212,000 or 28.3%. This increase was
due primarily to increases in staffing, the manufacturing of prototype units for
our EXTender 3200 for IDSL, IP EXTender 4000 and PBXgateway IP product lines
and, to a lesser extent, related overhead costs. For the three months ended July
31, 1998 and 1999, research and development expenses decreased as a percentage
of revenues from 24.1% to 21.3% as a result of increased revenues.
Sales and marketing. Sales and marketing expenses increased from $779,000
for the three months ended July 31, 1998 to $1.3 million for the three months
ended July 31, 1999, an increase of $568,000 or 72.9%. This increase was
primarily due to increases in staffing of both sales and marketing personnel
and, to a lesser extent, increased marketing activities related to the
introduction of our first multi-user product. For the three months ended July
31, 1998 and 1999, sales and marketing expenses increased as a percentage of
revenues from 25.0% to 29.8% as newly hired sales personnel generally do not
achieve full productivity for the first few months with us.
General and administrative. General and administrative expenses increased
from $391,000 for the three months ended July 31, 1998 to $494,000 for the three
months ended July 31, 1999, an increase of $102,000 or 26.2%. This increase was
primarily due to increases in staffing in our accounting group to support our
growth, consulting costs relating to an upgrade of our enterprise resource
planning system to ensure its Year 2000 compliance and, to a lesser extent,
professional service costs. For the three months ended July 31, 1998 and 1999,
general and administrative expenses decreased as a percentage of revenues from
12.6% to 10.9% as a result of increased revenues.
Other expense, net. Other expense, net consisted primarily of interest
expense related to our subordinated debt, offset by interest income, and foreign
exchange gains or losses related to the effects of the Canadian/U.S. exchange
rate on intra-company transactions. Other expense, net decreased from $129,000
for the three months ended July 31, 1998 to $95,000 for the three months ended
July 31, 1999, a decrease of $34,000 or 26.1%. Interest expense, offset by
interest income, decreased from $135,000 for the three months ended July 31,
1998 to $67,000 for the three months ended July 31, 1999. This decrease was
19
<PAGE> 26
due to a reduction in the subordinated debt on our balance sheet from $5.0
million to $2.5 million relating to the July 1998 financing. Foreign exchange
gains for the three months ended July 31, 1998 were $6,000 compared to a loss of
$29,000 for the three months ended July 31, 1999. The increased loss was due to
a strengthening of the U.S. dollar against the Canadian dollar.
Fiscal years ended April 30, 1998 and 1999
Revenues. Revenues increased from $7.9 million for the fiscal year ended
April 30, 1998 to $14.3 million for the fiscal year ended April 30, 1999, an
increase of $6.4 million or 81.2%. This increase was due to an increased number
of units sold, which resulted from continued development of our existing
distribution channels, the addition of new distribution channels and the release
of our first multi-user product late in the fourth quarter of fiscal 1999.
Revenues from that multi-user product accounted for $1.3 million or 9.1% of
revenues.
Cost of goods sold. Cost of goods sold increased from $2.8 million for
fiscal 1998 to $5.4 million for fiscal 1999, an increase of $2.6 million or
92.5%. This increase was primarily related to the increase in volume of units
shipped. For fiscal 1998 and 1999, gross margin decreased from 64.4% to 62.2%.
The decrease in gross margin was primarily due to start-up costs associated with
adding a second contract manufacturer, increased manufacturing headcount and, to
a lesser extent, the write-off of obsolete inventory.
Research and development. Research and development expenses increased from
$1.8 million for fiscal 1998 to $3.3 million for fiscal 1999, an increase of
$1.6 million or 90.5%. This increase was due primarily to the hiring of a vice
president of engineering and additional engineers, the expansion of our product
validation facilities and staff and, to a lesser extent, related overhead costs.
For fiscal 1998 and 1999, research and development expenses increased as a
percentage of revenues from 22.3% to 23.5% as we hired new staff to develop our
first multi-user product which did not generate revenues until April 1999.
Sales and marketing. Sales and marketing expenses increased from $2.2
million for fiscal 1998 to $3.9 million for fiscal 1999, an increase of $1.7
million or 77.5%. This increase was primarily due to the hiring of sales and
marketing personnel and increased marketing activities. For fiscal 1998 and
1999, sales and marketing expenses decreased slightly as a percentage of
revenues from 27.8% to 27.3%.
General and administrative. General and administrative expenses increased
from $1.5 million for fiscal 1998 to $1.6 million for fiscal 1999, an increase
of $132,000 or 8.9%. This increase was primarily due to the hiring of new
accounting personnel and related expenses. For fiscal 1998 and 1999, general and
administrative expenses decreased as a percentage of revenues from 18.9% to
11.3%.
Other expense, net. Other expense, net decreased from $595,000 for fiscal
1998 to $207,000 for fiscal 1999, a decrease of $388,000 or 65.2%. Interest
expense, offset by interest income, decreased from $518,000 for fiscal 1998 to
$268,000 for fiscal 1999. This decrease was due to a reduction in the
outstanding amount of our subordinated debt from $5.0 million to $2.5 million in
July 1998. Foreign exchange losses were $77,000 in fiscal 1998 versus a gain of
$60,000 in fiscal 1999. The gain during 1999 was due to a weakening of the U.S.
dollar against the Canadian dollar.
Fiscal years ended April 30, 1997 and 1998
Revenues. Revenues increased from $5.9 million for the fiscal year 1997 to
$7.9 million for fiscal 1998, an increase of $2.0 million or 33.0%. This
increase was due to an increased number of units sold relating to development of
our existing distribution channels, the addition of new distribution channels
and the release of our EXTender 3000 product line.
Cost of goods sold. Cost of goods sold increased from $2.3 million for
fiscal 1997 to $2.8 million for fiscal 1998, an increase of $487,000 or 21.1%.
This increase was primarily related to the increase in volume of units shipped.
For fiscal 1997 and 1998, gross margin increased from 60.9% to 64.4%. The
increase in
20
<PAGE> 27
gross margin was primarily due to manufacturing efficiencies, lower component
costs and the inclusion of non-recurring engineering fee revenues.
Research and development. Research and development expenses increased from
$815,000 for fiscal 1997 to $1.8 million for fiscal 1998, an increase of
$943,000 or 115.7%. The increase was due primarily to the hiring of engineers,
the creation of a product validation laboratory and, to a lesser extent, related
overhead and consulting costs. For fiscal 1997 and 1998, research and
development expenses increased as a percentage of revenues from 13.8% to 22.3%
as we developed new products, including the EXTender 3000 which did not generate
significant revenues until the fourth quarter of fiscal 1998, and upgraded
existing products, including switching to a Rockwell modem set on the EXTender
1000+.
Sales and marketing. Sales and marketing expenses increased from $1.1
million for 1997 to $2.2 million for 1998, an increase of $1.0 million or 91.3%.
This increase was primarily due to hiring of personnel including a vice
president of sales, vice president of marketing, vice president of business
development and sales personnel and, to a lesser extent, increased marketing
activities. For fiscal 1997 and 1998, sales and marketing expenses increased as
a percentage of revenues from 19.3% to 27.8%.
General and administrative. General and administrative expenses increased
by $900,000 from $607,000 for 1997 to $1.5 million for 1998, an increase of
144.6%. This increase was primarily due to recruitment of management personnel
including a new chief executive officer and chief financial officer, the opening
of our offices in Newton, Massachusetts and, to a lesser extent, consulting and
professional services costs. For fiscal 1997 and 1998, general and
administrative expenses increased as a percentage of revenues from 10.3% to
18.9% as we invested in our management team and corporate infrastructure.
Transaction-related expenses. In fiscal 1997, we recorded
transaction-related expenses of $493,000 related to our June 1996
recapitalization pursuant to which employee stock options were either exercised
and redeemed, or exchanged for new options in the U.S. company. In conjunction
with this event, we incurred a one-time compensation charge. See Note 13 of
Notes to Consolidated Financial Statements.
Other expense, net. Other expense, net increased from $343,000 for fiscal
1997 to $595,000 for fiscal 1998, a increase of $253,000 or 73.8%. Interest
expense, offset by interest income, increased from $393,000 for fiscal 1997 to
$518,000 for fiscal 1998 due to the issuance of $5.0 million in subordinated
debt as part of our June 1996 recapitalization and an increase in the
outstanding balances on a revolving line of credit. Foreign exchange gains were
$50,000 in fiscal 1997 versus a loss of $77,000 in fiscal 1998. The loss during
fiscal 1998 was due to a strengthening of the U.S. dollar against the Canadian
dollar.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data in dollars and as a percentage of revenues for our nine most
recent quarters. In management's opinion, this unaudited information has been
prepared on the same basis as the annual consolidated financial statements and
includes all adjustments necessary to fairly present the unaudited quarterly
results. These adjustments consist only of normal recurring adjustments. This
information should be read in conjunction with the
21
<PAGE> 28
consolidated financial statements and related notes included elsewhere in this
prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
OPERATIONS DATA: 1997 1997 1998 1998 1998 1998 1999 1999 1999
- -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $1,431 $1,728 $2,065 $2,652 $3,116 $3,441 $3,609 $4,104 $4,523
Cost of goods sold............. 543 603 665 989 1,188 1,330 1,376 1,496 1,690
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 888 1,125 1,400 1,663 1,928 2,111 2,233 2,608 2,832
Operating expenses:
Research and development..... 297 406 501 554 751 770 880 948 964
Sales and marketing.......... 361 625 551 655 779 918 1,004 1,187 1,347
General and administrative... 200 404 425 457 391 415 347 463 494
------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 857 1,434 1,477 1,665 1,922 2,103 2,231 2,597 2,805
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... 31 (309) (78) (3) 6 8 2 11 28
------ ------ ------ ------ ------ ------ ------ ------ ------
Other income (expense), net.... (126) (164) (179) (127) (129) (91) (8) 21 (95)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............. $ (95) $ (473) $ (256) $ (129) $ (123) $ (84) $ (6) $ 32 $ (68)
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
------------------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
1997 1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........... 37.9 34.9 32.2 37.3 38.1 38.6 38.1 36.4 37.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross margin................. 62.1 65.1 67.8 62.7 61.9 61.4 61.9 63.6 62.6
Operating expenses:
Research and development... 20.7 23.5 24.3 20.9 24.1 22.4 24.4 23.1 21.3
Sales and marketing........ 25.2 36.1 26.7 24.7 25.0 26.7 27.8 28.9 29.8
General and
administrative........... 14.0 23.3 20.6 17.2 12.6 12.1 9.6 11.3 10.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 59.9 83.0 71.6 62.8 61.7 61.1 61.8 63.3 62.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 2.2 (17.9) (3.8) (0.1) 0.2 0.2 0.0 0.3 0.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Other income (expense),
net........................ (8.8) (9.5) (8.7) (4.8) (4.1) (2.7) (0.2) 0.5 (2.1)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............ (6.6)% (27.4)% (12.4)% (4.9)% (3.9)% (2.4)% (0.2)% 0.8% (1.5)%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Our revenues have increased each quarter since the three months ended July
31, 1997 due to the introduction of new products, the development of our
existing distribution channels and the addition of new distribution channels.
While we have maintained our gross margins in the low sixty percent range, we
have experienced some variability in specific quarters. For the three months
ended October 31, 1997 and January 31, 1998, our gross margins increased to
65.1% and 67.8%, respectively, due to non-recurring engineering fees received in
these quarters. For the three months ended October 31, 1997, we experienced a
rapid increase in sales and marketing expenses associated with the hiring of a
new sales force. General and administrative expenses increased for the three
months ended October 31, 1997, primarily due to the costs associated with the
opening of our Newton office, and the recruitment of a new chief executive
officer and chief financial officer. General and administrative expenses have
generally decreased as a percentage of revenues, primarily due to increased
revenues.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the sale of preferred stock
and other financing arrangements, such as a bank line of credit, a subordinated
debt offering and a capital equipment
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financing. As of July 31, 1999, we had cash and equivalents of $3.6 million,
which included $230,000 borrowed under our credit facilities.
We entered into a revolving credit facility against accounts receivable in
April 1999 which provides borrowings of up to $2.0 million. Borrowings under
this credit facility bear interest at the prime rate, which was 8.0% as of July
31, 1999. Borrowings are due upon demand and are secured by substantially all of
our assets. As of July 31, 1999, we had no outstanding balance on this credit
facility. This agreement expires in April 2000. We have an equipment term loan
which provides borrowings of up to $500,000 through September 1999 to finance
the acquisition of computer hardware and furniture. As of July 31, 1999, we had
an outstanding balance of $230,000 under this facility. Borrowings under this
facility bear interest at 50 basis points above the prime rate. The loan is
payable in equal installments over 36 months. We also entered into subordinated
loan and security agreements in June 1996. Borrowings under these loans are $2.5
million, bear interest at a rate of 12.5% per annum and are secured by 2/3rds
of the outstanding common stock of our subsidiary, MCK Telecommunications.
Net cash provided by operating activities was $256,000 for the three months
ended July 31, 1999. Net cash provided by operating activities during the three
months ended July 31, 1999 was primarily due to decreases in inventory and
increases in accounts payable and accrued liabilities, partially offset by net
losses and increases in accounts receivable. Net cash used by operating
activities was $402,000 in fiscal 1999. During fiscal 1999, net cash used by
operating activities was primarily due to net losses and increases in accounts
receivable and inventories, partially offset by increases in accounts payable
and accrued liabilities. Net cash provided by operating activities was $82,000
in fiscal 1998. During fiscal 1998, net cash provided by operating activities
was primarily due to decreases in inventory and prepaid assets and increases in
accounts payable and accrued liabilities, partially offset by net losses and
increases in accounts receivable.
Net cash used in investing activities was $136,000 for the three months
ended July 31, 1999. Net cash used was primarily the result of purchases of
property and equipment. Net cash used in investing activities was $676,000 in
fiscal 1999 and $566,000 in fiscal 1998. Cash was used during these periods to
acquire property and equipment, a significant portion of which was used to
expand our product validation laboratory. We currently do not have significant
capital spending or short-term purchase commitments, but expect to continue to
engage in capital spending in the ordinary course of business. We expense all
software development costs as they are incurred.
Net cash provided by financing activities was $226,000 for the three months
ended July 31, 1999, which was related primarily to the establishment of an
equipment term loan. Net cash provided by financing activities in fiscal 1999
was $2.5 million, which was primarily due to the issuance of preferred stock,
partially offset by the repayment of subordinated debt. Net cash used by
financing activities in fiscal 1998 was $748,000, which was primarily due to a
decrease in short-term borrowings.
We expect to experience growth in our working capital needs for the
foreseeable future in order to execute our business plan. We anticipate that
operating activities, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions or investments in complementary businesses, technologies or
products. We believe that the net proceeds from this offering, together with our
current cash and equivalents, cash generated from operations and available
borrowings under our line of credit, will be sufficient to meet our anticipated
cash requirements for working capital and capital expenditures for at least the
next 12 months.
YEAR 2000 READINESS DISCLOSURE
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the Year
2000 approaches, and are commonly referred to as the "Year 2000 problem."
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Assessment. The Year 2000 problem affects the computers, software and
other equipment that we use, operate or maintain for our business. Accordingly,
we have organized a project team responsible for monitoring the assessment and
remediation status of our Year 2000 projects. This project team is currently
assessing the potential effects and costs of remediating the Year 2000 problem
for our internal systems. To date, we have not obtained verification or
validation from any independent third parties of our processes to assess and
correct any of our Year 2000 problems or the costs associated with these
activities.
Internal infrastructure. We believe that we have identified
mission-critical computers, servers and applications, and our business systems
and related equipment used in connection with our internal operations that will
need to be evaluated to determine if they must be modified, upgraded or replaced
to minimize the possibility of a material disruption to our business. Upon
completion of such evaluation, which we expect to occur by October 1999, we
expect to commence the process of modifying, upgrading and replacing major
systems that have been assessed as adversely affected, and expect to complete
this process before the occurrence of any material disruption of our business.
Systems other than information technology systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, telephone switches, security systems and other common
devices, may be affected by the Year 2000 problem. We are currently assessing
the potential effects and costs of remediating the Year 2000 problem on our
office equipment and our facilities and expect this process to be completed by
the end of the calendar year 1999.
Products. We have tested and intend to continue to test all of our
products for Year 2000 problems. Only our Branch Office EXTender 6000 and
PBXgateway IP products have internal clocks, and we believe such product lines
are Year 2000 compliant. None of our other products have time keeping
capabilities and are therefore, by default, Year 2000 compliant. We currently do
not expect any significant Year 2000 problems to arise with our products. We
have generally represented to our indirect channel partners and end users that
our products are Year 2000 compliant, and if that turns out to be untrue, these
parties may make claims against us which may result in litigation or contract
terminations.
We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems will not exceed $100,000,
almost all of which we believe will be incurred in calendar year 1999. Of the
$100,000, approximately $40,000 has been used to upgrade existing systems
through April 30, 1999, and the remaining amount will be used to replace
non-Year 2000 compliant systems. All of the costs have been capitalized to date
and we expect that future costs will also be capitalized. In addition, we have
not deferred any material information technology projects as a result of our
Year 2000 problem activities.
Suppliers. We are in the process of assessing the readiness of our
sole-sourced component suppliers. We expect that we will be able to resolve any
significant Year 2000 problems with sole-sourced component suppliers; however,
we cannot assure you that these suppliers will resolve any or all Year 2000
problems before the occurrence of a material disruption to the operation of our
business. Any failure of these third parties to timely resolve Year 2000
problems with their systems could harm our business.
Most likely consequences of Year 2000 problems. We expect to identify and
resolve all Year 2000 problems that could adversely affect our business
operations. However, we believe that it is not possible to determine with
complete certainty that all Year 2000 problems affecting us have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are simply too numerous for us to anticipate every possible
problem. In addition, no one can accurately predict how many Year 2000
problem-related failures will occur or the severity, duration or financial
consequences of these possibly inevitable failures. As a result, we believe that
the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our indirect channel partners and end
users that will divert management's time and attention and financial and
human resources from ordinary business activities;
- business disputes and claims for pricing adjustments or penalties due to
Year 2000 problems by our indirect channel partners and end users; and
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- a number of serious business disputes alleging that we failed to comply
with the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 problems affecting
our internal systems are not effective. We expect to complete our contingency
plans by the end of October 1999. Depending on the systems affected, these plans
could include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct, on an accelerated schedule, any
Year 2000 problems that arise or to provide manual workarounds for
information systems.
Our implementation of any of these contingency plans could harm our
business.
Disclaimer. The discussion of our efforts and expectations relating to
Year 2000 compliance are forward-looking statements. Our ability to achieve Year
2000 compliance and the level of incremental associated cost, could be adversely
affected by, among other things, availability and cost of programming and
testing resources, third-party suppliers' ability to modify proprietary
software, and unanticipated problems identified in our ongoing compliance
review.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. We have a fixed rate debt obligation. An increase in
interest rates would not increase interest expense due to the fixed nature of
our debt obligation or materially change the fair value of the debt obligation.
We have cash equivalents that primarily consist of overnight money market
accounts. A 100 basis point shift in interest rates would not result in a
material change in interest expense, cash flows or the fair value of the cash
equivalents.
Foreign Currency Exchange Rate Risk. We primarily sell our products in
U.S. dollars and therefore we are not generally exposed to foreign currency
exchange risk. However, our Canadian subsidiary sells products to Canadian
customers that it invoices in Canadian dollars. In fiscal 1999, this revenue
accounted for 11.8% of revenues and for the three months ended July 31, 1999 it
accounted for 8.5% of revenues. Transactions with our Canadian subsidiary, whose
functional currency is the Canadian dollar, present us with foreign currency
exchange risk. The principal transactions are buying and selling of inventory.
The intercompany balance is denominated in U.S. dollars and changes in the
foreign currency exchange rate result in foreign currency gains and losses.
Using the intercompany balance at July 31, 1999, a 10% strengthening of the U.S.
dollar against the Canadian dollar would result in a foreign currency
transaction loss of $90,000.
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BUSINESS
OVERVIEW
MCK Communications is a leading provider of remote voice access products
that enable corporations to seamlessly extend the features and applications of
private branch exchanges, or PBXs, from the corporate office to remote branch
offices and telecommuters over wide area networks, or WANs. Our EXTender
products cost-effectively deliver a unified enterprise-wide voice network by
enabling the PBX to function as a corporate voice server that transmits
packetized voice and PBX signaling information to remote locations over
corporations' existing data networks. In addition, our products reduce the total
cost of ownership by leveraging corporations' current investment in voice and
data equipment, and streamline network administration through the utilization of
industry standard network management techniques.
INDUSTRY BACKGROUND
Most businesses today have deployed separate networks to support voice and
data communications. As the corporate world shifts from large, centralized
organizations to distributed workforces with multiple branch offices and a large
number of telecommuters, new demands are being placed on the traditionally
localized corporate communications networks. While data networks have evolved to
meet this challenge by offering high-speed remote data access and a high degree
of interoperability among data systems and components, corporate voice networks
have remained largely centralized and proprietary. Consequently, branch offices
and telecommuters do not have cost-effective access to the features and
applications of corporate voice systems.
This shift toward corporate decentralization results from a number of
factors. The competitive advantage of being located near key customers,
suppliers and partners and the competition for qualified employees are driving
corporations to open branch offices in numerous geographic locations. We believe
Fortune 5000 businesses maintain approximately 1.6 million branch offices. In
order to retain employees and comply with expanding environmental regulation,
corporations are also implementing large-scale telecommuting programs. According
to the Gartner Group, the number of telecommuters worldwide is expected to grow
from 35 million in 1998 to 140 million in 2003.
Because of decentralization, corporations are increasingly challenged by
the need to integrate voice and data networks across multiple locations.
Corporations depend on company-wide communication to ensure critical internal
collaboration, provide suitable levels of customer service and maintain
operational efficiency and productivity by sharing resources across all
locations. As the business environment becomes more competitive, a unified
communications network will become increasingly important. These factors are
driving demand for remote access solutions that deliver an integrated network
environment with all the features and applications found at corporate
headquarters to distributed locations and employees.
Corporate Data Networks
Initially, data networks were built upon mainframe computers that served a
single office location, were accessible by a limited number of users and were
too costly for small organizations. Over the past 20 years, advances in computer
processing and networking technology have altered this centralized model to
deliver cost-effective, high-speed distributed data processing and
communications by using a client-server architecture. Corporations have been
able to deploy equipment from multiple vendors that is interoperable at the
corporate office or throughout a local area network, or LAN, using multiple
network protocols because of the adoption of standard communication protocols,
internetworking technologies, and industry-standard system management platforms,
as well as the use of open architectures. These same developments have also
facilitated widespread data access through the deployment of remote access
equipment capable of extending the reach of the data network beyond the LAN over
public and private networks to create WANs.
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Today, most remote data access capabilities are deployed to branch offices
and telecommuters over a variety of circuit-based networks that were architected
for voice service. These circuit-based networks are dedicated point-to-point
connections that require corporations to constantly maintain sufficient
bandwidth to meet their maximum communications requirements. The recent
development of broadband technologies has resulted in the deployment of new
packet-based networks. These next generation networks divide all types of data,
including voice, into packets that can be simultaneously transmitted and
reassembled into their original form at their final destination. As a result,
these packet-based networks are more efficient in their use of available
bandwidth than traditional circuit-based networks, thus minimizing network
capacity constraints and management requirements.
As a result of the growing demand for high-bandwidth applications, such as
Internet and intranet access, a new generation of service providers is migrating
from existing circuit-based networks to packet-based networks. The ability of
packet-based networks to increase bandwidth availability and network efficiency,
lower operating costs and simplify network administration has led service
providers to make significant investments in packet-based networks in the public
WAN infrastructure. Next generation telecommunications service providers are
creating new service offerings over private managed networks and public
networks, such as the Internet and are using new technologies, such as Quality
of Service to offer both services over the same network. Widespread access to
corporate data networks, coupled with the deployment of new packet-based
networks, is enabling corporations to realize tremendous productivity gains due
to increased collaboration, internal communication and sharing of resources.
Examples of specific benefits include company-wide e-mail capabilities,
company-wide access to the files and applications that are run from the
corporate server and immediate access for remote workers.
Corporate Voice Networks
Large corporate voice systems are generally based on circuit-based networks
and corporate voice switches known as private branch exchanges, or PBXs. Given
the mission critical nature of voice communications and related applications,
PBX systems have been architected with numerous built-in fault tolerant and
redundancy features and are designed to deliver 99.999% up-time reliability. In
addition to delivering reliable voice service, PBXs have the capability to serve
as the platform for more than 500 critical voice features and applications.
PBX-based applications include:
- voicemail systems;
- unified messaging systems that create a single interface for accessing
voicemail, e-mail and fax messages;
- automatic call distribution, or ACD systems;
- auto-attendant systems;
- call accounting software;
- least-cost routing applications; and
- interactive voice response, or IVR systems.
The PBX is also responsible for delivering features and capabilities such as:
- phone numbering plans;
- three- or four-digit internal dialing;
- call transferring, conferencing and forwarding; and
- receptionist call screening.
The Multimedia Telecommunications Association, or MTA, estimates that the
installed base of PBX systems in the United States in 1998 exceeded 45 million.
In addition, the MTA has reported that the PBX market is growing. Since 1991
over 44 million PBX lines have been added to both new PBX systems
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and existing systems. In 1998 alone, 7.4 million new lines were added to PBX
systems. Full-featured PBXs typically cost between $100,000 and $1.0 million,
and are designed for large, centralized corporate environments with 50 or more
users. In addition, corporations often spend as much on the applications
supported by their PBXs as they do on the equipment itself. According to the
MTA, over $25 billion has been spent on PBX systems in the United States since
1991.
Despite the reliability and functionality of centralized circuit-based
voice networks, the features and applications of today's PBXs cannot be
cost-effectively extended to small branch offices and telecommuters. A number of
factors have created this deficiency. Technical signaling limitations cause the
quality of voice transmission to degrade beyond a limited distance from the PBX.
In addition, the high cost associated with deploying a PBX and its supported
voice applications typically makes them prohibitively expensive for small branch
offices and telecommuters. Accordingly, corporations seeking to extend voice
applications to small branch offices have the following voice options, all of
which have significant limitations:
- Key Systems/Hybrid PBXs. Key systems and hybrid PBXs are small,
proprietary voice switches that have functionality similar to PBXs but
have been cost-effectively architected to service small office
environments. Accordingly, they lack the full feature set and scalability
of more expensive PBX systems. Key systems have limited interoperability
with PBX systems, and consequently function as stand-alone voice systems
with separate voice applications that create inefficiencies and network
management complexities in a multi-office environment.
- Centrex. Centrex is a business telephone service that is offered by
local telephone companies from their central office switches. While
Centrex offers many of the same features as PBXs, its effectiveness is
constrained by phone companies' switch capacity, its lack of
interoperability with PBXs, its geographic limitations and its reliance
upon the local phone company for service and support. In addition,
full-featured Centrex service for a small office can be a prohibitively
expensive solution.
- Off-Premises Extension, or OPX. An Off-Premises Extension is a dedicated
telephone line that originates from a PBX and extends a subset of PBX
features and applications to remote users. OPX offerings cannot support
digital telephone sets, and require an expensive dedicated leased line or
private network connection.
- LAN and NT PBXs. Recently introduced solutions from data networking
vendors, such as LAN and NT-server based PBXs, lack the full feature set
of traditional PBXs and have limited ability to network with the
corporate PBX, thus also failing to give an enterprise a unified voice
network.
The inability of these voice options to fully network with the PBX has caused
corporations to deploy separate voice networks for their branch offices and
telecommuters, limiting the effectiveness of corporate communications and
increasing the burden on systems administrators. In addition, corporations
seeking to extend voice applications to telecommuters presently have no
cost-effective, full-featured solutions.
The Opportunity for PBX-based Remote Voice Access over Data Networks
As business organizations decentralize, remote access to the corporate
communications network is becoming increasingly important. While data networks
have evolved to meet this critical business requirement, there is a need for a
suitable voice solution that cost-effectively leverages the PBX and its features
and applications to offer corporate voice applications to small branch offices
and telecommuters. Furthermore, in order to lower costs and simplify network
administration, corporations are increasingly demanding that distributed voice
and data services be offered over the same centrally-managed corporate
communications infrastructure. This convergence of voice and data is made
possible by the packetization of voice and advances in Quality of Service which
enable the transmission of voice over private managed data networks and public
data networks, such as the Internet. Accordingly, to deliver remote voice access
over data networks, a solution should be capable of packetizing voice and PBX
signaling information. As a result of its reliability, the wide variety of
applications that it supports and the size of its installed base,
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PBXs are pervasive in large, corporate enterprises and are likely to remain
entrenched as the central corporate system on which new voice applications are
developed and deployed. Thus, solutions for the remote voice marketplace must
offer a centrally-managed interface to proprietary PBX systems and have the
capability of packetizing and transmitting voice and PBX signaling information
over both traditional circuit-based data networks and emerging packet networks.
THE MCK EXTender SOLUTION
We develop and market products that enable enterprises to seamlessly
deliver all of the PBX features and applications that exist at the corporate
office to branch offices and telecommuters. Our technology allows enterprises to
create a unified, enterprise-wide voice network by enabling the PBX to function
as a corporate voice server that transmits packetized voice and PBX signaling
information to remote locations over existing data networks. In addition, our
products reduce the total cost of ownership by leveraging corporations' current
investments in voice and data equipment, and streamline network administration
through the utilization of industry standard network management techniques.
Following are the key attributes of our solution:
Full-Featured Remote Voice Access. Our EXTender solutions seamlessly
provide the features and applications of the PBX to branch office employees,
telecommuters and remote call center agents over circuit and packet networks.
Our solutions allow these remote workers to utilize PBX features such as three-
or four-digit internal dialing, call transferring and conferencing, and
applications such as voicemail, unified messaging and automated call
distribution. Extending these corporate voice applications to remote employees
increases productivity, facilitates internal collaboration and delivers to
external callers transparent access to all telephone extensions throughout a
corporation.
Digital Line Extension Technology. The features and applications of the
PBX reside on the digital line cards of the PBX. We have developed proprietary
software and hardware interfaces that extract the voice and PBX signaling
information from these digital line cards. Our products then packetize and
transmit this information to our remote devices over existing data networks.
Utilizing this captured information, our remote products mimic the digital line
card, thereby transparently connecting the user's digital telephone set to the
corporate PBX. As a result of this product architecture and our experience in
interfacing with the proprietary digital line cards of most leading PBX vendors,
our products enable corporations to deploy effective remote voice solutions
without significant reconfigurations or upgrades to their existing PBX systems.
Similarly, our products enable branch offices and telecommuters to use their
digital telephone sets and existing user interfaces to transparently access
their corporate PBXs.
Packet Voice Architecture. Our extensive experience in packetizing voice,
PBX signaling information and voice applications enables us to deliver a
complete remote voice solution over traditional circuit-based networks and
emerging packet-based networks. Utilizing our proprietary Remote Voice Protocol,
or RVP, software platform and our standardized hardware architecture, we
packetize, compress, encode, transmit and decode voice over networks such as
asynchronous transfer mode, or ATM, digital data service, digital subscriber
line, or DSL, fiber, frame relay, IP, integrated services digital network, or
ISDN, T-1, fractional T-1 and traditional telephone networks. Our products
enable next generation service providers such as the emerging DSL and cable
network operators to provide MCK EXTender functionality as a value-added service
offering to corporations for branch offices and telecommuters over WANs.
Lower Cost Solution. Our products provide a cost-effective solution to
enable full-featured remote voice access, lowering costs in the following areas:
- Transmission. Our products lower transmission costs by consolidating
voice and data traffic over a single network, eliminating local loop
service charges and enabling remote users to utilize volume-based,
corporate long distance rates.
- Management. Our recently introduced products provide telecom managers
the ability to centrally manage our remote devices using Telnet,
hypertext mark-up language, or HTML, and simple network management
protocol, or SNMP, with graphical user interfaces. Our customers can use
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these remote monitoring and diagnostic capabilities to solve problems
on-line, thereby reducing the time and cost associated with dispatching a
technician to a remote site.
- Equipment. Our products enable corporations to leverage their existing
capital investment in PBX systems, voice applications and data networks,
thereby eliminating the need to expend significant additional capital on
disparate, incompatible solutions such as key systems.
- Facilities. Our products allow corporations to reduce physical facility
costs and infrastructure investments by enabling employees to work
effectively outside of corporate locations.
Compatibility with Leading PBX Manufacturers. We have worked with Alcatel,
Lucent, NEC and Nortel Networks to develop interfaces between our RVP software
platform and their primary proprietary PBX protocols. These manufacturers have
tested and validated in their labs that our RVP platform is interoperable with
their primary PBX products, including 4400/4200 (Alcatel), DEFINITY (Lucent),
NEAX 1000/2000/2400 (NEC), Meridian (Nortel Networks), and Norstar (Nortel
Networks) equipment. According to Dataquest, these four manufacturers represent
approximately 65% of the U.S. PBX market share for large enterprise customers.
STRATEGY
Our strategy is to become the leading provider of remote voice access
solutions for branch offices and telecommuters of Fortune 5000 businesses. The
following are the principal elements of our business strategy:
Maintain technology leadership in the remote voice access marketplace. Our
technology enables us to provide leading remote voice access products that
distribute PBX features and applications to branch offices and telecommuters.
Our technology leadership is the result of our knowledge and experience
interfacing with proprietary PBX systems, our ability to packetize voice and PBX
signaling information and our understanding of how to condition packet voice for
transmission over circuit and packet networks. We intend to continue to leverage
our existing expertise in packetized PBX voice applications to develop new
products and applications that target broadband markets, in particular DSL and
cable. We will also continue to work with third-party software and hardware
manufacturers to ensure the interoperability between our solutions and a wide
range of networking equipment in order to facilitate ease of deployment and
ensure that we can transmit packet voice within multiple network environments.
Establish our Gateway products as platforms for new voice applications. We
intend to establish our Gateway products as platforms for the delivery of new
applications and services to branch offices and telecommuters. Our products are
positioned on the line-side of the PBX, which enables us to extend the full
features and applications of the PBX to remote locations with minimal impact on
the PBX or its resident software applications. We believe that this
non-intrusive implementation, and our products' positioning within the corporate
voice switch room, strategically positions us to develop new software
components, as well as incorporate third-party software applications, to provide
new features and applications for remote users.
Expand distribution, marketing and technology relationships. We will
continue to establish distribution, marketing and technology relationships with
PBX vendors, service providers and distribution channel partners to further
penetrate our target markets and develop our products. We have development,
marketing and distribution relationships with Alcatel, Lucent and NEC and
distribution relationships with Nortel Networks and its major channel partners
such as Bell Canada, BellSouth, GTE and Williams Communications. We have also
established a number of other important distribution channel relationships such
as with SBC and Sprint North Supply. In addition to expanding our field sales
and systems engineering forces, we will continue to work with our channel
partners to focus on major corporate accounts. Furthermore, we will continue to
build additional channels, both in the U.S. and international markets, to expand
the distribution of our products.
Work with broadband equipment vendors and next generation service
providers. We are working with a number of leading broadband equipment vendors
and next generation service providers to jointly
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develop service offerings based on our technology that can deliver our
application over broadband networks such as DSL and cable. We jointly developed
a DSL product with Copper Mountain and are in the process of developing other
product sets with Copper Mountain and other broadband equipment vendors. We are
also working with leading service providers such as Rhythms NetConnections to
develop service offerings based on our new broadband product set. We have
entered into a distribution agreement with Rhythms pursuant to which it markets
a service called PBXpress that delivers remote PBX voice to its customers by
bundling our equipment into this service offering. We anticipate entering into
new relationships with broadband equipment vendors and next generation service
providers such as competitive local exchange carriers, or CLECs, Internet
service providers, or ISPs, and managed service providers to enhance our
leadership position.
Continue to target Fortune 5000 corporations. We intend to continue to
focus our distribution strategies on Fortune 5000 corporations. These
organizations have made substantial capital investments in PBX systems and have
significant numbers of branch offices and telecommuters. Accordingly, these
corporations have the most to gain from an integrated, PBX-based voice network.
We are well positioned to target the Fortune 5000 market because our products
interface with PBX systems from Alcatel, Lucent, NEC and Nortel Networks. We
will work with our existing and new partners to increase the market opportunity
for, and drive market acceptance of, our products.
TECHNOLOGY
We have developed expertise in digital line extension and the packetization
of voice for transmission over data networks to address the technology
challenges of extending the features and applications of corporate PBXs to
remote locations. Another key component of our technological advantage is the
highly flexible software and hardware architecture upon which we build our
remote voice solutions. We will continue to invest significant resources to
maintain and extend our technological advantage.
Digital Line Extension Technology
The rich features and applications of proprietary PBX systems are accessed
through digital line cards that reside on the user or line side of the PBX.
These line-side interfaces enable the delivery of the features and applications
of PBX systems to digital telephone sets. As a result of our years of experience
in working with major PBX manufacturers, we have gained a significant
understanding of these digital line cards and have developed line-side software
interfaces to a number of different proprietary digital line cards used in
today's PBX systems. In addition to our software interfaces, we have developed a
hardware subsystem capable of duplicating the electrical interfaces of Alcatel,
Lucent, NEC and Nortel Networks PBX systems. These line-side software and
hardware interfaces extract the voice and PBX signaling information from the
digital line cards located on the PBX and, using our RVP software platform,
packetize this voice and PBX signaling information for transmission over data
networks to our remote voice access products. We have developed messaging
software that transmits this voice and PBX signaling information from our remote
voice access products to the digital telephone sets of the PBX manufacturers
that we support, thereby transparently connecting these sets to the PBX.
Delivery of Packet Voice with Remote Voice Protocol
To deliver voice over data networks, solutions must convert voice into
packet form and then transmit these voice packets alongside data packets.
Despite the advantages of simultaneous transmission of voice and data, there are
also a number of technological challenges to delivering voice over data networks
because audio quality can be distorted by jitter and latency associated with
congestion on the data network.
We have developed a proprietary software platform, known as Remote Voice
Protocol, or RVP, that packetizes, compresses and encodes circuit voice and PBX
signaling information for secure transmission over data networks. We have
implemented both industry standard and proprietary voice prioritization and
voice fragmentation techniques that use bandwidth efficiently while also
ensuring that delay sensitive voice
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packets are delivered with the quality expected from voice. Much of this
technology revolves around our core expertise in developing software that runs
on standard digital signal processors, which are required for encoding voice for
transmission over bandwidth constrained networks. In particular, we have
designed and implemented the following software features in our products to
improve the quality of packet voice transmission, minimize system delay and
jitter, and utilize bandwidth efficiently:
- Voice Compression. We integrate a number of industry standard voice
coding algorithms, including G.711, G.726, G.729A and G.723.1, that
compress voice to reduce the total bandwidth required for transmission.
- Echo Cancellation. We deliver echoless voice by integrating industry
standard acoustic echo cancellation technology, known as G.165, to which
we have made proprietary enhancements.
- Silence Detection. Our proprietary silence detection technology
eliminates unnecessary transmission of voice packets during the periods
of silence that occur in normal conversation, freeing bandwidth for other
uses.
- Comfort Noise. We incorporate technology that inserts comfort noise
during periods of silence so that users do not inadvertently think that
the phone call is no longer active.
- Jitter Buffering Techniques. Our products adapt to the real-time
irregularities in network transmission and ensure all traffic reaches its
endpoint at the appropriate time by introducing delay that is
unrecognizable to the user.
- DTMF Processing Technology. Dual tone multi frequency, or DTMF, tones
are generated by depressing buttons on digital telephone sets, enabling
the digital telephone set to recognize dialed numbers used for outbound
calls and for applications such as voicemail. Our proprietary technology
improves the transmission of DTMF tones over packet networks.
We have significant experience in transmitting packet voice over both
low-speed, traditional telephone networks and higher speed, broadband networks.
We have developed network interfaces for the delivery of remote voice over
traditional telephone connections and ISDN networks and have incorporated
third-party network devices to support T-1, digital data service and frame relay
networks. In addition, to deliver data connectivity alongside our packet voice
transmission, we have expertise in terminating dial-up networking connections
and bridging standard data traffic such as TCP/IP.
Remote Voice Product Architecture
We develop our products using a combination of proprietary and commercial
hardware and software subsystems. Our product architecture enables these
subsystems to be configured and adapted in order to deliver a broad range of
enterprise voice product solutions, thereby minimizing product development
cycles and maximizing manufacturing efficiency. Our products are fully
compatible with the large installed base of telephone systems from Alcatel,
Lucent, NEC and Nortel Networks, and require no design modifications or upgrades
to these PBX systems or their respective digital telephone sets.
We have designed a standard hardware architecture that serves as a common
platform for our software modules. We use industry standard digital signal
processors and programmable logic devices to build a standard hardware platform
that can be software modified to support different applications or PBX protocols
without requiring a hardware change. We have also architected our products with
a variety of standard telephony and WAN interfaces to ensure that we can
transmit packet voice over the multiple network environments currently
available.
All of our products share a common software library of functional modules
that comprise our digital line interface software subsystem and our RVP software
platform. Our digital line interface software subsystem is responsible for the
interface to the proprietary software protocols on the digital line cards of
PBXs. This software subsystem has been designed to emulate a majority of the
digital line cards on the market today without requiring a change to our
hardware architecture. This flexible software architecture also enables us to
easily add software support for new PBX protocols. Our RVP software platform is
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<PAGE> 39
responsible for packetizing voice and PBX signaling information, as well as
conditioning these voice packets for transmission over data networks. RVP has
been engineered to enable new features to be easily and quickly introduced in
parallel to its existing capabilities.
All the software development for our IP EXTender 4000, EXTender 3200 for
IDSL, Branch Office EXTender 6000 and PBXgateway IP product lines runs on the
VxWorks real-time operating system from Wind River Systems. This industry
standard operating system provides our engineers with a standard development
environment in which to design new proprietary software applications and easily
incorporate third-party software applications. A standard development
environment such as VxWorks allows for the rapid prototyping and application
development necessary for our products that serve as platforms for future
applications.
PRODUCTS
We have worked with Alcatel, Lucent, NEC and Nortel Networks to develop
seamless interfaces between the proprietary protocols of these leading PBX
vendors and our RVP software platform and standard hardware architecture. As a
result of these relationships, we have developed substantial expertise in
understanding and interfacing with these proprietary PBX protocols. These PBX
manufacturers have tested and validated in their own labs that our RVP platform
is interoperable with a variety of their PBX equipment. Currently, our EXTender
series of products is compatible with the following PBX systems: 4400/4200
(Alcatel), DEFINITY (Lucent), NEAX 1000/2000/2400 (NEC), Meridian (Nortel
Networks) and Norstar (Nortel Networks).
The EXTender solution consists of the following component parts:
- Customer Premise Equipment, or CPE, Devices. Single- or multi-user
remote location client devices that service branch offices, remote call
centers and telecommuters; and
- Corporate PBX Gateways. PBX switch site products, located at the
corporate location, that seamlessly extend voice traffic, PBX signaling
information and PBX applications to our CPE devices.
Our EXTender series of products enables corporations to provide the
functionality of the PBX and all of its supported applications to users who
traditionally have not had access to the corporate PBX and its voice
applications because of the limitations of current voice systems. Our products
enable the PBX to act as a server that seamlessly distributes the features and
applications of PBX-based voice systems to remote locations over networks such
as ATM, digital data service, DSL, fiber, frame relay, IP, ISDN, T-1, fractional
T-1 and traditional telephone connections. Remote voice users can utilize
digital telephone sets identical to the sets deployed in the corporate
headquarters and access the corporate voice system for applications such as
voicemail, ACD and interactive voice response, and features such as three- or
four-digit internal dialing, conferencing and call forwarding. By enabling all
employees, regardless of location, to have access to the corporate voice system,
our EXTender solutions create a single, unified voice network.
[Diagrams: 3 network topology diagrams that show the implementation of our
products.]
[EDGAR DESCRIPTIONS OF DIAGRAMS]
CAPTION: SINGLE-USER PRODUCTS
1. Diagram of single-user product configuration between a corporate location at
which a PBX and data server reside, utilizing PBXtender, and two remote
locations, each with a personal computer and telephone set, utilizing an
EXTender 3000 and EXTender 1000+ via ISDN or a traditional telephone network.
CAPTION: MULTI-USER PRODUCTS
2. Diagram of multiple-user product configuration between a corporate location
at which a PBX resides, utilizing an EXTender 6000 which connects to a network
termination device which connects to public and private networks, and a remote
location. The remote location connects to the public and private network via a
network termination device. A Branch Office EXTender 6000 connects to the
network termination device. Multiple phones connect to the Branch Office
EXTender 6000.
CAPTION: BROADBAND NETWORK PRODUCTS CURRENTLY IN BETA TRIALS
3. Diagram of a corporate location with a PBX connected to a PBXGateway IP which
connects to a network termination device which is connected, through broadband
networks, to remote locations which contain (i) an IP EXTender 4000 connected to
a telephone set and personal computer, (ii) a Branch Office EXTender 6000
connected to a telephone set, and (iii) an EXTender 3200 for ISDL connected to a
telephone set and personal computer. The EXTender 3200 connects directly to the
public and private network. The Branch Office EXTender 6000 and IP EXTender 4000
connect to the public and private network via a network termination device.
CPE Devices
Our single-user product line provides telecommuters and remote call center
agents with seamless connectivity to the corporate PBX and the LAN over data
networks.
- EXTender 1000+. The EXTender 1000+ is a single-user, integrated access
device that supports both PBX voice and personal computer, or PC, data
over a single traditional telephone line. The remote user's PC and
full-featured digital telephone set plug into the product, which
terminates and multiplexes voice and data over a single telephone line.
The product contains a built-in, industry-standard 56 kilobits per
second, or Kbps, modem which enables the user to access the corporate LAN
and supports standard Windows-based, dial-up networking technology. The
EXTender 1000+ unit is situated at the remote location and connects to
either another EXTender 1000+ unit or a
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<PAGE> 40
PBXtender gateway product located at the corporate PBX site. In the future, the
EXTender 1000+ will also be able to connect to a PBXgateway IP product located
at the corporate PBX site.
- EXTender 3000. The EXTender 3000 is a single-user, integrated access
device that supports both PBX voice and PC data over an ISDN basic rate
interface, or BRI, connection. An ISDN BRI connection is composed of two
64 Kbps lines, or b-channels, that each can deliver a separate network
connection. With its built-in ISDN line interface, the EXTender 3000
enables the remote user to connect a digital telephone set and a personal
computer into the EXTender 3000. The EXTender 3000 unit situated at the
remote location is connected to either another EXTender 3000 unit or a
PBXtender gateway product located at the corporate PBX site. In the
future, the EXTender 3000 will also be able to connect to a PBXgateway IP
product located at the corporate PBX site. There are three versions of
the EXTender 3000:
- EXTender 3000S and EXTender 3000T. The EXTender 3000S and the
EXTender 3000T utilize a serial data connection and offer simultaneous
voice and PC data multiplexed over one ISDN BRI b-channel. The second
b-channel is available for analog devices such as a fax, additional
phone or a modem. The EXTender 3000T uses standard Windows-based,
dial-up networking technology to enable the user to set up a dial-up
network connection to a remote access server at the corporate location
for remote LAN access.
- EXTender 3000E. The EXTender 3000E offers dedicated voice over one
ISDN BRI b-channel and a 64 Kbps Ethernet data connection on the
second b-channel. The EXTender 3000E uses an Ethernet port and
bridging technology to enable simultaneous voice and LAN access
capabilities. In addition, standard hardware compression technology is
utilized to significantly enhance data throughput. When not used for
Ethernet data, the second b-channel is available as an analog port,
supporting a fax, additional phone or modem.
- EXTender 3200 for IDSL. The EXTender 3200 for IDSL is a single-user,
integrated access device that delivers voice and PC data over an
integrated digital subscriber line, or IDSL, network connection. IDSL is
DSL-enabled ISDN network connection that combines both b-channels into
one digital connection that can simultaneously transmit packet voice and
data. The product was developed in conjunction with Copper Mountain and
interoperates with Copper Mountain's digital subscriber line access
multiplexer, or DSLAM, product line. DSLAMs are telecommunications
equipment located in the central offices of service providers that
transmit DSL traffic to and from end users. The EXTender 3200 for IDSL
connects to a PBXgateway IP product located at the corporate PBX site.
This product is currently in beta testing and is expected to be
commercially available by the fourth quarter of calendar year 1999.
- IP EXTender 4000. The IP EXTender 4000 is a single-user product that
delivers PBX voice over IP networks. The product requires an external
network termination device such as a DSL or cable modem and delivers
IP-based remote voice over data networks. The IP EXTender 4000 connects
to a PBXgateway IP product located at the corporate PBX site. This
product is currently in beta testing and is expected to be commercially
available by the fourth quarter of calendar year 1999.
Our branch office product provides remote offices with seamless
connectivity to the corporate PBX and the LAN over data networks.
- Branch Office EXTender 6000. The Branch Office EXTender 6000 is a
multi-user product that supports 8 remote users and will scale to support
12 users following the release of a 4-port daughter card that is expected
to be commercially available in the fourth quarter of calendar year 1999.
The product was constructed with standard 19-inch, rack-mountable
hardware so a number of units can easily be deployed together to service
larger remote offices. In addition, the product has dual external WAN
interfaces that allow for multiple network options and redundancy
capability and transmits voice over a wide variety of data networks
including ATM, digital data service, DSL, fiber, frame relay, IP, ISDN,
T-1 and fractional T-1 connections. The Branch Office EXTender 6000 can
be centrally administered over a Telnet connection, an in-band RVP
connection, or with
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<PAGE> 41
SNMP or HTML interfaces. The product's ability to dynamically allocate
bandwidth between multiple users allows for flexible configurations and
bandwidth conservation. The Branch Office EXTender 6000 located at the
remote office connects to either another Branch Office EXTender 6000 unit
or a PBXgateway IP located at the corporate PBX site.
Corporate PBX Gateway Products
Our PBX gateway products, located at the corporate PBX site, interface with
the line side of the PBX and create seamless extensions of voice, PBX signaling
information and PBX applications to our remote CPE products.
- PBXtender. The PBXtender is a high density PBX gateway product that can
support up to 24 ports per chassis. The PBXtender currently supports our
EXTender 1000+ and EXTender 3000 CPE product lines. The PBXtender can be
configured with up to 12 line cards that may be mixed and matched to
support up to 12 analog users or 24 ISDN users simultaneously. The
product also has a Windows-based graphical user interface to enable
remote management and diagnostics of our CPE equipment.
- PBXgateway. The PBXgateway supports a range of our CPE products,
including both multi-user and single-user clients. Depending upon the
version of the product, the PBXgateway will transmit voice over a wide
variety of data networks including ATM, digital data service, DSL, fiber,
frame relay, IP, ISDN, T-1 and fractional T-1 connections. The PBXgateway
can be centrally administered over a Telnet connection, an in-band RVP
connection, or with SNMP and HTML interfaces.
- Branch Office EXTender 6000. The Branch Office EXTender 6000 unit,
located at the corporate PBX site, seamlessly extends the
functionality of the corporate PBX to a Branch Office EXTender 6000
located at the remote office site. This product will transmit voice
over ATM, digital data service, fiber, frame relay, ISDN, T-1 or
fractional T-1 network connections.
- PBXgateway IP. The PBXgateway IP seamlessly extends the functionality
of the corporate PBX to a variety of our multi-user and single-user IP
CPE devices, including the Branch Office EXTender 6000, EXTender 3200
for IDSL, and the IP EXTender 4000. The PBXgateway IP can support up
to 12 simultaneous users across any of these CPE devices over multiple
types of networks, including DSL and IP networks. As part of our
strategy, we intend to utilize this product as a platform to deliver
new applications and services to our remote CPE devices utilizing both
new software components that we intend to develop and third-party
software applications that we intend to incorporate into the product.
The PBXgateway IP is currently in beta testing and is expected to be
commercially available by the fourth quarter of calendar year 1999.
Other Products
- Digital-to-Analog Recording Interface. Our Digital-to-Analog Recording
Interface converts proprietary digital PBX signaling into a standard
analog audio output so that voice calls can be recorded on any voice
logger or recording device. We offer 3 configurations that support from 2
to 48 lines, and are modular in nature, allowing for easy expansion to
accommodate more users. Our Digital-to-Analog Recording Interface is
compatible with the following voice systems: DEFINITY (Lucent); Meridian
(Nortel Networks); Norstar (Nortel Networks); and DMS Centrex (Nortel
Networks).
- Telebridge. The Telebridge series of products emulates digital PBX
telephone sets and terminates calls, allowing computer telephony
integration, or CTI, applications to interface with legacy PBX systems.
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SALES AND MARKETING
We primarily sell our products through an indirect distribution system that
includes the following channels: OEMs and private label partners, ILECs, systems
integrators and distributors, telecom and datacom VARs, and broadband service
providers. We support our sales channels with our own internal sales
professionals as well as marketing programs, educational programs, field
technical support and telephone technical support. At July 31, 1999, our sales
team was composed of a vice president of sales, eight regional sales managers,
three systems engineers, three channel sales managers and two sales
administrators. Our multi-channel strategy enables us to create end-user demand
for our products and services, and access corporate opportunities identified by
our channel partners, while also allowing the customers to choose the reseller
that is most appropriate for delivering those products and services to them.
OUR PRIMARY DISTRIBUTION CHANNELS
<TABLE>
<S> <C>
OEMs and Private Label Partners..... Alcatel, Bell Canada, Dictaphone, Lucent,
NEC
ILECs............................... BellSouth, GTE, SBC
Systems Integrators and
Distributors...................... Anixter, Dacon, Ingram Micro, Sprint North
Supply, Williams Communications
Telecom and Datacom VARs............ Northwest Extension, PB Exchange, Stevens
Communications, TeleCommute Solutions
Broadband Service Providers*........ AT&T Local Services, HarvardNet, JATO
Communications, Northpoint Communications,
Rhythms NetConnections, UUNet (MCI WorldCom)
</TABLE>
- ---------------
* Products in beta testing; channel under development
Our regional sales managers provide support to all of the channels in their
geographic territory. They work closely with our channel partners, participating
in end-user briefings, proposals, product training sessions, end-user seminars,
trade shows and other demand generating activities. In addition, regional sales
managers are involved in generating and qualifying end-user leads that are
closed in partnership with our indirect channels.
Our field-based systems engineers, located in Alberta, Tennessee and New
Jersey, provide our channels with technical training and perform pre- and
post-sale technical support for our channels and end-user customers. All of our
systems engineers have in-depth industry experience and product expertise. They
assist our channel partners with proposals, configurations, requests for
quotations and executive briefings, and perform other consultative duties.
Our channel sales managers work at a corporate level with all of our
largest channel partners in developing sales and marketing plans that are
implemented at the field levels. These channel sales managers are primarily
responsible for driving business through the Lucent, NEC and Nortel Networks
channels. They also work with our regional territory managers on large sales
opportunities and national accounts.
Our VARs are responsible for identifying potential business customers,
selling our products as part of complete solutions, and installing and
supporting the equipment at end-user sites. We establish relationships with our
resellers through written reseller agreements that provide pricing, discounts,
and terms and conditions under which they may purchase our products for resale.
These agreements are generally non-exclusive, may be terminated at will and do
not prevent our resellers from carrying competing lines or require our resellers
to attain specific sales levels. We provide significant sales, marketing,
training and technical support to our channels.
Sales outside of the United States accounted for 18.3% of sales in fiscal
year 1999. We sell globally through Alcatel, Lucent and NEC. In addition, we
have a distribution arrangement with Dacon
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<PAGE> 43
Electronics plc for European sales of Nortel Networks-based products, as well as
distribution arrangements with 10 other international distributors.
We focus our marketing efforts on awareness generation, lead generation and
sales support activities. Our marketing audience includes existing and
prospective customers, channel partners, trade and business press, industry
analysts and others who are influential in the industry.
We participate in over 20 trade shows annually, taking advantage of joint
marketing opportunities with our resellers and channel partners whenever
possible. Trade show efforts include shows in the telecommunications,
teleworking, CTI, networking, call center and service provider industries. We
participate in many seminars with our resellers, as well as all major PBX user
group events and industry-related conferences. We use direct marketing programs
to generate awareness and qualified leads. Many campaigns are executed in
conjunction with our resellers, customized with their messages and contact
information and then mailed to their prospect and customer lists. Our web site
serves as an information source for end users, prospects and channel partners,
as well as a lead generation tool and customer service resource. Additionally,
we dedicate significant marketing resources to public relations activities,
generation of product and partner press releases, speaking opportunities,
by-lined articles, product reviews, customer success stories and editorial
coverage.
To support our sales channels, we prepare training materials,
presentations, collateral, cost-justification tools, case studies, product
configurations, fact sheets, product introduction kits and distributor success
guides. Our regional sales managers and systems engineers regularly visit our
reseller offices and conduct product and technical training. Our marketing
database and sales force automation system currently contains over 20,000
records that can be segmented and are marketed to regularly.
CUSTOMER SUPPORT
A high level of customer support and service is critical to developing
long-term relationships with our major distribution channels and end-user
customers. The majority of our service and support activities are related to
installation support and initial network configuration issues. In North America,
we also offer a variety of comprehensive and flexible maintenance and support
programs including basic product warranty, installation services, 24 hours a
day, 7 days a week remote telephone support and onsite maintenance services. Our
products are architected with support in mind. For example, our branch products
are engineered with remote monitoring, management and diagnostic capabilities so
that problems can be diagnosed on-line, thereby reducing the time and costs
associated with dispatching a technician to a remote site.
A number of our distribution partners support our products. These
distribution partners provide installation, onsite maintenance and telephone
support services to our end users. To complement this service infrastructure, we
have engaged Vital Network Services, an outsourced technical support and
customer services organization, to provide fee-based telephone support,
installation and onsite maintenance services. We sell these services directly
and indirectly to end users. To date, our revenues attributable to customer
service and support services have been immaterial. We provide high-level,
back-up technical support and engineering assistance for both our distribution
partners and Vital Network Services. We have established strict escalation
guidelines with both our distribution channels and Vital Network Services to
ensure that the appropriate technical resources and management attention within
our company are focused on problems that are not solved in a timeframe
commensurate with the problem's priority.
At July 31, 1999, we employed five people in customer support. Although we
may augment our Newton, Massachusetts and Calgary, Alberta-based support staff,
we do not intend to recruit our own direct field service and support
organization.
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CUSTOMERS
We sell substantially all of our products through independent channel
partners. The following is a representative list of our indirect channel
partners responsible for revenues of $50,000 or more in the 12 months ending
July 31, 1999:
<TABLE>
<S> <C> <C>
Alcatel Dacon Electronics PB Exchange
Ameritech Dictaphone Positron
Anixter GTE SBC
BC Tel Loffler Business Systems Sprint North Supply
Bell Canada Lucent Stevens Communications
BellSouth Mitel TCI
Charter Communications NEC Teleswitch
Coastcom Northwest Extension Williams Communications
</TABLE>
For the fiscal year ended April 30, 1999, Lucent accounted for
approximately 46.7% of our revenues, which consisted of Lucent-branded products
that constituted 43.7% of our revenues and MCK-branded products that constituted
3.0% of our revenues. For the three-month period ended July 31, 1999, Lucent
accounted for approximately 46.3% of our revenues, which consisted of
Lucent-branded products that constituted 29.6% of our revenues and MCK-branded
products that constituted 16.7% of our revenues. No other customer represented
over 10% of revenues in either period. Approximately 78.7% and 74.3% of our
revenues were derived from ten customers in fiscal 1999 and in the three-month
period ended July 31, 1999, respectively.
The following is a representative list of end users, by vertical market
segment, that have deployed multiple systems:
<TABLE>
<CAPTION>
FINANCIAL/INSURANCE TECHNOLOGY GOVERNMENT/EDUCATION HOSPITALITY/TRAVEL
------------------- ---------- -------------------- ------------------
<S> <C> <C> <C>
Arthur Andersen 3M American Diabetes American Express Travel
Bankers Trust Ameritrade Association Avis
Bear Stearns Ascend City of San Antonio Promus Hotels
Comdisco Bottomline Technologies Massachusetts State Travel Services
Deloitte & Touche Citrix Systems Police International
Fidelity Digital (Compaq) New York University United Airlines
General Auto Insurance Landmark Systems U.S. Postal Service World Travel Partners
MFS Northrop Grumman
Merrill Lynch
Nationsbank (Bank of TELECOM/MEDIA OTHER
America) Argon
Option One CNN Circuit City
Prudential Securities Harte-Hanks Federal Express
Safeco Sitel Otis Elevator
Sun Trust TCI Pacificorp
TD Waterhouse Group Turner Broadcasting Pfizer
</TABLE>
RESEARCH AND DEVELOPMENT
To maintain our technology leadership position, we focus our research and
development efforts on improving the functionality and performance of our
existing products and designing new products that address customer needs and
changes in the marketplace. We have assembled a team of experienced hardware and
software engineers with capabilities in both networking and telecommunications.
Our engineering expertise includes significant understanding of:
- the line side of proprietary PBX systems;
- digital audio technology, such as echo cancellation and voice compression
algorithms;
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- IP telephony;
- wide area network and telephony interfaces; and
- network diagnostic and management frameworks.
At July 31, 1999, we employed 31 people in our engineering organization,
and intend to continue to expand all functional areas of the engineering
organization. We perform research and product development activities at our
principal offices in Newton, Massachusetts, as well as at our Calgary, Alberta
development facility.
Our research and development process is driven by market demand. Product
development begins with a comprehensive functional product specification based
on input from all functional groups and levels within our company. In addition,
we value feedback from our end-user customers and distribution channel partners,
and have incorporated a significant amount of customer-requested functionality
to date. We are also active in industry bodies and standards committees and
utilize information from these organizations in the product development process.
Finally, we have maintained an ongoing dialogue and established technology
partnerships with a number of PBX manufacturers, internetworking vendors,
broadband equipment suppliers and service providers. We will continue to work
with these companies to develop products that meet specific market requirements.
In addition to designing enhancements for our current products, we will
work to develop new remote voice products that extend the functionality of the
PBX across multiple networks, particularly broadband networks. Furthermore, we
plan to develop new software components for our universal hardware architecture
that expand the basic capabilities of our solutions to enable the delivery of
new applications and services. We are focusing development efforts on, among
other things, supporting additional PBX protocols and new network environments,
developing additional software applications, expanding the port density of our
existing products and implementing additional network management capabilities.
Finally, we will continue to work with third-party software and hardware
manufacturers to establish interoperability between our products and other
important elements within common network environments.
PRODUCT VALIDATION LABORATORY
Over the last year, we have hired the personnel and purchased the equipment
necessary to build our product validation laboratory. Of the 31 people in our
engineering organization, 5 are dedicated full time to our product validation
laboratory. At both our Newton, Massachusetts and Calgary, Alberta development
facilities, we have constructed state of the art laboratories with equipment
from such vendors as ADC Kentrox, Ascend, Cisco, Copper Mountain, Flowpoint,
IBM, Lucent, NEC, Netopia, Newbridge, Nortel Networks, Packeteer and Paradyne.
Our Calgary, Alberta facility system tests the EXTender product line and
validates our product's integration with the major PBX vendors that we support.
We conduct extensive product testing to ensure that our equipment meets the high
standards for voice quality and reliability associated with mission critical
systems such as PBXs. We also conduct extensive tests on the embedded systems
within our EXTender product line as well as on all the features and functions of
the EXTenders. Our Calgary facility also conducts tests that ensure that our
products are compatible with the PBXs and respective digital telephone sets of
manufacturers that we support.
Our Newton, Massachusetts facility tests system interoperability. The
ability to deliver traffic within multiple network environments and to
interoperate with equipment from numerous vendors has become a key component to
the success of communications equipment companies. Because no communications
equipment product can be validated independently of the network within which it
operates or independently from the equipment with which it interfaces, this lab
conducts extensive tests of our product line operating within multiple network
environments and interacting with equipment from numerous equipment vendors. We
conduct extensive tests that measure device performance, quality of service and
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<PAGE> 46
voice prioritization within multiple network environments and across a range of
network conditions. Our facilities contain the following equipment and network
circuits to conduct these tests:
- ATM switches, DSLAMs and frame relay access devices;
- enterprise routers that support multiple network interfaces and protocols
including ATM, Ethernet, frame relay, T-1 and V.35;
- multiplexers, inverse multiplexers, channel banks, and channel service
units, or CSUs, and data service units, or DSUs;
- CPE equipment such as DSL modems; and
- traditional telephone, ISDN, 56 Kbps leased line, T-1 and DSL circuits.
By combining the capabilities of our two facilities, we have implemented a
product validation procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is compatible with
most widely deployed network equipment and is capable of adapting to a wide
range of network conditions. Furthermore, the engineers in our product
validation laboratory work continually with validation engineers at other
equipment companies in order to compile feedback and recommendations to improve
our products.
MANUFACTURING
We outsource our manufacturing to two contract manufacturers. Celestica,
which is located in Exeter, New Hampshire and is ISO 9002 registered,
manufactures the Branch Office EXTender and PBXgateway IP products. They provide
full turnkey services, including material procurement, final assembly, testing,
shipment to our customers and warranty repair. Electronic Manufacturing Group
located in Calgary, Alberta manufactures all of our other product lines.
Electronic Manufacturing Group also provides us with printed circuit assemblies.
We are ISO 9001 registered and complete the final assembly, testing and
inspection of these printed circuit assemblies at our Calgary, Alberta facility.
We design and develop the key components, including printed circuit boards
and software, for all of our products. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. We design the tests and specify the testing equipment for the
product testing performed at Celestica and at our facility in Calgary, Alberta.
We use a rolling six-month forecast based upon anticipated product orders
to determine our material requirements. Lead times for the materials and
components that we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at a given time.
We, along with our contract manufacturers, may terminate our contracts without
cause at any time. At that time, the terminating party must honor all open
purchases.
COMPETITION
We compete in a new, rapidly evolving and highly competitive and fragmented
industry that is subject to increasing product, market and technology changes
brought about by the introduction of new technologies, the deployment of
broadband networks and changes in the regulatory environment. We believe that
the main competitive factors in our market are the following:
- technology partnerships, particularly with the major PBX manufacturers
and service providers;
- system reliability and performance;
- sales and distribution capability;
- price/performance characteristics;
- access to third-party technology;
- conformance to industry standards;
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- brand name recognition;
- ease of deployment and use;
- timeliness of product introductions;
- product features and breadth;
- customer relationships; and
- technical support and service.
We believe our success in competing with other manufacturers of
communications products depends primarily on:
- our ability to enter into and maintain key technology and distribution
relationships with third-party manufacturers, distributors, resellers and
service providers in our market segment;
- our engineering, marketing and sales skills;
- the price, quality and reliability of our products; and
- our delivery and service capabilities.
Our principal and potential competitors include large telecommunications
manufacturers such as Nortel Networks and a number of other public and private
companies that are developing next generation network access products that
target the branch office and telecommuting marketplaces. We expect competition
to intensify in the future and new competitors to emerge. Many of our
competitors are substantially larger than we are and have significantly greater
financial, sales and marketing, technical, manufacturing and other resources,
more established distribution channels and stronger relationships with service
providers. These competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we can.
Furthermore, we believe some of our competitors may offer aggressive sales
terms, including financing alternatives, which we might not be able to match.
These competitors may enter our existing or future markets with solutions that
may be less expensive, provide higher performance or additional features or be
introduced earlier than our solutions. Given the market opportunity, we also
expect that other companies may enter our market with better products and
technologies. If any technology that is competing with ours is more reliable,
has better quality, is less expensive or has other advantages over our
technology, then the demand for our products could decrease.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. Successful new
product introductions or enhancements by our competitors could reduce the sales
or market acceptance of our products, perpetuate intense price competition or
make our products obsolete. To be competitive, we must continue to invest
significant resources in research and development, sales and marketing and
customer support. We cannot be sure that we will have sufficient resources to
make these investments or that we will be able to make the technological
advances necessary to be competitive.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark, trade
secret and other intellectual property law, nondisclosure agreements and other
protective measures to protect our proprietary rights. We also utilize
unpatented proprietary knowledge and trade secrets, and employ various methods
to protect our trade secrets and knowledge. We presently have no patents.
41
<PAGE> 48
We believe our intellectual property rights are significant and that the
loss of all or a substantial portion of such rights could have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that our intellectual property protection measures
will be sufficient to prevent misappropriation of our technology. Some of our
contractual arrangements provide third parties with access to our source code
and other intellectual property upon the occurrence of specified events. Such
access could enable these third parties to use our intellectual property and
source code to develop and manufacture competing products, which would adversely
affect our performance and ability to compete. In addition, we cannot be certain
that others will not independently develop substantially equivalent intellectual
property, gain access to our trade secrets or intellectual property, or disclose
our intellectual property or trade secrets. Furthermore, the laws of many
foreign countries do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire or be required
to renew or to obtain licenses from others in order to develop and market
commercially viable products effectively. There can be no assurances that any
necessary licenses will be available on reasonable terms, if at all.
The communications industry is characterized by the existence of a large
number of patents and frequent claims and related litigation regarding patent
and other intellectual property rights. In particular, leading companies in the
communications markets have extensive patent portfolios. From time to time,
third parties may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to us. We expect that we may increasingly be subject to infringement
claims as the number of products and competitors in the market for our
technology grows and the functionality of products overlaps. Although we have
not been a party to any litigation asserting claims that allege infringement of
intellectual property rights, we may be a party to litigation in the future. In
addition, third parties may assert claims or initiate litigation against us or
our manufacturers, suppliers, OEMs, technology partners or customers alleging
infringement of their proprietary rights with respect to our existing or future
products.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
EMPLOYEES
At July 31, 1999, we had a total of 80 employees, of which 31 were in
research and development, 29 were in sales, marketing, business development and
customer support, 7 were in manufacturing, and 13 were in finance,
administration and operations. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider relations with
our employees to be good.
FACILITIES
We currently lease approximately 8,000 square feet of space at our
headquarters in Newton, Massachusetts under a lease that expires in June 2002,
and lease an additional 1,500 square feet at our headquarters building in Newton
on a month-to-month basis. We are currently in need of more space and anticipate
leasing additional office space in our current building in Newton, Massachusetts
or moving our corporate headquarters to new office space in the Newton area in
the next 6 to 12 months. We also lease approximately 8,500 square feet at our
development center in Calgary, Alberta under a lease that expires in December
2000.
LEGAL PROCEEDINGS
We are currently not a party to any material legal proceedings.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors and their ages as of
September 30, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven J. Benson.......................... 40 President, Chief Executive Officer,
Chairman and Director
Paul K. Zurlo............................. 33 Chief Financial Officer and Vice President
of Operations
Michael D. Williams....................... 41 Vice President of Business Development
Patrick J. Curley......................... 39 Vice President of Engineering
Jeffrey P. Dickerson...................... 39 Vice President of Sales
Joan E. Lockhart.......................... 43 Vice President of Marketing
J. Robert Geiman.......................... 26 Director of Corporate Development
Gregory M. Avis(1)........................ 40 Director
Michael H. Balmuth(2)..................... 36 Director
John B. Landry(2)......................... 51 Director
Calvin K. Manz............................ 46 Director
Paul Severino(1).......................... 52 Director
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Steven J. Benson has served as our President, Chief Executive Officer and a
Director of MCK since June 1997 and Chairman since August 1999. From September
1992 to April 1997, he served as Senior Vice President of Worldwide Sales and
Marketing at Shiva Corporation, a manufacturer of data access products. From
January 1988 to August 1992, Mr. Benson served as Director of Worldwide Sales
and Marketing for Lotus Development Corporation's Portable Computing Group. Mr.
Benson holds a Bachelor's degree from Bentley College.
Paul K. Zurlo has served as our Chief Financial Officer and Vice President
of Operations since September 1997. From July 1995 to June 1997, he served as a
Vice President at Summit Partners, a venture capital firm. Summit Partners and
its affiliates manage a number of venture capital funds, including Summit
Ventures IV, L.P., Summit Subordinated Debt Fund L.P. and Summit Investors III,
L.P., which are all stockholders of MCK. From July 1993 to July 1995, Mr. Zurlo
was a consultant with Bain & Company. Mr. Zurlo holds a Bachelor's degree from
Georgetown University and an M.B.A. from Harvard University.
Michael D. Williams has served as our Vice President of Business
Development since July 1997. From December 1994 to July 1997, he served in a
series of increasingly senior management positions at Gandalf Canada Ltd., a
networking solutions provider for the remote access market, most recently as the
Vice President of Product Marketing. From December 1992 to November 1994, Mr.
Williams served as the Strategic Marketing Manager for Canada at AT&T Network
Systems (now Lucent). Mr. Williams holds a Bachelor's degree from the University
of Waterloo.
Patrick J. Curley has served as our Vice President of Engineering since May
1998. From July 1994 to March 1998, he served as Director and Vice President of
Engineering at Windata, Inc., a wireless local area networking company. From
September 1991 to June 1994, Mr. Curley served as Director of Engineering at
PictureTel Corporation, a video and data conferencing company. He holds a
Bachelor's degree from Boston University.
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<PAGE> 50
Jeffrey P. Dickerson has served as our Vice President of Sales since
September 1997. From November 1996 to August 1997, he served as Vice President
of Sales and Service at Intelligent Environments, Inc., a British Internet
software company. From February 1993 to November 1996, Mr. Dickerson served as
Vice President of Direct Sales at VMark Software, Inc., a data warehousing
software company. Mr. Dickerson holds a Bachelor's degree from North Adams State
College.
Joan E. Lockhart has served as our Vice President of Marketing since July
1997. From May 1997 to July 1997, she served as Director of Marketing
Communications and Product Marketing for Anysoft, Inc., an Internet software
company. From July 1996 to May 1997, she served as Director of Corporate
Communications for PictureTel Corporation. From June 1992 to June 1996, Ms.
Lockhart served as Director of Corporate Marketing for Avid Technology, Inc., a
digital media company. Ms. Lockhart holds a Bachelor's degree from S.U.N.Y.
Binghamton.
J. Robert Geiman has served as our Director of Corporate Development since
January 1999. From July 1995 to December 1998, he served as an Associate at
Summit Partners. Mr. Geiman holds a Bachelor's degree from Dartmouth College.
Gregory M. Avis has served as a Director of MCK since May 1996. Mr. Avis
has served as a Managing Partner of Summit Partners since 1990, and has been a
General Partner since 1987. Mr. Avis also serves as a director of: Ditech
Communications Corporation, a manufacturer of communications equipment; Extended
Systems, Inc., a network peripherals and wireless communications company;
Powerwave Technologies, Inc., a designer and manufacturer of power amplifiers
for wireless communications; Splash Technology Holdings, Inc., a developer of
color server systems; and several privately held companies. Mr. Avis holds a
Bachelor's degree from Williams College and an M.B.A. from Harvard University.
Michael H. Balmuth has served as a Director of MCK since September 1997. He
has served as a Principal at Summit Partners since December 1998 and a Vice
President from March 1997 to December 1998. From August 1991 to February 1997,
Mr. Balmuth served as a Principal at Broadview Associates. He is a director of
several private companies. Mr. Balmuth holds a Bachelor's degree from Dartmouth
College and an M.B.A. from Harvard University.
John B. Landry has served as a Director of MCK since September 1997. Since
1995, he has served as Vice President of Technology Strategy for IBM. In
addition, since February 1995, Mr. Landry has served as the Chairman of
Anyday.com, an Internet calendar and personal information management company.
From March 1996 to January 1999, he served as Chairman of Narrative
Communications, an Internet-based advertising and direct marketing company. From
December 1990 to June 1995, Mr. Landry served as the Senior Vice President of
Development and Chief Technology Officer for Lotus Development Corporation. He
also serves as a director of Giga Information Group, a market research firm, and
Interliant, an applications service provider, as well as several private
companies. Mr. Landry holds a Bachelor's degree from Babson College.
Calvin K. Manz has served as a Director since June 1989. He founded our
company in June 1989, and served as our President and Chief Executive Officer
until June 1997. He has served as the President and Chief Executive Officer of
Odyssey Financial Inc., a financial and management advisor to technology
companies, since December 1997. Mr. Manz was a Director of Telebackup Systems
Inc., a software utilities company, from June 1997 until the company merged in
May 1999 with Veritas Software, a supplier of storage management software. Mr.
Manz also serves as a director of International Properties Group Ltd., a
publicly-traded real estate company in Canada, and several private companies.
Paul Severino has served as a Director of MCK since July 1999. He has
served as the Chairman of NetCentric Corporation, a provider of Internet
protocol telephony applications, since August 1997. From October 1994 to
November 1996, Mr. Severino served as the Chairman of the Board of Bay Networks,
Inc., after its formation from the merger of Wellfleet and Synoptics. From
October 1986 to October 1994, he served as the President and Chief Executive
Officer of Wellfleet Communications, Inc., a company he co-founded and which
merged with Bay Networks. He is a director of Media 100, Inc., a provider of
44
<PAGE> 51
digital video systems, Interspeed, Inc., a remote access equipment company, and
SilverStream Software, Inc., an Internet software company. Mr. Severino holds a
Bachelor's degree from Rensselaer Polytechnic Institute.
Following this offering, the Board of Directors will consist of six
directors divided into three classes, with each class serving for a term of
three years. At each annual meeting of stockholders, directors will be elected
by the holders of common stock to succeed the directors whose terms are
expiring. Messrs. Benson and Manz are Class I directors whose terms will expire
in 2000. Messrs. Balmuth and Landry are Class II directors whose terms will
expire in 2001, and Messrs. Avis and Severino are Class III directors whose
terms will expire in 2002.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee composed of Messrs.
Avis and Severino, which makes recommendations concerning salaries and incentive
compensation for our employees and administers the 1996 Stock Option Plan and
the 1999 Stock Option and Grant Plan. The Board of Directors also has an Audit
Committee composed of Messrs. Balmuth and Landry, which recommends the
engagement of our outside auditors and reviews our accounting controls, the
results and scope of the audit and other services provided by our outside
auditors. The Board of Directors may establish, from time to time, other
committees to facilitate the management of our business.
DIRECTOR COMPENSATION
We do not currently compensate our directors, but they are reimbursed for
out-of-pocket expenses incurred in connection with attendance at meetings of the
Board of Directors or its committees. Our directors are generally eligible to
participate in the 1996 Stock Option Plan and the 1999 Stock Option and Grant
Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of our Board of Directors are
Messrs. Avis and Severino. None of the executive officers serves on the Board of
Directors or Compensation Committee of any entity which has one or more
executive officers serving as a member of our Board of Directors or Compensation
Committee.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
earned for services rendered to us by our current Chief Executive Officer and
each of our four other most highly compensated executive officers whose salary
and bonus compensation for the fiscal year ended April 30, 1999 exceeded
$100,000, collectively referred to below as the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION NUMBER OF SHARES ALL
------------------- UNDERLYING OPTIONS OTHER
NAME & PRINCIPAL POSITION(1) SALARY BONUS(2) GRANTED(#) COMPENSATION(3)
- ---------------------------- -------- -------- ------------------ ---------------
<S> <C> <C> <C> <C>
Steven J. Benson....................... $271,356 $243,268 $660
President and Chief Executive Officer
Paul K. Zurlo.......................... 109,584 34,258 290
Chief Financial Officer and Vice
President of Operations
Michael D. Williams.................... 110,000 24,280 264
Vice President of Business
Development
Jeffrey P. Dickerson................... 120,001 75,568 264
Vice President of Sales
Joan E. Lockhart....................... 122,193 15,308 304
Vice President of Marketing
</TABLE>
- ---------------
(1) The number of shares of restricted stock held by each of the Named Executive
Officers at the end of the fiscal year ended April 30, 1999 is as follows:
Mr. Benson, shares; Mr. Zurlo, shares; Mr. Williams,
shares; Mr. Dickerson, shares; and Ms. Lockhart, shares. The
value of these shares of restricted stock is as follows: Mr. Benson,
$ ; Mr. Zurlo, $ ; Mr. Williams, $ ; Mr. Dickerson,
$ ; and Ms. Lockhart, $ . The values of the restricted stock
holdings were calculated on the basis of the fair market value of $ per
share at April 30, 1999, as determined by the Board of Directors.
(2) Includes amounts paid in respect of interest due to us from the Named
Executive Officers on certain promissory notes. See "Certain Transactions."
(3) Represents premiums paid for term life insurance.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended April 30, 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------ ANNUAL RATES OF STOCK
NUMBER OF SHARES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Benson......
Paul K. Zurlo.........
Michael D. Williams...
Jeffrey P.
Dickerson...........
Joan E. Lockhart......
</TABLE>
- ---------------
(1) Based on an aggregate of options granted to officers and
employees during the fiscal year ended April 30, 1999.
(2) All stock options granted vest as to 1/4th of the underlying shares on the
first anniversary of the date of grant and 1/48th of the underlying shares
monthly thereafter, so long as the optionee remains as an employee.
(3) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 5% and 10% appreciation rates
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<PAGE> 53
established in regulations of the SEC, compounded annually. The potential
realizable value is not intended to predict future appreciation of the price
of our common stock and do not give effect to any actual appreciation after
the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held by the Named Executive
Officers. The Named Executive Officers did not exercise any stock options during
fiscal year 1999. There was no public trading market for our common stock as of
April 30, 1999. Accordingly, the values of the unexercised in-the-money options
have been calculated on the basis of the fair market value at that time of
$ per share, as determined by the Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Benson........................... -- -- $
Paul K. Zurlo.............................. -- --
Michael D. Williams........................ -- --
Jeffrey P. Dickerson....................... -- --
Joan E. Lockhart........................... -- --
</TABLE>
1999 STOCK OPTION AND GRANT PLAN
Our Board of Directors and stockholders adopted the 1999 Stock Option and
Grant Plan in August 1999. The 1999 Stock Option and Grant Plan permits us to
grant incentive stock options, non-qualified stock options and restricted and
unrestricted stock. These grants may be made to our officers, employees,
independent directors, consultants, advisors and key persons. The 1999 Stock
Option and Grant Plan allows for the issuance of shares of common stock.
No shares have been issued under the 1999 Stock Option and Grant Plan.
The 1999 Stock Option and Grant Plan is administered by the Board of
Directors or a committee designated by the Board of Directors. Subject to the
provisions of the 1999 Stock Option and Grant Plan, the Board of Directors or
the committee may select the individuals eligible to receive awards, determine
the terms and conditions of the awards granted, accelerate the vesting schedule
of any award and generally administer and interpret the plan.
The exercise price of options granted under the 1999 Stock Option and Grant
Plan is determined by the Board of Directors or the committee. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant, or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power. Non-qualified stock options may be
granted at prices which are less than the fair market value of the underlying
shares on the date granted. Options are typically subject to vesting schedules,
terminate ten years from the date of grant and may be exercised for specified
periods after the termination of the optionee's employment or other service
relationship with us. Upon the exercise of options, the option exercise price
must be paid in full either in cash or by certified or bank check or other
instrument acceptable to the Board of Directors or the committee or, in the sole
discretion of the Board of Directors or the committee, by delivery of shares of
common stock that have been owned by the optionee free of restrictions for at
least six months. The exercise price may also be delivered to us (a) by the
optionee in the form of a promissory note if the loan of such funds to the
optionee has been authorized by the Board of Directors and the optionee pays so
much of the exercise price as represents the par value of the common stock
acquired in a form other than
47
<PAGE> 54
a promissory note and (b) by a broker under irrevocable instructions to the
broker selling the underlying shares from the optionee.
The purchase price, and vesting dates and/or requirements of restricted
stock awards are determined by the Board of Directors or the committee. The
Board of Directors or the committee may place conditions on the restricted stock
awards such as, continued employment and/or the achievement of performance goals
or objectives in a grant document. Restricted stock may not be sold, assigned,
transferred or pledged except as specifically provided in the grant document. If
a restricted stock award recipient's employment or other relationship with us
terminates or other events specified in the grant document occur, we have the
right to repurchase some or all of the shares of stock subject to the award at
the purchase price of such stock.
In the event of a merger, reorganization or consolidation, the sale of all
or substantially all of our assets or all of our outstanding capital stock or a
liquidation or other similar transaction, 50% of all outstanding awards issued
under the 1999 Stock Option and Grant Plan that are not then vested will become
fully vested and exercisable upon the closing of the transaction. In the event
of any such merger, reorganization or sale in which the outstanding awards
issued under the 1999 Stock Option and Grant Plan are not assumed by the
surviving entity, or equivalent substitute awards are not issued by such issuing
entity, all of the outstanding awards issued under the 1999 Stock Option and
Grant Plan that are not then vested will become fully vested and exercisable
upon the closing of the transaction. In such event, all awards issued under the
1999 Stock Option and Grant Plan will terminate upon closing of such
transactions. All participants under the 1999 Stock Option and Grant Plan will
be permitted to exercise, for a period of 15 days before any such termination,
all awards held by them which are then exercisable or will become exercisable
upon the closing of the transaction.
1996 STOCK OPTION PLAN
Our Board of Directors and stockholders adopted the 1996 Stock Option Plan
in June 1996. The 1996 Stock Option Plan permits us to grant incentive stock
options and non-qualified stock options to our officers, employees, directors,
consultants, and advisors. The 1996 Stock Option Plan allows for the issuance of
shares of common stock. Of the shares reserved for issuance under the
1996 Stock Option Plan, shares remain available for issuance.
The 1996 Stock Option Plan may be administered by the Board of Directors or
a committee designated by the Board of Directors. Subject to the provisions of
the 1996 Stock Option Plan, the Board of Directors or the committee may select
the individuals eligible to receive awards, determine the terms and conditions
of the awards granted, accelerate the vesting schedule of any award and
generally administer and interpret the 1996 Stock Option Plan.
The exercise price of options granted under the 1996 Stock Option Plan
shall be determined by the Board of Directors or the committee. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant, or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of outstanding capital stock. Non-
qualified stock options may be granted at prices which are less than the fair
market value of the underlying shares on the date granted. Options are typically
subject to vesting schedules, terminate ten years from the date of grant and may
be exercised for specified periods after the termination of the optionee's
employment or other service relationship with us. Upon the exercise of options,
the option exercise price must be paid in full either in cash or by certified or
bank check or other instrument acceptable to the Board of Directors or committee
or, in the sole discretion of the Board of Directors or committee, by delivery
of shares of common stock that have been owned by the optionee free of
restrictions for at least six months. The exercise price may also be delivered
to us (a) by the optionee in the form of a promissory note if the loan of such
funds to the optionee has been authorized by the Board of Directors and the
optionee pays that part of the exercise price that represents the par value of
the common stock acquired in
48
<PAGE> 55
a form other than a promissory note and (b) by a broker under irrevocable
instructions to the broker selling the underlying shares from the optionee.
In the event of a merger, reorganization or consolidation, the sale of all
or substantially all of our assets or all of our outstanding capital stock or a
liquidation or other similar transaction in which the outstanding awards issued
under the 1996 Stock Option Plan are not assumed by the surviving entity, or
equivalent substitute options are not issued by such surviving entity, then all
outstanding awards issued under the 1996 Stock Option Plan that are not then
vested will become fully vested and exercisable upon the closing of the
transaction. All awards issued under the 1996 Stock Option Plan will terminate
upon any of the transactions described above. All participants under the 1996
Stock Option Plan will be permitted to exercise, for a period of 15 days before
any such termination, all awards held by them which are then exercisable or will
become exercisable upon the closing of the transaction.
RESTRICTED AND UNRESTRICTED STOCK GRANTS
We sold an aggregate of shares of restricted common stock to our
employees and directors for an aggregate cash purchase price of $ ,
including an aggregate of shares sold to Messrs. Benson, Zurlo, Williams
and Dickerson and Ms. Lockhart for an aggregate purchase price of $ . Shares
of restricted common stock sold to employees and directors generally vest upon a
specified date or dates, subject to accelerated vesting for 50% of any unvested
shares upon a merger in which we are not the surviving company, or the sale of a
majority of our voting stock or substantially all of our assets, with unvested
shares being subject to repurchase at cost upon the termination of the
purchaser's employment or other relationship with us. In the event the
purchaser's employment or other relationship with us is terminated for cause,
all shares of restricted stock sold to the purchaser are generally subject to
repurchase by us at the purchaser's cost. shares of Mr. Benson's
restricted stock will vest upon completion of this offering.
SEVERANCE AGREEMENT
We entered into a severance agreement with Steven J. Benson on June 17,
1997. The severance agreement provides that, in the event Mr. Benson's
employment is terminated without cause, Mr. Benson will continue to receive
salary and benefits for six months or until Mr. Benson is reemployed, whichever
occurs first.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of the Board of Directors, non-officer employees may
be, indemnified by us to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on our behalf. The by-laws
also provide that the right of directors and officers to indemnification shall
be a contract right and shall not be exclusive of any other right now possessed
or hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. We also have directors' and officers' insurance against certain
liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or controlling persons MCK as
described above, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
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<PAGE> 56
CERTAIN TRANSACTIONS
Certain stock option grants to our directors and executive officers are
described in this prospectus under the caption "Management -- Executive
Compensation."
PRIVATE PLACEMENT TRANSACTIONS
We have issued preferred stock in private placement transactions as
follows:
<TABLE>
<CAPTION>
NUMBER
OF PRICE PER AGGREGATE
DATE OF ISSUANCE SERIES SHARES SHARE CONSIDERATION
---------------- ----------------------------- -------- --------- -------------
<S> <C> <C> <C> <C>
June 1996.................... Series E Redeemable Preferred $ $
of subsidiary
June 1996 and July 1998...... Series A Redeemable Preferred
June 1996.................... Series B Redeemable
Convertible Preferred
July 1998.................... Series C Redeemable Preferred
July 1998.................... Series D Redeemable
Convertible Preferred
</TABLE>
The following table summarizes the shares of our preferred stock and Series
E Redeemable Preferred Stock of our subsidiary purchased by our Named Executive
Officers, directors and 5% stockholders, and persons and entities associated
with them:
<TABLE>
<CAPTION>
SERIES B SERIES D
SERIES A REDEEMABLE SERIES C REDEEMABLE SERIES E
REDEEMABLE CONVERTIBLE REDEEMABLE CONVERTIBLE REDEEMABLE
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
-------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Summit Group......................
Lazard Freres Group...............
Calvin K. Manz....................
</TABLE>
For more detailed information regarding the investors, see "Principal
Stockholders."
We have also issued common stock and stock options in private placement
transactions to our executive officers and directors as follows:
On January 12, 1998, we issued restricted stock to certain of our executive
officers. We accepted promissory notes as consideration for the restricted
stock. Steven J. Benson, Paul K. Zurlo, Michael D. Williams, Jeffrey P.
Dickerson and Joan E. Lockhart each issued a promissory note to us in the
principal amounts of $ , $ , $ , $ and
$ , respectively, for , , , and
shares of common stock. These promissory notes bear interest at a compound
annual rate of 6%. The principal amount of the promissory notes and any accrued
and unpaid interest is required to be repaid with the net, after-tax proceeds
from the sale of the restricted stock granted to the executive officer and paid
for with these promissory notes. The principal amount of the promissory notes
and any accrued and unpaid interest are due and payable on the earlier of
January 12, 2003 or 60 days after the termination of the executive officer's
employment with us. We make annual bonus payments to these executive officers in
the amount of the annual interest due on the promissory notes. Approximately 50%
of the restricted stock of Messrs. Williams and Dickerson and Ms. Lockhart is
vested as of August 31, 1999, and the remaining unvested shares vest ratably on
a monthly basis through 2001, except that 50% of any remaining unvested shares
vest upon certain sale transactions. Approximately 56% of Mr. Zurlo's restricted
stock is vested as of August 31, 1999, and the remaining unvested shares vest
ratably on a monthly basis through 2001, except that 100% of any remaining
unvested shares vest upon certain sale transactions. Approximately 44% of Mr.
Benson's restricted stock is vested as of August 31, 1999, an additional 22%
shall vest upon consummation of this offering and the remainder shall vest
ratably on an annual basis through 2001.
50
<PAGE> 57
On January 31, 1998, we issued shares of restricted stock to one of
our Directors, John B. Landry, for an aggregate purchase price of $ . On
July 16, 1998, we granted nonqualified stock options to Mr. Landry with
an exercise price of $ per share. These shares of restricted stock and
stock options vest as to 1/4th of the shares on the first anniversary of the
date of grant and 1/48th of the shares on a monthly basis thereafter.
On July 12, 1999, we issued restricted stock to certain of our executive
officers. We accepted promissory notes as consideration for the restricted
stock. Paul K. Zurlo, Michael D. Williams, Jeffrey P. Dickerson, Joan E.
Lockhart and Patrick J. Curley each issued a promissory note to us in the
principal amount of for shares of common stock, and Steven J. Benson
issued a promissory note to us in the principal amount of for shares of
common stock. These promissory notes bear interest at a compound annual rate of
5.82%. The principal amount of the promissory notes and any accrued and unpaid
interest is required to be repaid with the net, after-tax proceeds from the sale
of the restricted stock granted to the executive officer and paid for with these
promissory notes. The principal amount of the promissory notes and any accrued
and unpaid interest are due and payable on the earlier of July 12, 2004 or 60
days after the termination of the executive officer's employment with us. We
make annual bonus payments to these executive officers in the amount of the
annual interest due on the promissory notes. The restricted stock of Messrs.
Benson, Zurlo, Williams, Dickerson and Curley, and Ms. Lockhart vests 1/4th on
the first anniversary of the date of grant and 1/48th of the shares monthly
thereafter.
On , 1999, we issued shares of common stock to one of our
Directors, Paul Severino, for an aggregate purchase price of $ , and we
granted nonqualified stock options to Mr. Severino with an exercise price
of $ per share. These shares of common stock and stock options were fully
vested on the date of grant.
CALGARY LEASE
On January 1, 1996, MCK Telecommunications, our subsidiary, entered into a
lease agreement with Manz Developments, Inc. Mr. Manz, a director and principal
stockholder of MCK, is the controlling stockholder of Manz Developments. The
term of the lease is for five years, and we have the option to extend the lease
for five years. Pursuant to the lease agreement, MCK Telecommunications pays
Manz Developments $144,000 Canadian per year.
REGISTRATION RIGHTS AGREEMENTS
Certain holders of common stock and preferred stock have certain
registration rights with respect to their shares of common stock, including
common stock issuable upon conversion of their preferred stock. See "Description
of Capital Stock -- Registration Rights of Certain Holders."
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of September 30, 1999 and as adjusted to reflect
the sale of the common stock offered hereby, by:
- all persons who own beneficially 5% or more of our common stock;
- the Chief Executive Officer and each of the other Named Executive
Officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned,
subject to community property laws, where applicable. Beneficial ownership is
determined in accordance with the rules issued by the SEC. Under these rules,
beneficial ownership includes any shares which the individual or entity has sole
or shared voting or investment power and shares of common stock subject to
options held that are currently exercisable or exercisable within 60 days of
September 30, 1999. The applicable percentage of "beneficial ownership" after
the offering is based upon shares of common stock outstanding, which
includes shares issuable upon conversion of all outstanding shares of
convertible preferred stock upon completion of this offering, but excludes all
outstanding shares of redeemable preferred stock subject to redemption upon
completion of this offering.
The address of the Summit Partners Group is 600 Atlantic Avenue, Boston, MA
02210. The address of Messrs. Avis and Balmuth is c/o Summit Partners, LLC, 600
Atlantic Avenue, Boston, MA 02210. The address of the Lazard Freres Group is 30
Rockeller Plaza, New York, NY 10020. The address of all other listed
stockholders is c/o MCK Communications, Inc. 313 Washington Street, Newton,
Massachusetts 02458.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
NUMBER OF SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED OFFERING OFFERING
---------------- ---------- ---------
<S> <C> <C> <C>
Summit Partners Group(1)................................ 42.2% %
Lazard Freres Group(2).................................. 15.0
Steven J. Benson(3)..................................... 8.1
Paul K. Zurlo(4)........................................ 1.2
Michael D. Williams(5).................................. *
Jeffrey P. Dickerson(6)................................. *
Joan E. Lockhart(7)..................................... 1.0
Gregory M. Avis(8)...................................... 42.2 --
Michael H. Balmuth(9)................................... 42.2 --
John B. Landry(10)...................................... *
Calvin K. Manz(11)...................................... 21.7
Paul Severino........................................... -- --
All executive officers and directors as a group (11
persons)(12).......................................... 34.0
</TABLE>
- ---------------
* Less than 1%
(1) Represents shares held by Summit Ventures IV, L.P., shares
held by Summit Subordinated Debt Fund, L.P., and shares held by
Summit Investors III, L.P. Summit Ventures IV, L.P., Summit Subordinated
Debt Fund, L.P., and Summit Investors III, L.P. are part of an affiliated
group of investment partnerships referred to, collectively, as the Summit
Partners Group.
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<PAGE> 59
(2) Represents shares held by Lazard Technology Partners L.P.,
shares held by Lazard Technology Partners LLC, and shares held by
Lazard Technology Investors (1998) LLC. Lazard Technology Partners L.P.,
Lazard Technology Partners LLC and Lazard Technology Investors (1998) LLC
are part of an affiliated group of investment partnerships referred to,
collectively, as the Lazard Freres Group.
(3) Includes shares underlying options granted to Mr. Benson which are
exercisable within 60 days of September 30, 1999 and shares owned by
the Benson Family Limited Partnership, of which Mr. Benson is the general
partner and two trusts for his minor children are the limited partners.
(4) Includes shares underlying options granted to Mr. Zurlo which are
exercisable within 60 days of September 30, 1999.
(5) Includes shares underlying options granted to Mr. Williams which are
exercisable within 60 days of September 30, 1999.
(6) Includes shares underlying options granted to Mr. Dickerson which
are exercisable within 60 days of September 30, 1999.
(7) Includes shares underlying options granted to Ms. Lockhart which are
exercisable within 60 days of September 30, 1999.
(8) Represents shares described in note (1) above, beneficially owned by Summit
Partners Group. Mr. Avis disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(9) Represents shares described in note (1) above, beneficially owned by Summit
Partners Group. Mr. Balmuth disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein.
(10) Includes shares underlying options granted to Mr. Landry which are
exercisable within 60 days of September 30, 1999.
(11) Represents shares held by Manz Developments, Inc., of which Mr. Manz holds
100% of the voting stock and 48% of the total equity.
(12) Includes shares underlying options which are exercisable within 60
days of September 30, 1999.
DESCRIPTION OF CAPITAL STOCK
Following the offering, our authorized capital stock will consist of
shares of common stock of which will be issued and
outstanding; and shares of undesignated preferred stock issuable in one
or more series to be designated by the board of directors, of which no shares
will be issued and outstanding.
As of September 30, 1999, there were outstanding: (1) shares of
common stock held by stockholders of record; (2) shares of
convertible preferred stock (convertible into shares of common stock);
(3) shares of redeemable preferred stock (to be redeemed upon closing of
the offering for an aggregate of approximately $ million, including accrued
dividends of approximately $ million); and (4) options to purchase an
aggregate of shares of common stock.
COMMON STOCK
The holders of common stock have one vote per share. Holders of common
stock are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority, or, in the case of election of directors, by a plurality, subject to
any voting
53
<PAGE> 60
rights granted to holders of any then outstanding preferred stock. Except as
otherwise provided by law, amendments to our certificate of incorporation, which
will be effective upon consummation of the offering, must be approved by a
majority of the voting power of the common stock.
Holders of common stock share ratably in any dividends declared by the
Board of Directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock. In the event of our merger or consolidation
with or into another company as a result of which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock will be entitled to
receive the same kind and amount, on a per share of common stock basis, of such
shares of stock and other securities and property, including cash. On our
liquidation, dissolution or winding up, all holders of common stock are entitled
to share ratably in any assets available for distribution to the holders of
shares of common stock. No shares of common stock are subject to redemption or
have preemptive rights to purchase additional shares of common stock.
All the outstanding shares of common stock are legally issued, fully paid
and nonassessable.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our Board of Directors is
authorized to establish the voting rights, if any, and the designations, powers,
preferences, qualifications, limitations and restrictions applicable to the
shares of each series. The Board of Directors may, without stockholder approval,
issue preferred stock with voting and other rights that could adversely affect
the voting power and other rights of the holders of the common stock and could
have anti-takeover effects. The ability of the Board of Directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change of control or the removal of our existing
management. We have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Under the terms of the Registration Rights Agreement, amended and restated
in July 1998, the holders of at least 50% of the shares held in the aggregate by
Summit Group, Lazard Freres Group and certain other entities may demand that we
file a registration statement for the registration of all or any portion of
their shares, subject to certain minimum thresholds, under the Securities Act.
We are not required to effect more than a total of two of these demand
registrations per year. Upon completion of this offering, holders of an
aggregate of shares are party to the Registration Rights Agreement.
In addition, after the closing of the offering, these stockholders and Manz
Developments will be entitled to piggyback registration rights in connection
with any registration by us of securities for our own account or the account of
other stockholders. If we propose to register any shares of common stock under
the Securities Act, we are required to give those stockholders notice of the
registration and to include their shares in the registration statement. At any
time after we become eligible to file a registration statement on Form S-3,
these stockholders may require us to file an unlimited number of registration
statements on Form S-3 under the Securities Act with respect to their shares of
common stock.
The registration rights of these stockholders will terminate when the
shares held by them may be sold under Rule 144 under the Securities Act. We are
generally required to bear all of the expenses of all demand and piggyback
registrations, except underwriting discounts and commissions. We also have
agreed to indemnify those stockholders under the terms of the Registration
Rights Agreement.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any amendment to our certificate of incorporation must first be approved by
a majority of the board of directors and thereafter approved by a majority of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment.
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<PAGE> 61
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Statutory Business Combination Provision. Following the offering, we will
be subject to Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from consummating a "business
combination," except under certain circumstances, with an "interested
stockholder" for a period of three years after the date such person became an
"interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contains any such exclusion.
By-law Provisions. Our by-laws provide that a special meeting of
stockholders may be called only by the President or the Board of Directors
unless otherwise required by law. Our by-laws provide that only those matters
included in the notice of the special meeting may be considered or acted upon at
that special meeting unless otherwise provided by law. In addition, our by-laws
include advance notice and informational requirements and time limitations on
any director nomination or any new proposal which a stockholder wishes to make
at an annual meeting of stockholders.
Ability to Adopt Stockholder Rights Plan. The Board of Directors may in
the future resolve to issue shares of preferred stock or rights to acquire such
shares to implement a stockholder rights plan. A stockholder rights plan
typically creates voting or other impediments that would discourage persons
seeking to gain control of MCK by means of a merger, tender offer, proxy contest
or otherwise if the Board of Directors determines that such change in control is
not in the best interests of our stockholders. The Board of Directors has no
present intention of adopting a stockholder rights plan and is not aware of any
attempt to obtain control of MCK.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol MCKC.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be American
Stock Transfer Company.
55
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.
After this offering, shares of common stock will be outstanding,
assuming the issuance of an aggregate of shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of August 31, 1999, and assumes no exercise of outstanding
options. The shares sold in this offering will be freely tradable without
restriction under the Securities Act. The remaining shares of common
stock outstanding upon completion of the offering are restricted securities in
that they may be sold in the public market only if registered or if they qualify
for an exemption from registration under the Securities Act or Rules 144 or 701
of the Securities Act.
All of our officers, directors and stockholders have entered into lock-up
agreements generally providing that they will not offer, pledge, sell, offer to
sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any of the shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
common stock owned by them, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens
Inc. Transfers may be made earlier:
- as a bona fide gift or gifts, provided the donee or donees agree in
writing to be bound by this restriction;
- as a distribution to partners, stockholders or beneficiaries of the
transferor, provided that the distributees agree in writing to be bound
by the terms of this restriction;
- with respect to dispositions or purchases of common stock acquired on the
open market; or
- with the prior written consent of BancBoston Robertson Stephens Inc.
BancBoston Robertson Stephens Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, BancBoston Robertson Stephens Inc. will consider, among
other factors, the stockholder's reasons for requesting the release, the number
of shares for which the release is being requested and market conditions at the
time. Following the expiration of the 180 day lock-up period, additional shares
of common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of MCK or a
person, or persons whose shares are aggregated, who has beneficially owned
restricted securities for at least one year, including the holding period of any
prior owner except an affiliate of MCK, would be entitled to sell within any
three month period a number of shares that does not exceed the greater of 1% of
our then outstanding shares of common stock or the average weekly trading volume
of our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about MCK. Any person, or persons whose shares are aggregated, who
is not deemed to have been an affiliate of MCK at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least two years
including any period of ownership of preceding non-affiliated holders, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
56
<PAGE> 63
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under the 1996
Stock Option Plan and the 1999 Stock Option and Grant Plan.
Following the offering, under specified circumstances and subject to
customary conditions, the Summit Group, the Lazard Freres Group and certain
other stockholders have will have rights with respect to shares of common
stock, subject to the 180-day lock-up arrangement described above, to require us
to register their shares of common stock under the Securities Act, and they,
along with Manz Developments, will have rights to participate in any future
registration of securities by us.
57
<PAGE> 64
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, and Hambrecht & Quist LLC have severally agreed with us,
subject to the terms and conditions of the underwriting agreement, to purchase
from us the number of shares of common stock set forth below opposite their
respective names. The underwriters are committed to purchase and pay for all
shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Dain Rauscher Wessels.......................................
Hambrecht & Quist LLC.......................................
-------
Total.............................................
=======
</TABLE>
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price shown on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the representatives of the underwriters.
Over-Allotment Option. We and certain of our stockholders have granted to
the underwriters an option, exercisable no later than 30 days after the date of
this prospectus to purchase up to additional shares of common stock at
the initial public offering price less the underwriting discount shown on the
cover page of this prospectus. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of the option which the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered hereby. We and certain of our
stockholders will be obligated, as part of the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of common stock offered hereby.
Indemnity. We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make in respect of those
liabilities.
Lock-up Agreements. All our executive officers, directors and certain of
our stockholders, who will own in the aggregate shares of common
stock after the offering, have agreed that they will not, without the prior
written consent of BancBoston Robertson Stephens, offer, sell, or otherwise
dispose of any shares of common stock, options or warrants to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock owned by them during the 180-day period following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of BancBoston Robertson Stephens, offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted before the date hereof, and
may grant additional options under its stock option plans, provided that,
without the prior written consent of BancBoston Robertson Stephens, such
additional options shall not be exercisable during such period. BancBoston
Robertson Stephens may release us or our stockholders from such restrictions at
anytime, in whole or in part, without notice.
Determination of Offering Price. Before the offering, there has been no
public market for the common stock. The initial public offering price for the
common stock will be determined by negotiation
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<PAGE> 65
among us and the representatives. Among the factors considered in determining
the initial public offering price are prevailing market and economic conditions,
our revenues and earnings, market valuations of other companies engaged in
activities similar to us, estimates of our business potential and prospects, the
present state of our business operations, our management and other factors
deemed relevant. The estimated initial public offering price range shown on the
cover of this prospectus is subject to change as a result of market conditions
and other factors.
Stabilization. Certain persons participating in the offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common stock at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effective
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the common stock. A syndicate
covering transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the underwriters to reclaim a selling concession from a syndicate member in
connection with the offering when the common stock sold by the syndicate member
is purchased in syndicate covering transactions. Such transactions may be
effected on the Nasdaq National Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for MCK Communications by McDermott, Will & Emery, Boston, Massachusetts.
Various legal matters related to the sale of the common stock offered hereby
will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at April 30, 1999 and 1998, and for each of the two years
in the period ended April 30, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
PricewaterhouseCoopers LLP, independent accountants, have audited our
statements of operations, cash flows and changes in stockholders' equity for the
year ended April 30, 1997. We have included these 1997 financial statements in
the prospectus and elsewhere in the registration statement in reliance on
PricewaterhouseCoopers LLP report, given on their authority as experts in
accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
In September 1997, we engaged Ernst & Young LLP as our independent
auditors, to replace PricewaterhouseCoopers LLP. The decision was made by our
Board of Directors and was not due to any disagreement with
PricewaterhouseCoopers LLP. During the fiscal year ended April 30, 1997 and
during the interim period prior to engaging Ernst & Young LLP, we had no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of
procedure, which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused them to make reference thereto in
their report on our financial statements. The reports of PricewaterhouseCoopers
LLP on our financial statements for the fiscal year ended April 30, 1997 (the
last fiscal year audited by PricewaterhouseCoopers LLP) did not contain any
adverse opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles.
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<PAGE> 66
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all the information included in the
registration statement, parts of which have been omitted as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract or other document are not necessarily complete.
Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
The registration statement can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC.
60
<PAGE> 67
MCK COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors............................. F-2
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Common Stockholders' Deficit..... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
MCK Communications, Inc.
We have audited the accompanying consolidated balance sheets of MCK
Communications, Inc. (the Company) as of April 30, 1999 and 1998, and the
related consolidated statements of operations, common stockholders' deficit, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of April 30, 1999 and 1998 and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
July 30, 1999
F-2
<PAGE> 69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
MCK Communications, Inc.
We have audited the accompanying consolidated statements of operations,
common stockholders' deficit and cash flows for the year ended April 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements audited by us
present fairly, in all material respects, the consolidated results of its
operations and its cash flows and changes in stockholders' deficit for the year
ended April 30, 1997, in conformity with accounting principles generally
accepted in the United States.
PricewaterhouseCoopers LLP
Calgary, Alberta
June 20, 1997
F-3
<PAGE> 70
MCK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
---------------------------- JULY 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents........................... $ 1,867,213 $ 3,284,984 $ 3,596,211
Accounts receivable (net of allowances of
$150,000 in 1998, 179,560 in 1999 and
$198,251 at July 31, 1999).................. 1,893,036 3,350,389 3,593,508
Inventory...................................... 756,746 1,493,641 1,245,490
Prepaids and other current assets.............. 294,445 213,025 292,839
------------ ------------ ------------
Total current assets........................ 4,811,440 8,342,039 8,728,048
Fixed assets, net................................ 804,970 1,054,561 1,056,706
Other assets..................................... 48,915 31,843 28,093
------------ ------------ ------------
Total assets..................................... $ 5,665,325 $ 9,428,443 $ 9,812,847
============ ============ ============
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................... $ 485,014 $ 1,666,438 $ 1,672,083
Accrued liabilities............................ 474,947 693,005 1,018,573
Accrued compensation and benefits.............. 306,086 404,490 313,700
Borrowings under line of credit................ -- -- 76,812
Deferred revenue............................... -- -- 25,817
------------ ------------ ------------
Total current liabilities................... 1,266,047 2,763,933 3,106,985
Long-term debt................................... 5,000,000 2,500,000 2,653,624
Redeemable preferred stock of subsidiary......... 2,293,333 2,490,280 2,540,495
Redeemable preferred stock....................... 15,244,755 21,010,759 21,462,308
Redeemable convertible preferred stock........... 1,911,111 4,703,751 4,799,201
Common stockholders' deficit:
Common stock, $.001 par value; 25,000,000
authorized: 3,253,967, 3,464,170 and 3,709,170
shares issued and outstanding, respectively.... 3,254 3,464 3,709
Additional paid-in capital....................... 154,077 178,186 790,441
Accumulated deficit.............................. (19,901,160) (23,897,510) (24,566,415)
Accumulated other comprehensive income (loss).... (155,290) (165,743) (206,324)
Notes receivable from officers................... (150,802) (158,677) (771,177)
------------ ------------ ------------
Total common stockholders' deficit............... (20,049,921) (24,040,280) (24,749,766)
------------ ------------ ------------
Total liabilities and common stockholders'
deficit........................................ $ 5,665,325 $ 9,428,443 $ 9,812,847
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 71
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED APRIL 30, JULY 31,
--------------------------------------- -----------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 5,920,645 $ 7,875,779 $14,269,603 $3,116,151 $4,522,919
Cost of goods sold..................... 2,313,015 2,799,994 5,389,557 1,188,294 1,690,472
----------- ----------- ----------- ---------- ----------
Gross profit........................... 3,607,630 5,075,785 8,880,046 1,927,857 2,832,447
Operating expenses:
Research and development............. 814,664 1,757,524 3,348,608 751,124 963,591
Sales and marketing.................. 1,145,265 2,191,182 3,888,537 779,298 1,347,459
General and administrative........... 607,106 1,484,812 1,616,620 391,277 493,705
Transaction-related charges.......... 493,284 -- -- -- --
----------- ----------- ----------- ---------- ----------
Total operating expenses........... 3,060,319 5,433,518 8,853,765 1,921,699 2,804,755
----------- ----------- ----------- ---------- ----------
Income (loss) from operations.......... 547,311 (357,733) 26,281 6,158 27,692
Other (income) expense:
Interest expense..................... 527,060 663,121 397,969 150,562 90,282
Interest income...................... (134,204) (144,888) (130,339) (15,185) (23,706)
Other (income) expense, net.......... (50,337) 77,217 (60,267) (6,413) 28,672
----------- ----------- ----------- ---------- ----------
Total other expense................ 342,519 595,450 207,363 128,964 95,248
Income (loss) before provision for
income taxes......................... 204,792 (953,183) (181,082) (122,806) (67,556)
Provision for income taxes............. 302,109 -- -- -- --
----------- ----------- ----------- ---------- ----------
Net loss............................... (97,317) (953,183) (181,082) (122,806) (67,556)
Dividends on subsidiary redeemable
preferred stock...................... 133,333 160,000 196,947 49,614 50,215
Dividends on redeemable preferred
stock................................ 1,010,557 1,220,000 1,965,921 393,234 551,134
----------- ----------- ----------- ---------- ----------
Total dividends on preferred stock..... 1,143,890 1,380,000 2,162,868 442,848 601,349
----------- ----------- ----------- ---------- ----------
Loss applicable to common stock........ $(1,241,207) $(2,333,183) $(2,343,950) $ (565,654) $ (668,905)
=========== =========== =========== ========== ==========
Basic and diluted net loss per share... $ (0.60) $ (1.03) $ (0.92) $ (0.24) $ (0.24)
=========== =========== =========== ========== ==========
Shares used in computing basic and
diluted net loss per share........... 2,083,759 2,272,079 2,536,931 2,390,233 2,813,097
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 72
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON
SHARES STOCK ACCUMULATED
COMPREHENSIVE OF AT ADDITIONAL OTHER
INCOME COMMON PAR PAID-IN ACCUMULATED COMPREHENSIVE
(LOSS) STOCK VALUE CAPITAL DEFICIT INCOME
------------- --------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996..................... -- 1,000 $ 100 -- $ (207,533) --
Cancellation of old common stock.............. -- (1,000) (100) -- 100 --
Issuance of new common stock.................. -- 2,031,616 2,032 -- (2,032) --
Dividends to Manz Development, Inc............ -- -- -- -- (16,119,603) --
Dividends on preferred stock.................. -- -- -- -- (1,143,890) --
Stock options exercised....................... -- 140,476 140 $ 2,621 -- --
Other......................................... -- -- -- -- 2,298 --
Net loss...................................... $ (97,317) -- -- -- (97,317) --
----------- --------- ------ -------- ------------ ---------
Total comprehensive income (loss)............. $ (97,317) -- -- -- -- --
-----------
Balance at April 30, 1997..................... -- 2,172,092 2,172 2,621 (17,567,977) --
Stock options exercised....................... -- 76,530 77 1,659 -- --
Sale of restricted stock...................... -- 1,005,345 1,005 149,797 -- --
Foreign currency translation adjustment....... $ (155,290) -- -- -- -- $(155,290)
Dividends on preferred stock.................. -- -- -- -- (1,380,000) --
Net loss...................................... (953,183) -- -- -- (953,183) --
----------- --------- ------ -------- ------------ ---------
Total comprehensive income (loss)............. $(1,108,473) -- -- -- -- --
Balance at April 30, 1998..................... -- 3,253,967 3,254 154,077 (19,901,160) (155,290)
Stock options exercised....................... -- 157,703 158 16,286 -- --
Sale of restricted stock...................... -- 75,000 75 11,175 -- --
Cancellation of restricted stock.............. -- (22,500) (23) (3,352) -- --
Foreign currency translation adjustment....... $ (10,453) -- -- -- -- (10,453)
Dividends on preferred stock.................. -- -- -- -- (2,162,868) --
Issuance of preferred stock in exchange for
redemption premium.......................... -- -- -- -- (1,652,400) --
Net loss...................................... (181,082) -- -- -- (181,082) --
----------- --------- ------ -------- ------------ ---------
Total comprehensive income (loss)............. $ (191,535) -- -- -- -- --
Balance at April 30, 1999..................... -- 3,464,170 3,464 178,186 (23,897,510) (165,743)
Foreign currency translation adjustment
(unaudited)................................. $ (40,581) -- -- -- -- (40,581)
Sale of restricted stock...................... -- 245,000 245 612,255 -- --
Dividends on preferred stock (unaudited)...... -- -- -- -- (601,349) --
Net loss (unaudited).......................... (67,556) -- -- -- (67,556) --
----------- --------- ------ -------- ------------ ---------
Total comprehensive income (loss)
(unaudited)................................. $ (108,137) -- -- -- -- --
Balance at July 31, 1999 (unaudited).......... -- 3,709,170 $3,709 $790,441 $(24,566,415) $(206,324)
=========== ========= ====== ======== ============ =========
<CAPTION>
NOTES TOTAL
RECEIVABLES COMMON
FROM STOCKHOLDERS'
OFFICERS DEFICIT
----------- -------------
<S> <C> <C>
Balance at April 30, 1996..................... -- $ (207,433)
Cancellation of old common stock.............. -- --
Issuance of new common stock.................. -- --
Dividends to Manz Development, Inc............ -- (16,119,603)
Dividends on preferred stock.................. -- (1,143,890)
Stock options exercised....................... -- 2,761
Other......................................... -- 2,298
Net loss...................................... -- (97,317)
--------- ------------
Total comprehensive income (loss)............. -- --
Balance at April 30, 1997..................... -- (17,563,184)
Stock options exercised....................... -- 1,736
Sale of restricted stock...................... $(150,802) --
Foreign currency translation adjustment....... -- (155,290)
Dividends on preferred stock.................. -- (1,380,000)
Net loss...................................... -- (953,183)
--------- ------------
Total comprehensive income (loss)............. -- --
Balance at April 30, 1998..................... (150,802) (20,049,921)
Stock options exercised....................... -- 16,444
Sale of restricted stock...................... (11,250) --
Cancellation of restricted stock.............. 3,375 --
Foreign currency translation adjustment....... -- (10,453)
Dividends on preferred stock.................. -- (2,162,868)
Issuance of preferred stock in exchange for
redemption premium.......................... -- (1,652,400)
Net loss...................................... -- (181,082)
--------- ------------
Total comprehensive income (loss)............. -- --
Balance at April 30, 1999..................... (158,677) (24,040,280)
Foreign currency translation adjustment
(unaudited)................................. -- (40,581)
Sale of restricted stock...................... (612,500) --
Dividends on preferred stock (unaudited)...... -- (601,349)
Net loss (unaudited).......................... -- (67,556)
--------- ------------
Total comprehensive income (loss)
(unaudited)................................. -- --
Balance at July 31, 1999 (unaudited).......... $(771,177) $(24,749,766)
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 73
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED APRIL 30, JULY 31,
---------------------------------------- ------------------------
1997 1998 1999 1998 1999
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss.................................... $ (97,317) $ (953,183) $ (181,082) $ (122,806) $ (67,556)
Depreciation and amortization............... 160,075 230,342 393,977 72,943 132,031
Deferred income taxes....................... 22,593 (80,000) -- -- --
Transaction-related charges................. 44,554 -- -- -- --
Change in operating assets and liabilities:
Accounts receivable...................... 712,364 (846,047) (1,457,353) (257,254) (243,119)
Inventory................................ (222,271) 283,403 (736,895) (344,503) 248,151
Prepaids and other current assets........ (943,093) 366,050 81,420 (42,944) (79,814)
Accounts payable......................... (373,529) 357,431 1,181,424 118,784 5,645
Accrued liabilities...................... 1,380 451,344 218,058 (21,594) 325,568
Accrued compensation and benefits........ (166,085) 272,666 98,404 (126,904) (90,790)
Deferred revenue......................... -- -- -- -- 25,817
------------ ----------- ----------- ----------- ----------
Net cash (used) provided by operating
activities.......................... (861,329) 82,006 (402,047) (724,278) 255,933
Cash flows from investing activities:
Purchase of fixed assets.................... (318,908) (565,526) (675,650) (182,226) (136,147)
Cash flows from financing activities:
Proceeds from issuance of preferred stock,
net of issuance costs.................... 15,000,000 -- 4,940,323 4,953,761 (4,135)
Dividends paid to Manz Development, Inc..... (14,119,603) -- -- -- --
Issuance of subordinated debt............... 5,000,000 -- -- -- --
Payment of debt and equity issuance costs... (297,382) -- -- -- --
Redemption of preferred stock............... (500,000) -- -- -- --
Repayment of promissory note................ (1,166,667) -- -- -- --
Increase (decrease) in short-term
borrowings............................... 390,684 (749,496) -- -- 230,436
Repayment of subordinated debt.............. -- -- (2,500,000) (2,500,000) --
Proceeds from exercise of stock options..... 2,761 1,736 16,444 1,663 --
------------ ----------- ----------- ----------- ----------
Net cash provided (used) by financing
activities.......................... 4,309,793 (747,760) 2,456,767 2,455,424 226,301
Effect of exchange rate changes on cash....... 97,909 (129,761) 38,701 7,085 (34,860)
------------ ----------- ----------- ----------- ----------
Net increase (decrease) in cash............... 3,227,465 (1,361,041) 1,417,771 1,556,005 311,227
Cash and equivalents at beginning of year..... 789 3,228,254 1,867,213 1,867,213 3,284,984
------------ ----------- ----------- ----------- ----------
Cash and equivalents at end of year........... $ 3,228,254 $ 1,867,213 $ 3,284,984 $ 3,423,218 $3,596,211
============ =========== =========== =========== ==========
Non-cash transactions:
Dividends on preferred stock................ $ 1,143,890 $ 1,380,000 $ 2,162,868 $ 442,848 $ 601,349
Sale of restricted stock.................... -- 150,802 7,875 7,875 612,500
Dividends paid to Manz Developments, Inc.... 2,000,000 -- -- -- --
Issuance of preferred stock in exchange for
redemption premium....................... -- -- 1,652,400 1,652,400 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 74
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999
1. NATURE OF OPERATIONS
MCK Communications, Inc. (MCK or the Company) develops and markets remote
voice access products that enable corporations to distribute the features and
applications of PBX systems to branch offices and telecommuters over data
networks. Sales are made to OEMs and private label partners, ILECs, systems
integrators and distributors, telecom and datacom VARs, and broadband service
providers. In the fiscal years ended 1997, 1998 and 1999, sales to one customer
represented 27%, 46% and 47%, respectively, of consolidated revenues.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of MCK
Communications, Inc. and its Canadian subsidiary, MCK Telecommunications, Inc.
All significant intercompany accounts and transactions are eliminated.
(b) Cash Equivalents
Cash equivalents are defined as short-term, highly-liquid investments
having an original maturity of three months or less.
(c) Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
(d) Fixed Assets
Fixed assets are stated at cost and depreciated on a straight-line basis
over the following estimated useful lives:
<TABLE>
<S> <C>
Equipment....................... 3 years
Furniture and fixtures.......... 3 years
Purchased software.............. 2 years
Leasehold improvements.......... The lesser of five years or term
of lease
</TABLE>
(e) Fair Value of Financial Instruments
The Company's cash, cash equivalents, accounts receivable, accounts
payable, accrued liabilities and long-term debt are carried at cost, which
approximates fair value.
(f) Revenue Recognition
Revenues from product sales to end users are recognized upon shipment. A
portion of the Company's sales are made to distributors under arrangements where
the distributors are not obligated to pay the Company until the distributor has
resold the product. The Company defers recognition of such sales and related
gross margin until the product is sold by the distributors.
(g) Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," or SFAS 128, which was required to be adopted for fiscal
years ending after December 15, 1997. Earnings
F-8
<PAGE> 75
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
per share amounts for all periods presented conform to the SFAS 128
requirements. See Note 11 for the computation of basic and diluted earnings per
share.
(h) Use of Estimates
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the collectibility of accounts
receivable and the carrying value of inventory. Actual results could differ from
those estimates.
(i) Translation of Foreign Currencies
The functional currency for the Company's Canadian operations is the
Canadian dollar. The translation of Canadian dollars into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date, and for revenue and expense accounts using the
weighted-average exchange rate during the period. The gains or losses resulting
from such translation are reported in a separate component of stockholders'
deficit, which also includes exchange gains and losses on certain intercompany
balances of a long-term investment nature. Gains or losses resulting from
foreign currency transactions, which are included in results of operations, were
a gain of approximately $86,000 in 1997, a loss of approximately $67,000 in 1998
and a gain of approximately $56,000 in 1999. The Company's Canadian subsidiary
represented approximately $3,350,000 of total assets at April 30, 1999. The
Company had foreign and U.S. revenues of $2.6 million and $11.7 million,
respectively, during the year ended April 30, 1999.
(j) Income Taxes
The Company provides deferred taxes to recognize temporary differences
between the financial and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
(k) Comprehensive Income
During the year ended April 30, 1999, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and presentation of comprehensive income and its components in the financial
statements. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners.
(l) Segments of an Enterprise
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," or SFAS
131, which was required to be adopted for fiscal years beginning after December
15, 1997. SFAS 131 superseded SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise." This statement changes the way public companies report
segment information in annual financial statements. SFAS 131 requires public
companies to report financial and descriptive information about their operating
segments in interim financial reports to shareholders as well. The adoption of
this Statement had no impact on the disclosures in the Company's financial
statements as the Company operates in one business segment.
F-9
<PAGE> 76
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(m) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash equivalents and trade accounts
receivable. The Company invests its cash equivalents in deposits with financial
institutions with strong credit ratings. The Company sells its products to
customers in the telecommunications industry, primarily in the United States and
Canada. The Company maintains reserves for potential credit losses and such
losses have been within management's expectations. Trade accounts receivable at
April 30, 1998 and 1999 included approximately $1,002,000 and $1,068,000,
respectively, from one customer.
(n) Interim Financial Information
The financial information for the three month periods ended July 31, 1998
and 1999 is unaudited but includes all adjustments, consisting only of normal
recurring adjustments, that the Company considers necessary for a fair
presentation of the operating results and cash flows for such periods. Results
for the three month period ended July 31, 1999 are not necessarily indicative of
results in future periods.
3. INVENTORY
Inventories consisted of:
<TABLE>
<CAPTION>
APRIL 30,
------------------------ JULY 31,
1998 1999 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $ 230,888 $ 518,235 $ 595,068
Work-in-process................................ 382,211 780,584 535,902
Finished goods................................. 143,647 194,822 114,520
---------- ---------- ----------
$ 756,746 $1,493,641 $1,245,490
========== ========== ==========
</TABLE>
4. FIXED ASSETS
Fixed assets consisted of:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C> <C>
Equipment...................................... $ 715,139 $1,054,588
Purchased software............................. 176,896 410,715
Leasehold improvements......................... 243,048 269,339
Furniture and fixtures......................... 155,553 231,644
---------- ----------
1,290,636 1,966,286
Accumulated depreciation....................... (485,666) (911,725)
---------- ----------
$ 804,970 $1,054,561
========== ==========
</TABLE>
5. CREDIT AGREEMENTS
Revolving Credit Agreement. The Company maintains a revolving credit
agreement that provides for borrowings up to the lesser of $2,000,000 or 80% of
qualifying accounts receivable, which, at April 30, 1999, provided for
borrowings of approximately $1,920,000. No amounts were outstanding under this
agreement during the year ended April 30, 1999. Interest is charged at the
bank's base rate (7.75% at
F-10
<PAGE> 77
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1999). This agreement expires in April 2000. The debt is
collateralized by substantially all assets of the Company.
Subordinated Debt. The Company issued $5,000,000 of 12.5% subordinated
promissory notes in connection with a recapitalization in June 1996. In July
1998, the Company completed a private placement (see Note 7), and repaid
$2,500,000 of the subordinated promissory notes. Amounts outstanding under the
remaining subordinated promissory notes are due at the earlier of a qualified
initial public offering or as follows: $1,666,666 on June 30, 2000 and $833,334
on June 30, 2001.
The Company paid interest of approximately $506,000, $375,000 and $663,000
for the years ended 1997, 1998 and 1999, respectively, and $156,250 (unaudited)
and $16,875 (unaudited) for the three months ended July 31, 1998 and 1999,
respectively, associated with these credit agreements.
6. INCOME TAXES
Pre-tax income (loss) is summarized by country as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Canada................................................... $130,693 $(180,545) $(195,394)
United States............................................ 74,099 (772,638) 14,312
-------- --------- ---------
Total.......................................... $204,792 $(953,183) $(181,082)
======== ========= =========
</TABLE>
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Current:
Canada................................................... $246,041 $ 80,000 $ --
United States............................................ 25,194 -- --
-------- --------- ---------
271,235 80,000
--
Deferred:
Canada................................................... 30,874 (80,000) --
-------- --------- ---------
Total.......................................... $302,109 $ -- $ --
======== ========= =========
</TABLE>
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate......... $ 71,677 $(333,614) $ (63,379)
Tax loss with no current benefit......................... -- 330,104 45,843
Foreign tax differential................................. 12,573 (16,290) (12,214)
Non-deductible expenses.................................. 220,103 19,800 29,750
Other, net............................................... (2,244) -- --
-------- --------- ---------
Total.......................................... $302,109 $ -- $ --
======== ========= =========
</TABLE>
F-11
<PAGE> 78
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals....................................... $ 201,000 $ 198,000
Tax credits................................................. 32,000 63,000
Net operating loss carryforward............................. -- 48,000
--------- ---------
Total deferred tax assets......................... 233,000 309,000
--------- ---------
Deferred tax liabilities:
Depreciation................................................ (14,000) (18,000)
Other....................................................... (15,000) (10,000)
--------- ---------
Total deferred tax liabilities.................... (29,000) (28,000)
--------- ---------
Valuation allowance......................................... (204,000) (281,000)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
At April 30, 1998 and 1999, the Company had $31,500 and $63,000 of Canadian
investment tax credits earned as a result of government incentive programs which
expire in 2008 and 2009 respectively and net operating loss carryforwards of
$112,600 which expire in 2019.
The Company paid income taxes of $264,000, $18,900 and $912 in 1997, 1998
and 1999, respectively.
7. PREFERRED STOCK
On July 16, 1998, the Company raised $5,000,000 through the private
placement of 28,505 shares of Series C Redeemable Preferred Stock and 1,672,354
shares of Series D Redeemable Convertible Preferred Stock. In connection with
the private placement, the Company restructured the redemption premium that
would have been due under certain circumstances to the Series A preferred
stockholders associated with the redemption of the Series B preferred stock and
issued 1,652,400 shares of Series A preferred stock to the existing Series A
stockholders. The Company used $2,500,000 of the proceeds to repay a portion of
the subordinated promissory notes and the balance of the private placement
proceeds was retained for working capital purposes.
F-12
<PAGE> 79
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred stock consisted of:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Redeemable preferred stock:
Series A redeemable preferred stock, 13,333,333 and
14,985,733 shares issued (liquidation value of
$13,333,333 and $14,985,733, plus accrued dividends of
$1,986,113 and $3,373,199) at April 30, 1998 and 1999,
respectively........................................... $15,244,755 $18,284,241
Series C redeemable preferred stock, 28,505 shares issued
(liquidation value of $2,850,000 plus accrued dividends
of $256,356)........................................... -- 2,726,518
Series E redeemable preferred stock of subsidiary, no par
value, 2,000,000 shares issued and outstanding
(liquidation value of $2,000,000 plus accrued dividends
of $293,333 and $490,280).............................. 2,293,333 2,490,280
----------- -----------
Total............................................. $17,538,088 $23,501,039
=========== ===========
Redeemable convertible preferred stock:
Series B redeemable convertible preferred stock, 3,968,384
shares issued (liquidation value of $1,666,667 plus
accrued dividends of $244,444 and $408,567)............ $ 1,911,111 $ 2,075,234
Series D redeemable convertible preferred stock, 1,672,354
shares issued (liquidation value of $2,500,000 plus
accrued dividends of $158,356)......................... -- 2,628,517
----------- -----------
Total............................................. $ 1,911,111 $ 4,703,751
=========== ===========
</TABLE>
Each share of preferred stock accrues daily dividends on a cumulative basis
at a rate of 8% per annum on their respective liquidation values. Total accrued
and unpaid dividends at April 30, 1998 and 1999 were $2,523,890 and $4,686,758,
respectively. The Series A, C and D preferred stock were recorded net of
$74,691, $29,838 and $29,839 of issuance costs, respectively. The Series E
preferred stock represents redeemable preferred stock in the Company's Canadian
subsidiary. All of the Series E preferred stock is owned by Manz Developments,
Inc. (MDI), the beneficial owners of which also own 2,031,616 shares of common
stock of the Company.
Each share of Series A, C and E preferred stock, together with any accrued
and unpaid dividends, are to be redeemed by the Company in three equal
installments in June 2001, June 2002 and June 2003. Series A, C and E preferred
stock automatically redeem in the event of a change in ownership, and may also
be redeemed after a qualified initial public offering, as defined.
Each share of Series B preferred stock is convertible into shares of the
Company's common stock, at the option of the holder, at a conversion price of
approximately $0.42 per share. The Series B preferred stock automatically
converts into common stock upon the earlier of a qualified initial public
offering, as defined, or upon request of 66.7% of Series B preferred
stockholders. Upon conversion, all accrued and unpaid dividends will be paid in
either cash or additional shares of common stock at fair market value, at the
option of the Company.
Each share of Series D preferred stock is convertible into shares of the
Company's common stock, at the option of the holder, at a conversion price of
approximately $1.50 per share. The Series D preferred stock automatically
converts into common stock upon the earlier of a qualified initial public
offering, as defined, or upon request of 66.7% of Series D preferred
stockholders. Upon conversion, all accrued and unpaid dividends will be paid in
either cash or additional shares of common stock, at the option of the Company.
At any time after June 27, 2003, the Company is required, at the request of
a majority of Series B and D preferred stockholders, to redeem all Series B and
D preferred stock at a price equal to its
F-13
<PAGE> 80
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liquidation value plus all accumulated and unpaid dividends. The Series B and D
preferred stock may also become redeemable upon a change in ownership unless the
holders elect to convert their shares to common stock.
As long as any Series B or D preferred stock are outstanding, the holders
of Series B are entitled to elect three directors and the holders of Series D
are entitled to elect one director of the Company. Holders of Series B and
Series D preferred stock are entitled to vote with the common stock on all
matters submitted to stockholders.
The Series A, C and E preferred stock is nonvoting. However, as long as any
preferred stock is outstanding, the Company is restricted, without the consent
of the preferred shareholders, from selling more than 20% of its consolidated
assets (20% of the Company's Canadian subsidiary's assets for Series E preferred
stock), merging (unless the preferred stock is redeemed in the transaction),
issuing any instrument that would rank senior to the common stock, liquidating
or increasing the authorized number of preferred shares.
8. STOCK PLANS
In June 1996, the Company adopted the 1996 Stock Option Plan (the Plan),
which provides for the issuance of up to 823,061 shares of common stock of the
Company as either incentive stock options or non-qualified stock options (see
Note 13). Options granted under the Plan generally vest as to 25% of the
underlying shares on the first anniversary of the date of grant and ratably over
the remaining thirty-six months and expire five years from date of grant. At
April 30, 1999, 72,823 shares were available for future grant. At April 30,
1997, 1998 and 1999, there were 158,546, 214,360 and 95,835 options exercisable
under the plan, at a weighted average exercise price of $.001, $.08 and $.07 per
share, respectively.
The following table summarizes option activity over the life of this plan:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Granted................................................... 547,669 $ .07
Exercised................................................. (140,476) .01
Canceled.................................................. (40,020) .15
-------- -----
Outstanding at April 30, 1997............................... 367,173 .10
Granted................................................... 94,100 .15
Exercised................................................. (76,530) .02
Canceled.................................................. (77,180) .15
-------- -----
Outstanding at April 30, 1998............................... 307,563 .10
Granted................................................... 498,541 .18
Exercised................................................. (157,703) .10
Canceled.................................................. (13,341) .15
-------- -----
Outstanding at April 30, 1999............................... 635,060 .16
-------- -----
Granted (unaudited)....................................... 247,000 2.06
Exercised (unaudited)..................................... -- --
Canceled (unaudited)...................................... (18,142) .15
-------- -----
Outstanding at July 31, 1999 (unaudited).................... 863,918 $ .71
======== =====
</TABLE>
The Company's stock plans are accounted for under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB No. 25). Under APB No. 25,
F-14
<PAGE> 81
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
no compensation expense is recorded when the exercise price of options granted
equals the market price of the underlying stock on the date of grant. Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), requires the Company to disclose, on a pro forma
basis, the effect on net income (loss) as if the Company had recorded
compensation expense for its stock-based compensation plans based on the fair
value of the awards. On a pro forma basis, the effect in 1997, 1998 and 1999 was
immaterial.
However, the pro forma effect in 1997, 1998 and 1999 of expensing the
estimated fair value of stock options is not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options and stock purchase shares in future years.
The fair market value for these options was estimated at the date of grant
using the minimum value method and the following weighted-average assumptions
for options granted in 1997, 1998 and 1999: risk-free interest rate of 5.0%,
4.5% and 5.0%; a weighted-average expected life of the option of five years; and
no dividends. The weighted-average fair value of stock options granted in 1997,
1998 and 1999 was $0.03, $0.03 and $0.04. The weighted average remaining
contractual life for those stock options outstanding at April 30, 1999 was 3.94
years. The options outstanding at April 30, 1999 have exercise prices ranging
from $0.001 to $0.30 per share.
The Company issued 75,000 shares of restricted common stock in May 1998 and
1,005,345 shares of restricted common stock in June and September, 1997 to
certain executives and a member of the Board of Directors in exchange for
promissory notes equal to the fair market value of the common stock on the grant
date ($0.15 per share). The promissory notes are non-interest bearing to
employees insofar as the Company is required to reimburse the employees for any
interest on the promissory notes that is payable to the Company. The restricted
stock generally vests over four years and the promissory notes have a five-year
maturity. The outstanding balance of the promissory notes at April 30, 1998 and
1999 is $150,802 and $158,677, respectively.
At April 30, 1999, the Company had reserved 6,336,544 shares of common
stock for issuance under the 1996 Stock Option Plan and upon conversion of the
Series B and D preferred stock.
9. EMPLOYEE SAVINGS PLANS
The Company maintains a retirement savings plan under section 401(k) of the
Internal Revenue Code. The plan covers substantially all U.S. employees and
allows participants to defer a portion of their annual compensation on a pre-tax
basis. The Company also maintains a Registered Retirement Savings Plan for its
Canadian employees which allows participants to defer a portion of their annual
compensation on a pre-tax basis. The Company made no contributions to either
plan during 1997, 1998 or 1999.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space in the United States and Canada under
non-cancelable operating leases. The Company's Canadian facility is leased from
Manz Developments, Inc., a related party. Rent expense under this arrangement
was approximately $96,000 in 1997 and 1998 and $99,000 in 1999. Total rent
expense under all operating leases for 1997, 1998 and 1999 was approximately
$96,000, $264,000 and $333,000, respectively. At April 30, 1999, future minimum
lease commitments were approximately $333,000 in 2000, $273,000 in 2001,
$207,000 in 2002 and $69,000 in 2003.
F-15
<PAGE> 82
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
The calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED APRIL 30, JULY 31,
--------------------------------------- -----------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss....................... $ (97,317) $ (953,183) $ (181,082) $ (122,806) $ (67,556)
Dividend on subsidiary
redeemable preferred
stock....................... 133,333 160,000 196,947 49,614 50,215
Dividends on preferred stock... 1,010,557 1,220,000 1,965,921 393,234 551,134
----------- ----------- ----------- ----------- ---------
Total dividends........ 1,143,890 1,380,000 2,162,868 442,848 601,349
Numerator for basic and diluted
earnings per share-income
available to common
stockholders................ $(1,241,207) $(2,333,183) $(2,343,950) $ (565,654) $(668,905)
=========== =========== =========== =========== =========
Denominator:
Denominator for basic and
diluted earnings per
share -- weighted-average
shares...................... 2,083,759 2,272,079 2,536,931 2,390,233 2,813,097
=========== =========== =========== =========== =========
Basic and diluted earnings (loss)
per share...................... $ (0.60) $ (1.03) $ (0.92) $ (0.24) $ (0.24)
=========== =========== =========== =========== =========
</TABLE>
The following potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED APRIL 30, ENDED JULY 31,
----------------------- --------------
1997 1998 1999 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options................ 367 308 635 398 864
===== ===== ===== ===== =====
Shares of nonvested restricted stock............... -- 934 732 827 827
===== ===== ===== ===== =====
Shares potentially issuable upon conversion of
Series B and D preferred stock................... 4,709 5,598 9,420 7,596 7,849
===== ===== ===== ===== =====
</TABLE>
12. VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE RESERVES AND ALLOWANCES:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF INCOME (PRINCIPALLY BALANCE AT
PERIOD YEAR STATEMENT WRITE-OFFS) END OF YEAR
- ------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended April 30, 1997................... $ 48,709 $ 12,500 $ (14,031) $ 47,178
Year ended April 30, 1998................... $ 47,178 $165,252 $ (62,430) $150,000
Year ended April 30, 1999................... $150,000 $112,418 $ (82,858) $179,560
</TABLE>
F-16
<PAGE> 83
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CORPORATE RESTRUCTURING
In June 1996, the Company completed a recapitalization. The
recapitalization consisted of the following major transactions:
1) Issued 3,968,384 shares of Series B redeemable convertible preferred
stock in the Company valued at $1,666,667 and 2,000,000 shares of Series
E redeemable preferred stock in its Canadian subsidiary valued at
$2,000,000 to MDI, the then sole shareholder of the Company.
2) Sold 13,333,333 shares of Series A redeemable preferred stock to an
outside investor for $13,333,333.
3) Arranged for the outside investor to purchase from MDI the 3,968,384
shares of Series B redeemable convertible preferred stock for
$1,666,667.
4) Obtained $5,000,000 of 12.5% subordinated promissory notes from the
outside investor.
5) Paid the following to MDI: $14,119,603 of dividends, $500,000 for
redemption of preferred stock and $1,166,667 for repayment of an
outstanding promissory note.
6) Incurred a transaction charge of $493,284, consisting of $448,730 of
employee stock options redeemed for cash and other charges of $44,554.
Subsequent to the series of transactions described above, the outside
investor, through ownership of 3,968,384 shares of Series B redeemable
convertible preferred stock, owned 66.1% of the Company, and MDI, through
ownership of 2,031,616 shares of common stock, owned 33.9% of the Company.
14. SUBSEQUENT EVENTS
The Company is contemplating completing a stock split prior to the
effective date of its initial public offering.
On June 1, 1999, the Company increased its option pool for the 1996 Stock
Option Plan (the Plan), by 200,000 shares. Subsequent to the increase, the
Company granted approximately 247,000 options to key employees.
On June 23, 1999, the Company issued 245,000 shares of restricted common
stock to certain executives in exchange for promissory notes equal to the fair
market value of the common stock on the date of grant.
On July 1, 1999, the Company entered into a financing agreement with a bank
to provide a $500,000 equipment line of credit. Under the terms of the
agreement, the Company can draw up to $500,000 through September 1999 to
purchase capital equipment. Drawings under the line are treated as a term loan
which is payable in 36 equal monthly installments of principal and interest. The
equipment line carries a rate of interest equal to the bank's base rate plus 50
basis points (8.5% at July 30, 1999). The Company has drawn approximately
$230,000 on the line in July.
F-17
<PAGE> 84
EDGAR DESCRIPTIONS FOR INSIDE BACK COVER:
CAPTION: AWARDS FOR EXTENDER PRODUCT LINE.
1. Diagram showing the MCK logo circled by the logos of awards with the
following text: (1) 1998 Product of the Year, Call Center Magazine, EXTender
3000; (2) 1998 Product of the Year, Computer Telephony Magazine, EXTender
3000-series; (3) 1998 Product of the Year, CTI Magazine, EXTender 3000; (4) 1998
Product of the Year, Call Center Solutions Magazine, EXTender 3000; (5) Best of
Show, CT Expo 98, Computer Telephony Magazine, PBXtender; (6) Judges' Pick, 1998
Computer Telephony, EXTender 6000; (7) 1998 Editor's Choice, CTI Magazine,
EXTender 3000; (8) Best of CT Expo Fall 1998, CTI Magazine, EXTender; (9) Best
of CT Expo Spring 1999, Computer Telephony Magazine, Branch Office EXTender
6000; (10) Best of Show, Demo 97, Fall Expo, Computer Telephony/Teleconnect
Magazine, EXTender; (11) Editor's Choice, 1998 Telemarketing and Call Center
Solutions, PBXtender/IP EXTender 4000.
<PAGE> 85
[LOGO]
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- -------
<S> <C>
SEC Registration Fee........................................ $17,214
NASD Filing Fee............................................. 6,692
Nasdaq National Market Listing Fee.......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... 15,000
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
-------
Total....................................................... *
</TABLE>
- ---------------
* To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our amended and restated certificate of incorporation provides
that no director of MCK Communications be personally liable to MCK
Communications, its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to MCK Communications or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or repurchases, or (4) for any transaction from which the director
derived an improper personal benefit. In addition, the first amended and
restated certificate of incorporation provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by MCK Communications of its officers and certain non-officer employees under
certain circumstances against expenses, including attorneys fees, judgments,
fines and amounts paid in settlement, reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal proceeding
in which any such person is involved by reason of the fact that such person is
or was an officer or employee of the registrant if such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of MCK Communications, and, with respect to criminal actions
or proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
Under Section 7 of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions, MCK
Communications, its directors, certain officers and persons who control MCK
Communications within the meaning of the Securities Act against certain
liabilities.
II-1
<PAGE> 87
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant during the past three years.
Further included is the consideration, if any, received by the Registrant for
such shares, and information relating to the section of the Securities Act or
rule of the Securities and Exchange Commission under which exemption from
registration was claimed.
1. An aggregate of shares of Series A preferred stock (which
are subject to redemption, and will be redeemed, upon the completion of
this initial public offering) were issued in a private placement in July
1998 to investment funds associated with Summit Partners. The
consideration received for such shares was $ .
2. An aggregate of shares of Series C preferred stock (which
are subject to redemption, and will be redeemed, upon the completion of
this initial public offering) was issued in a private placement in July
1998 to investment funds associated with Lazard Freres, and certain
other purchasers, pursuant to a Stock Purchase Agreement. The
consideration received for such shares was $ .
3. An aggregate of shares of Series D preferred stock (which
are convertible into shares of common stock) was issued
in a private placement in July 1998 to investment funds associated with
Lazard Freres, and certain other purchasers, pursuant to a Stock
Purchase Agreement. The consideration received for such shares was $
.
4. From January 1998 to August 1999, an aggregate of shares
of common stock was sold to certain directors and key executives of MCK
Communications pursuant to Stock Restriction Agreements and a Stock
Purchase Agreement for prices ranging from $ to $ per
share. The aggregate consideration received for such shares was $ .
5. From June 1996 to July 1999, MCK Communications granted stock options to
purchase an aggregate of shares of common stock to
directors, employees and consultants with exercise prices ranging from
$ to $ per share pursuant to MCK Communications 1996 Stock
Option Plan. As of July 31, 1999, shares of common stock have
been issued upon exercise of options.
6. Prior to August 1996, we sold several series of preferred stock to
investment funds associated with Summit Partners and certain entities
associated with Wilson, Sonsini, Goodrich and Rosati, P.C. For
additional information regarding the sale of preferred stock to the
Summit Group, see "Certain Transactions with Related Parties."
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these securities were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to compensation, as
provided by Rule 701, or pursuant to Section 4(2) of the Securities Act on the
basis that the transactions did not involve a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
2.1 Stock and Note Purchase Agreement, dated as of June 27,
1996, by and among MCK Communications, Inc., MCK
Telecommunications, Inc., Cal Manz, Manz Developments, Inc.
and the Investors named therein (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.2 Stock Purchase Agreement, dated as of July 16, 1998, by and
among MCK Communications, Inc. and the Purchasers named
therein (excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request).
</TABLE>
II-2
<PAGE> 88
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant (to be filed following consummation of the
offering).
*3.3 Form of First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to
consummation of this offering).
3.4 By-laws of the Registrant.
*3.5 Form of Second Amended and Restated By-laws of the
Registrant (to be effective upon consummation of the
offering).
*4.1 Specimen certificate for shares of common stock, $.001 par
value, of the Registrant.
*5.1 Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
10.1 Amended and Restated Stockholders' Agreement, dated July 16,
1998, between the Registrant and the Stockholders named
therein.
10.2 Amended and Restated Registration Rights Agreement, dated
July 16, 1998, between the Registrant and the Stockholders
named therein.
10.3 Amended and Restated 1996 Stock Option Plan of the
Registrant.
10.4 1999 Stock Option and Grant Plan of the Registrant.
10.5 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to WS Investment Company 96A in the
amount of $8,750 dated June 27, 1996.
10.6 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Trustee, WSGR Retirement Plan FBO
Jeffery D. Saper in the amount of $16,250 dated June 27,
1996.
10.7 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Summit Subordinated Debt Fund, L.P.
in the amount of $4,875,500 dated June 27, 1996.
10.8 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Summit Investors III in the amount
of $99,500 dated June 27, 1996.
10.9 Form of Stock Restriction Agreement for sale of restricted
stock to executive officers.
10.10 Form of Promissory Note for purchase of restricted stock by
executive officers.
10.11 Form of Pledge Agreement.
10.12 Form of Bonus Agreement.
*10.13 Lease Agreement between Manz Developments, Inc. and MCK
Telecommunications, Inc. dated January 1, 1996.
*10.14 Office Lease between MCK Communications, Inc. and 313
Washington Street, LLC dated June 2, 1997, as amended April
22, 1998 and June 30, 1998.
*10.15 Agreement between MCK Communications, Inc. and Lucent
Technologies, Inc. effective as of April 30, 1999.
*10.16 Master Support Agreement between MCK Communications, Inc.
and Vital Networks, Inc. dated June 28, 1999.
16.1 Letter regarding change in certifying accountants
*23.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney (included on page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
II-3
<PAGE> 89
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newton, Commonwealth of
Massachusetts, on August 24, 1999.
MCK COMMUNICATIONS, INC.
By: /s/ STEVEN J. BENSON
------------------------------------
Steven J. Benson
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of Steven J. Benson and Paul K.
Zurlo such person's true and lawful attorney-in-fact and agent with full power
of substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or to any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that any said attorney-in-fact and agent, or any
substitute or substitutes of any of them, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN J. BENSON President, Chief Executive August 24, 1999
- --------------------------------------------------- Officer and Director (Principal
Steven J. Benson Executive Officer)
/s/ PAUL K. ZURLO Chief Financial Officer August 24, 1999
- --------------------------------------------------- (Principal Financial Officer
Paul K. Zurlo and Principal Accounting
Officer)
/s/ CALVIN K. MANZ Director August 24, 1999
- ---------------------------------------------------
Calvin K. Manz
/s/ JOHN B. LANDRY Director August 24, 1999
- ---------------------------------------------------
John B. Landry
/s/ GREGORY M. AVIS Director August 24, 1999
- ---------------------------------------------------
Gregory M. Avis
</TABLE>
II-5
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL H. BALMUTH Director August 24, 1999
- ---------------------------------------------------
Michael H. Balmuth
/s/ PAUL SEVERINO Director August 24, 1999
- ---------------------------------------------------
Paul Severino
</TABLE>
II-6
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
2.1 Stock and Note Purchase Agreement, dated as of June 27,
1996, by and among MCK Communications, Inc., MCK
Telecommunications, Inc., Cal Manz, Manz Developments, Inc.
and the Investors named therein (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.2 Stock Purchase Agreement, dated as of July 16, 1998, by and
among MCK Communications, Inc. and the Purchasers named
therein (excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request).
3.1 Certificate of Incorporation of the Registrant.
*3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant (to be filed following consummation of the
offering).
*3.3 Form of First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to
consummation of this offering).
3.4 By-laws of the Registrant.
*3.5 Form of Second Amended and Restated By-laws of the
Registrant (to be effective upon consummation of the
offering).
*4.1 Specimen certificate for shares of common stock, $.001 par
value, of the Registrant.
*5.1 Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
10.1 Amended and Restated Stockholders' Agreement, dated July 16,
1998, between the Registrant and the Stockholders named
therein.
10.2 Amended and Restated Registration Rights Agreement, dated
July 16, 1998, between the Registrant and the Stockholders
named therein.
10.3 Amended and Restated 1996 Stock Option Plan of the
Registrant.
10.4 1999 Stock Option and Grant Plan of the Registrant.
10.5 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to WS Investment Company 96A in the
amount of $8,750 dated June 27, 1996.
10.6 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Trustee, WSGR Retirement Plan FBO
Jeffery D. Saper in the amount of $16,250 dated June 27,
1996.
10.7 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Summit Subordinated Debt Fund, L.P.
in the amount of $4,875,500 dated June 27, 1996.
10.8 Class A Subordinated Promissory Note issued by MCK
Communications, Inc. to Summit Investors III in the amount
of $99,500 dated June 27, 1996.
10.9 Form of Stock Restriction Agreement for sale of restricted
stock to executive officers.
10.10 Form of Promissory Note for purchase of restricted stock by
executive officers.
10.11 Form of Pledge Agreement.
10.12 Form of Bonus Agreement.
*10.13 Lease Agreement between Manz Developments, Inc. and MCK
Telecommunications, Inc. dated January 1, 1996.
*10.14 Office Lease between MCK Communications, Inc. and 313
Washington Street, LLC dated June 2, 1997, as amended April
22, 1998 and June 30, 1998.
*10.15 Agreement between MCK Communications, Inc. and Lucent
Technologies, Inc. effective as of April 30, 1999.
*10.16 Master Support Agreement between MCK Communications, Inc.
and Vital Networks, Inc. dated June 28, 1999.
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
16.1 Letter regarding change in certifying accountants
*23.1 Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney (included on page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
<PAGE> 1
EXHIBIT 2.1
MCK COMMUNICATIONS, INC.
STOCK AND NOTE PURCHASE AGREEMENT
------------------------------
DATED AS OF JUNE 27, 1996
------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1 AUTHORIZATION AND CLOSING................................................. 1
1.1. Authorization of Redeemable Stock and Notes...................... 1
1.2. Convertible Stock................................................ 1
1.3. Purchase and Sale of Stock and Notes............................. 1
1.4. The Closing...................................................... 1
Section 2 CONDITIONS TO CLOSING..................................................... 2
2.1. Obligations of the Purchasers.................................... 2
2.2. Obligations of MCK Nevada and MDI................................ 5
Section 3 COVENANTS................................................................. 2
3.1. Financial Statements and Other Information....................... 2
3.2. Inspection of Property........................................... 4
3.3. Negative Covenants............................................... .4
3.4. Affirmative Covenants............................................ 7
3.5. Convertible Stock Restrictions................................... 8
3.6. Compliance with Agreements....................................... 9
3.7. Current Public Information....................................... 9
3.8. Preemptive Rights................................................ 10
3.9. Use of Proceeds from Sale of Notes and Redeemable Stock.......... 11
3.10. Use of Proceeds from Initial Public Offerings.................... 11
Section 4 TRANSFER OF RESTRICTED SECURITIES......................................... 12
4.1. General Provisions............................................... 12
4.2. Opinion Delivery................................................. 12
4.3. Rule 144A........................................................ 12
4.4. Legend Removal................................................... 12
Section 5 REPRESENTATIONS AND WARRANTIES OF REPRESENTING PARTIES.................... 12
5.1. Organization, Corporate Power and Licenses....................... 12
5.2. Capital Stock and Related Matters................................ 13
5.3. Subsidiaries; Investments........................................ 14
5.4. Authorization, No Breach......................................... 14
5.5. Financial Statements............................................. 16
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.6. Absence of Undisclosed Liabilities............................... 17
5.7. No Material Adverse Change....................................... 17
5.8. Absence of Certain Developments.................................. 17
5.9. Assets........................................................... 18
5.10. Tax Matters...................................................... 19
5.11. Contracts and Commitments........................................ 19
5.12. Intellectual Property Rights..................................... 21
5.13. Litigation, etc.................................................. 23
5.14. Brokerage........................................................ 23
5.15. Insurance........................................................ 23
5.16. Employees........................................................ 23
5.17. Employee Benefits................................................ 24
5.18. Real Property Holding Corporation Status......................... 25
5.19. Compliance with Laws............................................. 25
5.20. Affiliated Transactions.......................................... 25
5.21. Customers and Suppliers.......................................... 26
5.22. Disclosure....................................................... 26
Section 6 REPRESENTATIONS AND WARRANTIES OF PURCHASERS.............................. 26
6.1. Organization Corporate Power and Licenses........................ 26
6.2. Authorization, No Breach......................................... 27
6.3. Litigation etc................................................... 27
6.4. Brokerage........................................................ 28
6.5. Disclosure....................................................... 28
6.6. Investment Representations....................................... 28
Section 7 DEFINITIONS............................................................... 28
7.1. Definitions...................................................... 28
Section 8 INDEMNIFICATION........................................................... 33
8.1. Indemnification by the Shareholders.............................. 33
8.2. Claims for Indemnification....................................... 33
8.3. Defense by Shareholders.......................................... 34
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.4. Limits........................................................... 35
Section 9 MISCELLANEOUS............................................................. 36
9.1. Expenses......................................................... 36
9.2. Remedies......................................................... 36
9.3. Treatment of the Redeemable Stock................................ 37
9.4. Consent to Amendments............................................ 37
9.5. Survival of Representations and Warranties....................... 37
9.6. Successors and Assigns........................................... 37
9.7. Severability..................................................... 37
9.8. Counterparts..................................................... 38
9.9. Descriptive Headings, Interpretation............................. 38
9.10. Governing Law.................................................... 38
9.11. Notices.......................................................... 38
9.12. No Strict Construction........................................... 39
</TABLE>
-iii-
<PAGE> 5
LIST OF SCHEDULES
-----------------
Schedule of Purchasers
Schedule of Option Grants
Disclosure Schedule
Purchaser Disclosure Schedule
LIST OF EXHIBITS
----------------
Exhibit A - Articles of Incorporation
Exhibit B - Form of Note
Exhibit C - Registration Agreement
Exhibit D - Stockholders Agreement
Exhibit E - Put/Call Agreement
Exhibit F - Stock Pledge Agreement
Exhibit G - Opinion of Counsel to MCK Nevada
Exhibit H - Opinion of Macleod Dixon
Exhibit I - Release
Exhibit J - Non-Competition Agreement
-i-
<PAGE> 6
STOCK AND NOTE PURCHASE AGREEMENT
THIS STOCK AND NOTE PURCHASE AGREEMENT is made as of June 27,1996, by
and among MCK Telecommunications Inc., a corporation organized under the laws of
the Province of Alberta ("MCK CANADA"), MCK Communications Inc., a corporation
organized under the laws of the State of Nevada ("MCK NEVADA"), Cal Manz
("MANZ"), Manz Developments, Inc., a corporation organized under the laws of the
Province of Alberta ("MDI"), and the Persons listed on the Schedule of
Purchasers attached hereto (collectively referred to herein as the "PURCHASERS"
and individually as a "PURCHASER"). Except as otherwise provided herein,
capitalized terms used herein are defined in Section 7 hereof.
The parties hereto hereby agree as follows:
SECTION 1
AUTHORIZATION AND CLOSING
1.1 AUTHORIZATION OF REDEEMABLE STOCK AND NOTES. MCK Nevada has
authorized the issuance and sale to the Purchasers of (a) 13,333,333 shares of
its Series A Redeemable Preferred Stock (the "REDEEMABLE STOCK"), having the
rights and preferences set forth in EXHIBIT A attached hereto, and (b) Class A
Subordinated Promissory Notes in the aggregate original principal amount of Five
Million Dollars ($5,000,000.00) and each in the form attached hereto as EXHIBIT
B appropriately completed (the "NOTES").
1.2 CONVERTIBLE STOCK. MDI has authorized the sale to the
Purchasers of 3,968,384 outstanding shares of Series B Convertible Preferred
Stock of MCK Nevada (the "CONVERTIBLE STOCK"), having the rights and preferences
set forth in EXHIBIT A attached hereto.
1.3 PURCHASE AND SALE OF STOCK AND NOTES. At the Closing, MCK
Nevada shall issue and sell to each Purchaser and, subject to the terms and
conditions set forth herein, each Purchaser shall purchase from MCK Nevada the
number of shares of Redeemable Stock and the aggregate principal amount of Notes
set forth opposite such Purchaser's name on the SCHEDULE OF PURCHASERS attached
hereto, at the aggregate price set forth opposite such Purchaser's name on the
SCHEDULE OF PURCHASERS. Further, at the Closing, MDI shall sell to each
Purchaser and, subject to the terms and conditions set forth herein, each
Purchaser shall purchase from MDI the number of shares of Convertible Stock set
forth opposite such Purchaser's name on the SCHEDULE OF PURCHASERS at the
aggregate price set forth opposite such Purchaser's name on the SCHEDULE OF
PURCHASERS. The sale of the Redeemable Stock, the Convertible Stock and the
Notes to each Purchaser shall constitute a separate sale hereunder.
1.4 THE CLOSING. The closing of the separate purchases and sales
of the Redeemable Stock, the Convertible Stock and the Notes (the "CLOSING")
shall take place at the offices of Macleod Dixon, 3700 Canterra Tower, 400 Third
Avenue S.W., Calgary, Alberta Canada, at 10:00 a.m. on June 27, 1996, or at such
other place or on such other date as may be mutually
- 1 -
<PAGE> 7
agreeable to MDI, MCK Nevada and each Purchaser. At the Closing, (a) MCK Nevada
shall deliver to each Purchaser stock certificates evidencing the Redeemable
Stock to be purchased by such Purchaser and instruments evidencing the Notes to
be purchased by such Purchaser, registered in such Purchaser's or its nominee's
name, (b) MDI shall deliver to each Purchaser stock certificates, duly endorsed
for transfer, evidencing the Convertible Stock to be purchased by such
Purchaser, (c) the Purchasers shall remit payment of the purchase price for the
Redeemable Stock and the Notes by a check or wire transfer of immediately
available funds to the U.S. dollar trust account of Macleod Dixon at The
Toronto-Dominion Bank, #2 Calgary Place, 340 - 5th Avenue S.W., Calgary, Alberta
T2P OL3, in the aggregate amount set forth opposite such Purchaser's name on the
SCHEDULE OF PURCHASERS attached hereto and (d) the Purchasers shall remit
payment of the purchase price for the Convertible Stock by a check or wire
transfer of immediately available funds to the U.S. dollar trust account of
Macleod Dixon at the Toronto-Dominion Bank, #2 Calgary Place, 340 - 5th Avenue
S.W., Calgary, Alberta T2P OL3, in the aggregate amount set forth opposite such
Purchaser's name on the Schedule of Purchasers.
SECTION 2
CONDITIONS TO CLOSING
2.1 OBLIGATIONS OF THE PURCHASERS. The obligation of each
Purchaser to purchase and pay for the Notes, the Redeemable Stock and the
Convertible Stock at the Closing is subject to the satisfaction as of the
Closing of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties contained in Section 5 hereof shall be true and
correct at and as of the Closing as though then made and MCK Canada, MCK Nevada,
MDI and Manz shall have performed all of the covenants required to be performed
by them hereunder prior to the Closing.
(b) ARTICLES OF INCORPORATION. MCK Nevada's Articles of
Incorporation (the "ARTICLES OF INCORPORATION") shall have been duly amended and
restated to include the provisions set forth in EXHIBIT A attached hereto, shall
be in full force and effect under the laws of the State of Nevada as of the
Closing as so amended and restated and shall not have been further amended or
modified.
(c) REGISTRATION AGREEMENT. MCK Nevada, the Purchasers
and MDI shall have entered into a registration agreement in the form of EXHIBIT
C attached hereto (the "REGISTRATION AGREEMENT"), and the Registration Agreement
shall be in full force and effect as of the Closing.
(d) STOCKHOLDERS AGREEMENT. MCK Nevada, the Purchasers
and MDI shall have entered into a stockholders agreement in the form of EXHIBIT
D attached hereto (the "STOCKHOLDERS AGREEMENT"), and the Stockholders Agreement
shall be in full force and effect as of the Closing.
- 2 -
<PAGE> 8
(e) PUT/CALL AGREEMENT. MCK Nevada and MDI shall have
entered into a put/call agreement in the form attached hereto as EXHIBIT E (the
"PUT/CALL AGREEMENT"), and the Put/Call Agreement shall be in full force and
effect as of the Closing.
(f) KEY-MAN LIFE INSURANCE. MCK Nevada shall have
initiated procedures to obtain a key-man life insurance policy on the life of
Cal Manz in the face amount of $1,000,000. Such insurance policy shall name MCK
Nevada as beneficiary and shall provide that such insurance policy may not be
canceled unless the insurance carrier gives at least 30 days prior written
notice of such cancellation to the Purchasers.
(g) BOARD OF DIRECTORS. MCK Nevada shall have taken all
action necessary to provide for the appointment of Gregory M. Avis, Paul K.
Zurlo and Cal Manz to serve as members of MCK Nevada's Board of Directors.
(h) SECURITIES LAW COMPLIANCE. MCK Nevada shall have made
all filings under all applicable securities laws necessary to consummate the
issuance of the Notes, the Redeemable Stock and the Convertible Stock pursuant
to this Agreement in compliance with such laws.
(i) AMENDMENT OF EURO NOMINEES AGREEMENT. MCK Canada and
Euro Nominees, a body corporate organized under the laws of Grand Cayman Island
("Euro Nominees"), shall have amended that certain Share Purchase and Sale
Agreement dated March 29, 1996 to fix the amount owed by MCK Canada to Euro
Nominees pursuant thereto at Canadian $1,575,000.00, and such amendment shall be
in full force and effect.
(j) AMENDMENT OF NMI AGREEMENT. MCK Canada and MDI shall
have amended that certain Share Purchase and Sale Agreement dated March 29, 1996
to fix the elected amount upon exchange of shares at Canadian $675,000.00.
(k) STOCK PLEDGE AGREEMENT. MCK Nevada shall have
executed and delivered a Stock Pledge Agreement in the form attached hereto as
EXHIBIT F (the "Pledge Agreement"), and the Pledge Agreement shall be in full
force and effect as of the Closing.
(l) LEGAL OPINIONS.
(i) Each Purchaser shall have received from Allison,
MacKenzie, Hartman, Soumbeniotis & Russell, Ltd., counsel for MCK Nevada, an
opinion with respect to the matters set forth in EXHIBIT F attached hereto,
which shall be addressed to each Purchaser, dated the date of the Closing and in
form and substance reasonably satisfactory to each Purchaser.
(ii) Each Purchaser shall have received from Macleod
Dixon, counsel for MCK Canada, MDI and Manz, an opinion with respect to the
matters set forth in EXHIBIT G attached hereto, which shall be addressed to each
Purchaser, dated the date of the Closing and in form and substance reasonably
satisfactory to each Purchaser.
- 3 -
<PAGE> 9
(m) OPTION PLAN. MCK Nevada shall have adopted a stock
option plan in form and substance reasonably satisfactory to the Purchasers, and
shall have reserved an aggregate of 453,061 shares of Common Stock for issuance
pursuant thereto.
(n) RELEASE. Euro Nominees shall have executed and
delivered a Release in substantially the form attached hereto as EXHIBIT I (the
"Release"), and the Release shall be in full force and effect as of the Closing.
(o) NON-COMPETITION AGREEMENTS. Cal Manz, Gordon
Campbell, Wayne Leibel, Bruce K. Meyer, Juergen Geibler, Roy Phillips, Heinz
Mesiatowsky and J. Dexter Lindsay shall each have executed and delivered a
Non-Competition Agreement with MCK Canada in substantially the form attached
hereto as EXHIBIT J (the "Non-Competition Agreements"), and the Non-Competition
Agreements shall be in full force and effect as of the Closing.
(p) CLOSING DOCUMENTS. MCK Nevada shall have delivered to
each Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of the
Closing, stating that the conditions specified in Section 1 and Section 2 have
been fully satisfied and that the representations and warranties set forth in
Section 5 hereof are true and correct as of the Closing Date;
(ii) certified copies of (A) the resolutions duly
adopted by MCK Nevada's Board of Directors authorizing the execution, delivery
and performance of this Agreement, the Registration Agreement, the Stockholders
Agreement, the Put/Call Agreement, the Pledge Agreement and each of the other
agreements contemplated hereby, the filing of the amendment to the Articles of
Incorporation referred to in Section 2.1(b), the issuance and sale of the
Redeemable Stock and the Notes and the consummation of all other transactions
contemplated by this Agreement, and (B) the resolutions duly adopted by MCK
Nevada's shareholders adopting the amendment to the Articles of Incorporation
referred to in Section 2.1(b);
(iii) certified copies of MCK Nevada's Articles of
Incorporation and the Bylaws, each as in effect at the Closing;
(iv) copies of all third party and governmental
consents, approvals and filings required in connection with the consummation of
the transactions contemplated hereby (including, without limitation, all
securities law filings and waivers of all preemptive rights and rights of first
refusal); and
(v) such other documents relating to the transactions
contemplated by this Agreement as any Purchaser or its counsel may reasonably
request.
- 4 -
<PAGE> 10
(q) EXPENSES. At the Closing, MCK Nevada shall have
reimbursed or made adequate provision for reimbursing the Purchasers for the
fees and expenses of their counsel as provided in Section 9.1 hereof.
(r) PROCEEDINGS. All corporate and other proceedings
taken or required to be taken by MCK Nevada in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Purchaser and its counsel.
(s) WAIVER. Any condition specified in this Section 2.1
(except any condition requiring or in the nature of a governmental approval or
consent) may be waived if consented to by each Purchaser; provided that no such
waiver shall be effective against any Purchaser unless it is set forth in a
writing executed by such Purchaser.
2.2 OBLIGATIONS OF MCK NEVADA AND MDI. The obligation of MCK
Nevada to deliver instruments and stock certificates representing the Notes and
the Redeemable Stock and MDI to deliver endorsed stock certificates representing
the Convertible Stock, at the Closing, is subject to the satisfaction as of the
Closing of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES: COVENANTS.
The representations and warranties of the Purchasers contained in Section 6
hereof shall be true and correct at and as of the Closing as though then made
and the Purchasers shall have performed all of the covenants required to be
performed by them hereunder prior to the Closing.
(b) SECURITIES LAW COMPLIANCE. MCK Nevada shall have made
all filings under all applicable securities laws necessary to consummate the
issuance of the Notes, the Redeemable Stock and the Convertible Stock pursuant
to this Agreement in compliance with such laws.
(c) LEGAL OPINIONS. Each of MCK Canada, MCK Nevada, MDI
and Manz shall have received from Allison, MacKenzie, Hartman, Soumbeniotis &
Russell, Ltd., counsel for MCK Nevada, an opinion with respect to the matters
set forth in EXHIBIT G attached hereto, which shall be addressed to each of MCK
Canada, MCK Nevada, MDI and Manz dated the date of Closing and in form and
substance reasonably satisfactory to each of MCK Canada, MCK Nevada, MDI and
Manz.
(d) OPTION PLAN. MCK Nevada shall have adopted a stock
option plan in form and substance reasonably satisfactory to Manz, and shall
have reserved an aggregate of 453,061 shares of Common Stock for issuance
pursuant thereto.
(e) CLOSING DOCUMENTS. The Purchasers shall have
delivered all of the following:
(i) an Officer's Certificate of each Purchaser, dated
the date of the Closing, stating that the conditions specified in Section 2.2
have been fully satisfied and that
- 5 -
<PAGE> 11
the representation and warranties of such Purchaser set forth in Section 6
hereof are true and correct as of the Closing Date;
(ii) copies of all third party and governmental
consents, approvals and filings required in connection with the consummation of
the transactions contemplated hereby (including, without limitation, all
securities law filings and waivers of all preemptive rights and rights of first
refusal); and
(iii) such other documents relating to the
transactions contemplated by this Agreement as any of MCK Nevada, MCK Canada,
MDI, Manz or its counsel may reasonably request.
(f) PAYMENTS. At the Closing, the Purchasers shall have
made the payments required by Sections 1.4(c) and 1.4(d) of this Agreement.
(g) PROCEEDINGS. All corporate and other proceedings
taken or required to be taken by each of the Purchasers in connection with the
transaction contemplated hereby to be consummated at or prior to the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to each of MCK Nevada, MCK Canada, MDI, Manz and its counsel.
(h) WAIVER. Any condition specified in this Section 2.2
(excepting any condition requiring or in the nature of a governmental approval
or consent) may be waived if consented to by each of MCK Nevada, MCK Canada, MDI
and Manz; provided that no such waiver shall be effective as against MCK Nevada,
MCK Canada, MDI and Manz unless it is set forth in a writing executed by each of
MCK Nevada, MCK Canada, MDI and Manz.
SECTION 3
COVENANTS
3.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. MCK Nevada shall
deliver to each Purchaser (so long as such Purchaser holds at least 10% of the
aggregate principal amount of the Notes, 10% of the outstanding Redeemable
Stock, 10% of the outstanding Convertible Stock or Investor Common Stock) and to
each transferee of a Purchaser who is the holder of at least 25% of the
aggregate principal amount of the Notes, 25% of the outstanding Redeemable Stock
or 25% of the outstanding Convertible Stock or Investor Common Stock:
(a) as soon as available but in any event within 30 days
after the end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of MCK Nevada and its
Subsidiaries for such monthly period and for the period from the beginning of
the fiscal year to the end of such month, and unaudited consolidated balance
sheets of MCK Nevada and its Subsidiaries as of the end of such monthly period,
setting forth in each case comparisons to MCK Nevada's annual budget and, after
May 1, 1997, to the corresponding period in the preceding fiscal year, and all
such statements shall be prepared in accordance with generally accepted
accounting principles, consistently applied,
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subject to the absence of footnote disclosures and to normal year-end
adjustments for recurring accruals, and shall be certified by MCK Nevada's chief
financial officer;
(b) within 90 days after the end of each fiscal year,
consolidated statements of income and cash flows of MCK Nevada and its
Subsidiaries for such fiscal year, and consolidated balance sheets of MCK Nevada
and its Subsidiaries as of the end of such fiscal year, setting forth in each
case comparisons to MCK Nevada's annual budget and to the preceding fiscal year,
all prepared in accordance with generally accepted accounting principles,
consistently applied, and, with respect to the consolidated portions of such
statements (but not with respect to the annual budget), accompanied by an
opinion containing no exceptions or qualifications of a "Big Six" accounting
firm;
(c) at least 30 days but not more than 90 days prior to
the beginning of each fiscal year, an annual budget prepared on a monthly basis
for MCK Nevada and its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows and balance sheets), and promptly upon
preparation thereof any other significant budgets prepared by MCK Nevada and any
revisions of such annual or other budgets, and within 30 days after any monthly
period in which there is a material adverse deviation from the annual budget, an
Officer's Certificate explaining the deviation;
(d) promptly (but in any event within five business days)
after the discovery or receipt of notice of any Event of Noncompliance, any
default under any material agreement to which it or any of its Subsidiaries is a
party or any other material adverse change, event or circumstance affecting MCK
Nevada or any Subsidiary (including, without limitation, the filing of any
material litigation against MCK Nevada or any Subsidiary or the existence of any
dispute with any Person which involves a reasonable likelihood of such
litigation being commenced), an Officer's Certificate specifying the nature and
period of existence thereof; and
(e) with reasonable promptness, such other information
and financial data concerning MCK Nevada and its Subsidiaries as any Person
entitled to receive information under this Section 3.1 may reasonably request.
Each of the financial statements referred to in Section 3.1(a) or 3.1(b) above
shall present fairly in all material respects the consolidated financial
condition, results of operations and cash flows of MCK Nevada in accordance with
generally accepted accounting principles applied on a consistent basis as of the
dates and for the periods set forth therein, subject, in the case of the
unaudited financial statements, to changes resulting from normal year-end
adjustments for recurring accruals (none of which would, alone or in the
aggregate, be materially adverse to the financial condition, operating results,
assets, operations or business prospects of MCK Nevada and its Subsidiaries
taken as a whole). Notwithstanding the foregoing, the provisions of this Section
3.1 and Section 3.2 below shall cease to be effective so long as MCK Nevada is
subject to the periodic reporting requirements of the Securities Exchange Act
and continues to comply with such requirements. Except as otherwise required by
law or judicial order or decree or by any governmental agency or authority, each
Person entitled to receive information regarding MCK Nevada and its Subsidiaries
under this Section 3.1 and Section 3.2 below shall use the same standards and
controls which such Person uses to maintain the confidentiality of its own
confidential
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information (but in no event less than reasonable care) to maintain the
confidentiality of all nonpublic information of MCK Nevada or any of its
Subsidiaries obtained by it pursuant to this Section 3.1 and Section 3.2 below;
PROVIDED THAT each such Person may disclose such information in connection with
the sale or transfer of any Notes, Redeemable Stock, Convertible Stock or
Investor Common Stock if such Person's transferee agrees in writing to be bound
by the provisions hereof. For purposes of this Agreement and the Registration
Agreement, all holdings of Notes, Redeemable Stock, Convertible Stock and
Investor Common Stock by Persons who are Affiliates of each other (which, for
this purpose, shall also include Persons which have received distributions of
Redeemable Stock, Convertible Stock or Investor Common Stock from a partnership
holding such securities) shall be aggregated for purposes of meeting any
threshold tests under this Agreement and the Registration Agreement.
3.2 INSPECTION OF PROPERTY. MCK Nevada shall permit any
representatives designated by any Purchaser (so long as such Purchaser holds any
Notes, Redeemable Stock, Convertible Stock or Investor Common Stock) or any
transferee of a Purchaser who is the holder of at least 25% of the aggregate
principal amount of the Notes, 25% of the outstanding Redeemable Stock or 25% of
the outstanding Convertible Stock or Investor Common Stock, upon reasonable
notice and during normal business hours and at such other times as any such
Person may reasonably request, to (a) visit and inspect any of the properties of
MCK Nevada and its Subsidiaries, (b) examine the corporate and financial records
of MCK Nevada and its Subsidiaries and make copies thereof or extracts therefrom
and (c) discuss the affairs, finances and accounts of any such corporations with
the directors, officers, key employees and independent accountants of MCK Nevada
and its Subsidiaries.
3.3 NEGATIVE COVENANTS. So long as any Notes or Redeemable Stock
remain outstanding, MCK Nevada shall not, without the prior consent of a
majority in interest of the Purchasers:
(a) directly or indirectly declare or pay any dividends
or make any distributions upon any of its capital stock or other equity
securities other than the Redeemable Stock pursuant to the terms of the Articles
of Incorporation;
(b) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire, any
of MCK Nevada's or any Subsidiary's capital stock or other equity securities
(including, without limitation, warrants, options and other rights to acquire
such capital stock or other equity securities), other than (i) the Redeemable
Stock or Convertible Stock pursuant to the terms of the Articles of
Incorporation and (ii) repurchases at cost of Common Stock from former employees
of MCK Nevada its Subsidiaries upon termination of employment or directly or
indirectly redeem, purchase or make any payments with respect to any stock
appreciation fights, phantom stock plans or similar rights or plans;
(c) authorize, issue or enter into any agreement
providing for the issuance (contingent or otherwise) of, (i) any notes or debt
securities containing equity features (including, without limitation, any notes
or debt securities convertible into or exchangeable for capital stock
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or other equity securities, issued in connection with the issuance of capital
stock or other equity securities or containing profit participation features) or
(ii) any capital stock or other equity securities (or any securities convertible
into or exchangeable for any capital stock or other equity securities) which are
senior to Common Stock with respect to the payment of dividends, redemptions or
distributions upon liquidation or otherwise;
(d) make, or permit any Subsidiary to make, any loans or
advances to, guarantees for the benefit of, or Investments in, any Person (other
than a Wholly-Owned Subsidiary), except for (i) reasonable advances to employees
in the ordinary course of business, (ii) acquisitions permitted pursuant to
Section 3.3(h) below and (iii) Investments not exceeding $10,000 in any
twelve-month period or $25,000 at any time in the aggregate;
(e) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a merger or
consolidation between or among Wholly-Owned Subsidiaries) (a "COMPANY MERGER"),
unless prior to or contemporaneously with the consummation of such transaction
MCK Nevada repays all outstanding Indebtedness pursuant to the Notes and redeems
all of the outstanding Redeemable Stock pursuant to the terms of the Articles of
Incorporation;
(f) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 20% of the
consolidated assets of MCK Nevada and its Subsidiaries (computed on the basis of
book value, determined in accordance with generally accepted accounting
principles consistently applied, or fair market value, determined by MCK
Nevada's Board of Directors in its reasonable good faith judgment) in any
transaction or series of related transactions (other than sales of inventory in
the ordinary course of business) (a "COMPANY SALE"), unless prior to or
contemporaneously with the consummation of such transaction MCK Nevada repays
all outstanding Indebtedness pursuant to the Notes and redeems all of the
outstanding Stock pursuant to the terms of the Articles of Incorporation;
(g) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes);
(h) acquire, or permit any Subsidiary to acquire, any
interest in any company or business (whether by a purchase of assets, purchase
of stock, merger or otherwise), or enter into any joint venture that is not a
strategic alliance within MCK Nevada's ordinary course of business as previously
conducted, involving an aggregate consideration (including, without limitation,
the assumption of liabilities whether direct or indirect) exceeding $25,000 in
any one transaction or series of related transactions or exceeding $50,000 in
any twelve-month period;
(i) enter into, or permit any Subsidiary to enter into,
the ownership, active management or operation of any business other than the
development, production, marketing and sales of products for the
telecommunications industry and similar or related businesses;
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<PAGE> 15
(j) become subject to, or permit any of its Subsidiaries
to become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict (i) the right of any Subsidiary to make loans or
advances or pay dividends to, transfer property to, or repay any Indebtedness
owed to, MCK Nevada or another Subsidiary or (ii) MCK Nevada's right to perform
the provisions of this Agreement, the Registration Agreement, the Stockholders
Agreement, the Pledge Agreement, the Articles of Incorporation or the Bylaws
(including, without limitation, provisions relating to the declaration and
payment of dividends on and the making of redemptions of the Redeemable Stock);
(k) make any amendment to the Articles of Incorporation
or Bylaws or file any resolution of the board of directors with any governmental
agency containing any provisions which would increase the number of authorized
shares of the Redeemable Stock or adversely affect or otherwise impair the
rights or the relative preferences and priorities of the holders of the
Redeemable Stock under this Agreement, the Articles of Incorporation, the
Bylaws, the Registration Agreement, the Pledge Agreement or the Stockholders
Agreement;
(l) enter into, amend, modify or supplement, or permit
any Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, employees, shareholders or Affiliates or with any
individual related by blood, marriage or adoption to any such individual or with
any entity in which any such Person or individual owns a beneficial interest,
except for customary employment arrangements and benefit programs on reasonable
terms and except as otherwise expressly contemplated by this Agreement;
(m) establish or acquire any Subsidiaries other than (i)
MCK Canada or (ii) Wholly-Owned Subsidiaries;
(n) except as expressly provided for in any budget
approved by the Board of Directors, create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist, Indebtedness
exceeding an aggregate principal amount of $50,000 outstanding at any time on a
consolidated basis;
(o) except as expressly provided for in any budget
approved by the Board of Directors, create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist, any Liens
other than Permitted Liens;
(p) except as expressly provided for in any budget
approved by the Board of Directors, make any capital expenditures (including,
without limitation, payments with respect to capitalized leases, as determined
in accordance with generally accepted accounting principles consistently
applied) exceeding $50,000 in the aggregate on a consolidated basis during any
twelve-month period;
(q) except as expressly provided for in any budget
approved by the Board of Directors, enter into any leases or other rental
agreements (excluding capitalized leases, as determined in accordance with
generally accepted accounting principles consistently applied)
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<PAGE> 16
under which the amount of the aggregate lease payments for all such agreements
exceeds $50,000 on a consolidated basis for any twelve-month period;
(r) amend or modify any stock option plan or employee
stock ownership plan as in existence as of the Closing, adopt any new stock
option plan or employee stock ownership plan or issue any shares of Common Stock
to its or its Subsidiaries' employees other than pursuant to the stock option
plan referred to in Section 3.4(f) below;
(s) issue or sell, or permit any Subsidiary to issue or
sell, any shares of the capital stock, or rights to acquire shares of the
capital stock, of any Subsidiary to any Person other than MCK Nevada or a
Wholly-Owned Subsidiary; or
(t) borrow against, pledge, assign, modify, cancel or
surrender the key-man life insurance policy referred to in Section 2.1(f)
hereof.
3.4 AFFIRMATIVE COVENANTS. So long as any Notes or Redeemable
Stock remain outstanding, MCK Nevada shall, and shall cause each Subsidiary to:
(a) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material licenses,
authorizations and permits necessary to the conduct of its businesses;
(b) maintain and keep its material properties in good
repair, working order and condition, and from time to time make all repairs,
renewals and replacements necessary for the conduct of its businesses;
(c) pay and discharge when payable all material taxes,
assessments and governmental. charges imposed upon its properties or upon the
income or profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all material claims for labor, materials or
supplies which if unpaid would by law become a Lien upon any of its property,
unless and to the extent that the same are being contested in good faith and by
appropriate proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have been
established on its consolidated financial statements with respect thereto;
(d) comply with all other material obligations which it
incurs pursuant to any contract or agreement, whether oral or written, express
or implied, as such obligations become due, unless and to the extent that the
same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its books
with respect thereto;
(e) comply with all applicable laws, rules and
regulations of all governmental authorities, the violation of which would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of MCK
Nevada and its Subsidiaries taken as a whole;
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<PAGE> 17
(f) (i) maintain a stock option plan for the benefit of
the employees of MCK Nevada and its Subsidiaries pursuant to which 453,061
shares of Common Stock will be reserved for issuance; and
(ii) grant stock options as set forth on the SCHEDULE
OF OPTION GRANTS attached hereto, to the employees of MCK Canada named on such
schedule, to purchase the number of shares set forth opposite each such
employee's name, at an exercise price of $0.15 per share, having the general
terms set forth on such schedule;
(g) apply for and continue in force at the expense of MCK
Nevada adequate insurance covering risks of such types and in such amounts as
are customary for corporations of similar size engaged in similar lines of
business;
(h) maintain the key-man life insurance policy referred
to in Section 2.1(f) hereof,
(i) possess and maintain all material Intellectual
Property Rights necessary to the conduct of their respective businesses and own
all right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights;
(j) maintain proper books of record and account which
present fairly in all material respects its financial condition and results of
operations and make provisions on its consolidated financial statements for all
such proper reserves as in each case are required in accordance with generally
accepted accounting principles, consistently applied; and
(k) enter into and maintain nondisclosure and, on a best
efforts basis, noncompete agreements with its key employees.
3.5 CONVERTIBLE STOCK RESTRICTIONS. Until such time as MCK Nevada
shall have consummated a public offering of its Common Stock pursuant to a
registration statement declared effective under the Securities Act, MCK Nevada
shall not, without the prior written consent of the holders of a majority of the
Convertible Stock and Investor Common Stock (voting together):
(a) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire, any
of MCK Nevada's or any Subsidiary's capital stock or other equity securities
(including, without limitation, warrants, options and other rights to acquire
such capital stock or other equity securities), other than (a) the Redeemable
Stock pursuant to the terms of the Articles of Incorporation, or (b) repurchases
at cost of Common Stock from former employees of MCK Nevada or its Subsidiaries
upon termination of employment or directly or indirectly redeem, purchase or
make any payments with respect to any stock appreciation rights, phantom stock
plans or similar rights or plans;
(b) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability
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<PAGE> 18
company, a partnership or any other non-corporate entity which is treated as a
partnership for federal income tax purposes);
(c) make any amendment to the Articles of Incorporation
or Bylaws or take any other action which would adversely affect or otherwise
impair the rights or relative priority of the holders of the Convertible Stock
or the Investor Common Stock sold to the Purchasers pursuant to this Agreement,
the Articles of Incorporation, the Bylaws, the Registration Agreement or the
Stockholders Agreement; or
(d) enter into, amend, modify or supplement, or permit
any Subsidiary to enter into, amend, modify or supplement, any agreement,
commitment, arrangement or transaction with any of its or any Subsidiary's
officers, directors, employees, shareholders or Affiliates or with any
individual related by blood or marriage to any such individual or with any
entity in which any such Person or individual owns a beneficial interest, except
for customary employment arrangements and benefit programs on reasonable terms
and except as otherwise expressly contemplated by this Agreement.
3.6 COMPLIANCE WITH AGREEMENTS. MCK Nevada shall perform and
observe (a) all of its obligations to each holder of the Redeemable Stock and
all of its obligations to each holder of the Investor Common Stock set forth in
the Articles of Incorporation, the Bylaws and the Stockholders Agreement and (b)
all of its obligations to each holder of Registrable Securities (as such term is
defined in the Registration Agreement) set forth in the Registration Agreement.
3.7 CURRENT PUBLIC INFORMATION. After MCK Nevada has filed a
registration statement with the Securities and Exchange Commission pursuant to
the requirements of either the Securities Act or the Securities Exchange Act,
MCK Nevada shall file all reports required to be filed by it under the
Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, all to the extent
required to enable holders of Restricted Securities to sell such Restricted
Securities pursuant to (a) Rule 144 adopted by the Securities and Exchange
Commission under the Securities Act (as such rule may be amended from time to
time) or any similar rule or regulation hereafter adopted by the Securities and
Exchange Commission or (b) a registration statement on Form S-2 or S-3 or any
similar registration form hereafter adopted by the Securities and Exchange
Commission. Upon request, MCK Nevada shall deliver to any holder of Restricted
Securities a written statement as to whether it has complied with such
requirements.
3.8 PREEMPTIVE RIGHTS.
(a) Except for issuances of Common Stock (i) to MCK
Nevada's employees as contemplated by, and in accordance with, Section 3.4(f)
above, (ii) in connection with the acquisition of another company or business in
accordance with Section 3.3(h) above or (iii) pursuant to a public offering
registered under the Securities Act, if MCK Nevada authorizes the issuance or
sale of any shares of Common Stock or any securities containing options or
rights to acquire any shares of Common Stock (other than as a dividend on the
outstanding Common Stock), MCK Nevada shall first offer to sell to each
Purchaser (or any transferee of shares of
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<PAGE> 19
Convertible Stock or Investor Common Stock) (a "Holder") a portion of such stock
or securities equal to the quotient determined by dividing (x) the sum of (A)
the number of shares of Common Stock issuable upon conversion of the Convertible
Stock held by such Holder plus (B) the number of shares of Common Stock held by
such Holder by (y) the sum of (A) the total number of shares of Common Stock
issuable upon conversion of the outstanding Convertible Stock plus (B) the total
number of shares of Common Stock then outstanding. Each Holder shall be entitled
to purchase such stock or securities at the most favorable price and on the most
favor-able terms as such stock or securities are to be offered or sold to any
other Persons. The purchase price for all stock and securities offered to the
Holders shall be payable in cash or, to the extent otherwise required hereunder,
notes issued by such holders.
(b) In order to exercise its purchase rights hereunder, a
Holder must within 15 days after receipt of written notice from MCK Nevada
(which notice shall describe in reasonable detail the stock or securities being
offered, the purchase price thereof, the payment terms and such Holder's
percentage allotment) deliver a written notice to MCK Nevada describing its
election hereunder. If all of the stock and securities offered to the Holders is
not fully subscribed by such Holders, the remaining stock and securities shall
be reoffered by MCK Nevada to the Holders purchasing their full allotment upon
the terms set forth in this paragraph, except that such Holders must exercise
their purchase rights within five days after receipt of such reoffer.
(c) Upon the expiration of the offering periods described
above, MCK Nevada shall be entitled to sell such stock or securities which the
Holders have not elected to purchase during the 90 days following such
expiration on terms and conditions no more favorable to the purchasers thereof
than those offered to such Holders. Any stock or securities offered or sold by
MCK Nevada after such 90-day period must be reoffered to the Holders pursuant to
the terms of this Section 3.8.
(d) The rights of the Holders under this Section 3.8
shall terminate upon the effectiveness of a registration statement filed by MCK
Nevada with the Securities and Exchange Commission under the Securities Act;
PROVIDED THAT if the registration statement is withdrawn or abandoned before any
shares of Common Stock are sold thereunder, the provisions of this Section 3.8
shall remain in full force and effect.
3.9 USE OF PROCEEDS FROM SALE OF NOTES AND REDEEMABLE STOCK. MCK
Nevada, MCK Canada, MDI and Manz agree that the proceeds from the sale and
issuance of the Notes and the Redeemable Stock shall be used as follows:
(a) MCK Nevada will use S 12,150,853.00 of the proceeds
to repay concurrent with the Closing all Indebtedness owed to MDI (including
without limitation those amounts reflected as a "Shareholder Account" on the
financial statements of MCK Canada and/or MCK Nevada);
(b) MCK Nevada will use the U.S. dollar equivalent at
Closing of Canadian $2,250,000.00 (being U.S.$1,666,667) of the proceeds to make
a capital contribution (by way of equity or debt) to MCK Canada, and MCK Canada
will use such proceeds to (i) redeem all
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<PAGE> 20
outstanding Class C Preferred Shares of MCK Canada held by MDI, for a redemption
price equal to Canadian $675,000.00 and (ii) retire all Indebtedness owed by MCK
Canada to Euro Nominees, in an amount equal to Canadian $1,575,000.00;
(c) MCK Nevada will use proceeds as necessary to make a
capital contribution (by way of equity or debt) to MCK Canada for working
capital purposes; and
(d) Manz will use Canadian $202,308 of the proceeds to
repay concurrent with the Closing (or as soon thereafter as practicable) all
Indebtedness owed to MCK Canada.
3.10 USE OF PROCEEDS FROM INITIAL PUBLIC OFFERINGS. MCK Nevada
shall cause the managing underwriters responsible for MCK Nevada's initial
public offering of Common Stock registered under the Securities Act to consent
to the use by MCK Nevada of the net proceeds from such offering to retire the
Notes and redeem the Redeemable Stock pursuant to the terms of MCK Nevada's
Articles of Incorporation.
SECTION 4
TRANSFER OF RESTRICTED SECURITIES
4.1 GENERAL PROVISIONS. Restricted Securities are transferable by
means of (a) public offerings registered under the Securities Act, (b) Rule 144
or Rule 144A of the Securities and Exchange Commission (or any similar rule or
rules then in force) if such rule is available and (c) subject to the conditions
specified in Section 4.2 below, any other legally available means of transfer.
4.2 OPINION DELIVERY. In connection with the transfer of any
Restricted Securities (other than a transfer described in Section 4. 1 (a) or
(b) above), the holder thereof shall deliver written notice to MCK Nevada
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel which (to MCK Nevada's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to MCK Nevada an opinion of such counsel that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, MCK Nevada shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in Section 6.6 below. If MCK Nevada is
not required to deliver new certificates for such Restricted Securities not
bearing such legend, the holder thereof shall not transfer the same until the
prospective transferee has confirmed to this Company in writing its agreement to
be bound by the conditions contained in this Section and Section 6.6.
4.3 RULE 144A. Upon the request of any holder of Restricted
Securities, MCK Nevada shall promptly supply to such Person or its prospective
transferees all information regarding MCK Nevada required to be delivered in
connection with a transfer pursuant to Rule 144A of the Securities and Exchange
Commission.
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<PAGE> 21
4.4 LEGEND REMOVAL. If any Restricted Securities become eligible
for sale pursuant to Rule 144(k), MCK Nevada shall, upon the request of the
holder of such Restricted Securities, remove the legend set forth in Section 6.6
from the certificates for such Restricted Securities.
SECTION 5
REPRESENTATIONS AND WARRANTIES OF REPRESENTING PARTIES
As a material inducement to the Purchasers to enter into this Agreement
and purchase the Notes, the Redeemable Stock and the Convertible Stock
hereunder, and except as set forth on the attached Disclosure Schedule, MCK
Nevada, MCK Canada, MDI and Manz (collectively, the "Representing Parties")
hereby jointly and severally represent and warrant to the Purchasers that, now
and as of the Closing:
5.1 ORGANIZATION, CORPORATE POWER AND LICENSES. MCK Nevada is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada and is qualified to do business in every jurisdiction in
which the failure to so qualify has had or would reasonably be expected to have
a material adverse effect on the financial condition, operating results, assets,
operations or business prospects of MCK Nevada and its Subsidiaries taken as a
whole. MCK Nevada possesses all requisite corporate power and authority and all
material licenses, permits and authorizations necessary to own and operate its
properties, to carry on its businesses as now conducted and presently proposed
to be conducted and to carry out the transactions contemplated by this
Agreement. The copies of MCK Nevada's and each Subsidiary's charter documents
and bylaws which have been furnished to the Purchasers' counsel reflect all
amendments made thereto at any time prior to the date of this Agreement and are
correct and complete.
5.2 CAPITAL STOCK AND RELATED MATTERS.
(a) As of the date of this Agreement, the authorized
capital stock of MCK Nevada consists of (i) 20,000,000 shares of preferred
stock, 13,333,333 of which are designated as Series A Redeemable Preferred Stock
and none of which is issued or outstanding and 3,968,384 of which are designated
Series B Convertible Preferred Stock, all of which are issued and outstanding
and held beneficially and of record by MDI and (ii) 25,000,000 shares of Common
Stock, of which 2,031,616 shares are issued and outstanding and are held
beneficially and of record by MDI. Neither MCK Nevada nor any Subsidiary has, or
will have as of the Closing, outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor does it have, or will it have as of the Closing,
outstanding any rights or options to subscribe for or to purchase its capital
stock or any stock or securities convertible into or exchangeable for its
capital stock or any stock appreciation rights or phantom stock plans. Neither
MCK Nevada nor any Subsidiary is, or will be as of the Closing, subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, except pursuant to the Articles of Incorporation,
the Stockholders Agreement and the Put/Call Agreement. All of the outstanding
shares of MCK Nevada's
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<PAGE> 22
capital stock are validly issued, fully paid and nonassessable. The shares of
Redeemable Stock issued pursuant to this Agreement will be, when issued at the
Closing in accordance with the terms of this Agreement, validly issued, fully
paid and nonassessable.
(b) There are no statutory or contractual shareholders'
preemptive rights or rights of first refusal with respect to the sale or
issuance of the Notes, the Redeemable Stock or the Convertible Stock hereunder.
MCK Nevada has not violated any applicable securities laws (federal, state,
provincial or other) in connection with the offer, sale or issuance of any of
its capital stock, and the offer, sale and issuance of the Notes, the Redeemable
Stock and the Convertible Stock hereunder do not require registration under the
Securities Act or any applicable securities laws. There are no agreements among
MCK Nevada's shareholders with respect to the voting or transfer of MCK Nevada's
capital stock or with respect to any other aspect of MCK Nevada's affairs,
except for the Stockholders Agreement.
(c) The authorized capital stock of MCK Canada consists
of an unlimited number of Class A Common Shares, an unlimited number of Class C
Preferred Shares and an unlimited number of Class E Redeemable Preferred Shares,
of which immediately prior to Closing the only issued and outstanding shares of
MCK Canada are 20,000 Class E Redeemable Preferred Shares (the "MCK CANADA CLASS
E STOCK") held of record and beneficially by MDI, 100,000 Class C Preferred
Shares (the "MCK CANADA SERIES C STOCK") held of record and beneficially by MDI,
and 12,150,900 Class A Common Shares held of record and beneficially by MCK
Nevada. All of the outstanding shares of MCK Canada's capital stock are validly
issued, fully paid and nonassessable.
(d) MDI has, and immediately prior the Closing will have,
good and marketable title to the Convertible Stock, the MCK Canada Class E
Stock, and the MCK Canada Series C Stock, free and clear of all liens, claims,
security interests, charges, options, or other encumbrances of any kind. At the
Closing, the Purchasers will acquire from MDI good and marketable title to the
Convertible Stock, free and clear of all liens, claims, security interests,
charges, options, or other encumbrances of any kind.
5.3 SUBSIDIARIES; INVESTMENTS. The Disclosure Schedule correctly
sets forth the name of each Subsidiary of MCK Nevada and the jurisdiction of its
incorporation. Each such Subsidiary is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, possesses
all requisite corporate power and authority and all material licenses, permits
and authorizations necessary to own its properties and to carry on its
businesses as now being conducted and as presently proposed to be conducted and
is qualified to do business in every jurisdiction in which the failure to so
qualify has had or would reasonably be expected to have a material adverse
effect on the financial condition, operating results, assets, operations or
business prospects of MCK Nevada and its Subsidiaries taken as a whole. Except
as set forth in Section 5.2(c) above, all of the outstanding shares of capital
stock of each Subsidiary are validly issued, fully paid and nonassessable, and
all such shares are owned by MCK Nevada or another Subsidiary free and clear of
any Lien and are not subject to any option or right to purchase any such shares.
Neither MCK Nevada nor any Subsidiary
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owns or holds the right to acquire any shares of stock or any other security or
interest in any other Person.
5.4 AUTHORIZATION, NO BREACH.
(a) The execution, delivery and performance of this
Agreement, the Registration Agreement, the Stockholders Agreement, the Put/Call
Agreement, the Pledge Agreement, and all other agreements contemplated hereby to
which MCK Nevada is a party, and the amendment of the Articles of Incorporation
have been duly authorized by MCK Nevada. This Agreement, the Articles of
Incorporation, the Registration Agreement, the Stockholders Agreement, the
Put/Call Agreement, the Pledge Agreement and all other agreements contemplated
hereby to which MCK Nevada is a party each constitutes a valid and binding
obligation of MCK Nevada, enforceable against MCK Nevada in accordance with its
terms, subject to the rules and principles of equity and the rules and
principles applicable to bankruptcy and insolvency and except to the extent that
the enforceability of Section 6 of the Registration Agreement may be limited by
public policy. The execution and delivery by MCK Nevada of this Agreement, the
Registration Agreement, the Stockholders Agreement, the Put/Call Agreement, the
Pledge Agreement and all other agreements contemplated hereby to which MCK
Nevada is a party, the offering, sale and issuance of the Notes and the
Redeemable Stock hereunder, the amendment of the Articles of Incorporation and
the fulfillment of and compliance with the respective terms hereof and thereof
by MCK Nevada, do not and shall not (i) conflict with or result in a breach of
the terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in the creation of any lien, security interest, charge or encumbrance
upon MCK Nevada's or any Subsidiary's capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency pursuant to,
the charter or bylaws of MCK Nevada or any Subsidiary, or any law, statute, rule
or regulation to which MCK Nevada or any Subsidiary is subject, or any
agreement, instrument, order, judgment or decree to which MCK Nevada or any
Subsidiary is subject. None of the Subsidiaries are subject to any restrictions
upon making loans or advances or paying dividends to, transferring property to,
or repaying any Indebtedness owed to, MCK Nevada or another Subsidiary.
(b) The execution, delivery and performance of this
Agreement and all other agreements contemplated hereby to which MCK Canada is a
party have been duly authorized by MCK Canada. This Agreement, the
Non-Competition Agreements and all other agreements contemplated hereby to which
MCK Canada is a party each constitutes a valid and binding obligation of MCK
Canada, enforceable against MCK Canada in accordance with its terms, subject to
the rules and principles of equity and the rules and principles applicable to
bankruptcy and insolvency. The execution and delivery by MCK Canada of this
Agreement, the Non-Competition Agreements and all other agreements contemplated
hereby to which MCK Canada is a party and the fulfillment of and compliance with
the respective terms hereof and thereof by MCK Canada, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation
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of any lien, security interest, charge or encumbrance upon MCK Canada's capital
stock or assets pursuant to, (iv) give any third party the right to modify,
terminate or accelerate any obligation under, (v) result in a violation of or
(vi) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any court or administrative or
governmental body or agency pursuant to, the charter or bylaws of MCK Canada, or
any law, statute, rule or regulation to which MCK Canada is subject, or any
agreement, instrument, order, judgment or decree to which MCK Canada is subject.
(c) The execution, delivery and performance of this
Agreement, the Registration Agreement, the Stockholders Agreement, the Put/Call
Agreement and all other agreements contemplated hereby to which MDI is a party
have been duly authorized by MDI. This Agreement, the Registration Agreement,
the Stockholders Agreement, the Put/Call Agreement and all other agreements
contemplated hereby to which MDI is a party each constitutes a valid and binding
obligation of MDI, enforceable against NMI in accordance with its terms, subject
to the rules and principles of equity and the rules and principles applicable to
bankruptcy and insolvency and except to the extent that the enforceability of
Section 6 of the Registration Agreement may be limited by public policy. The
execution and delivery by MDI of this Agreement, the Stockholders Agreement, the
Put/Call Agreement and all other agreements contemplated hereby to which MDI is
a party, the sale of the Convertible Stock and the fulfillment of and compliance
with the respective terms hereof and thereof by MDI, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon MDI's capital stock or assets
pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of MDI, or any law, statute, rule
or regulation to which MDI is subject, or any agreement, instrument, order,
judgment or decree to which MDI is subject.
(d) This Agreement and all other agreements contemplated
hereby to which Manz is a party each constitutes a valid and binding obligation
of Manz, enforceable against Manz in accordance with its terms, subject to the
rules and principles of equity and the rules and principles applicable to
bankruptcy and insolvency. The execution and delivery by Manz of this Agreement
and all other agreements contemplated hereby to which Manz is a party and the
fulfillment of and compliance with the respective terms hereof and thereof by
Manz, do not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result in
the creation of any lien, security interest, charge or encumbrance upon Manz's
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, any law, statute, rule or regulation to which Manz is
subject, or any agreement, instrument, order, judgment or decree to which Manz
is subject.
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<PAGE> 25
5.5 FINANCIAL STATEMENTS. MCK Nevada has delivered to the
Purchasers the following financial statements:
(a) the consolidated balance sheets of MCK Canada and its
Subsidiaries as of April 30, 1995 and April 30, 1996 and the related statements
of income and cash flows for the twelve-month periods then ended, each audited
by Price Waterhouse; and
(b) the unaudited consolidated balance sheet of MCK
Canada and its Subsidiaries as of May 31, 1996 (the "MAY BALANCE SHEET"), and
the related statement of income and cash flows for the month then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is consistent in all material respects with the books and
records of MCK Canada (which, in turn, are accurate and complete in all material
respects) and presents fairly in all material respects the consolidated
financial condition, results of operations and cash flows of MCK Canada and its
Subsidiaries in accordance with generally accepted accounting principles applied
on a consistent basis as of the dates and for the periods set forth therein,
subject, in the case of the unaudited financial statements, to the absence of
footnote disclosures and subject, in the case of the unaudited financial
statements referred to in clause (c) above, to changes resulting from normal
year-end adjustments for recurring accruals (none of which would, alone or in
the aggregate, be materially adverse to the financial condition, operating
results, assets, operations or business prospects of MCK Canada and its
Subsidiaries taken as a whole).
5.6 ABSENCE OF UNDISCLOSED LIABILITIES. MCK Nevada and its
Subsidiaries do not have any material obligation or liability (whether accrued,
absolute, contingent, unliquidated or otherwise, whether or not known to MCK
Nevada or any Subsidiary, whether due or to become due and regardless of when
asserted) arising out of transactions entered into at or prior to the Closing,
or any action or inaction at or prior to the Closing, or any state of facts
existing at or prior to the Closing other than: (a) liabilities set forth on the
May Balance Sheet (including any notes thereto) or (b) liabilities and
obligations which have arisen after May 31, 1996, in the ordinary course of
business (none of which is a liability resulting from breach of contract, breach
of warranty, tort, infringement, claim or lawsuit).
5.7 NO MATERIAL ADVERSE CHANGE. Since May 31, 1996, to the best
knowledge and belief of each Representing Party there has been no material
adverse change in the financial condition, operating results, assets,
operations, business, prospects, employee relations or customer or supplier
relations of MCK Nevada and its Subsidiaries taken as a whole.
5.8 ABSENCE OF CERTAIN DEVELOPMENTS.
(a) Except as expressly set forth in this Agreement,
since May 31, 1996 neither MCK Nevada nor any Subsidiary has:
(i) issued any notes, bonds or other debt securities
or any capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity securities;
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<PAGE> 26
(ii) borrowed any amount or incurred or become
subject to any material liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts entered into in the
ordinary course of business consistent with past practice;
(iii) paid any material obligation or liability,
other than current liabilities paid in the ordinary course of business;
(iv) declared or made any payment or distribution of
cash or other property to its shareholders with respect to its capital stock or
other equity securities or purchased or redeemed any shares of its capital stock
or other equity securities (including, without limitation, any warrants, options
or other rights to acquire its capital stock or other equity securities);
(v) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business consistent with past practice,
or canceled any material debts or claims;
(vi) sold, assigned or transferred any patents or
patent applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other intangible assets,
or disclosed any proprietary confidential information to any Person (other than
to the Purchasers and other than in the ordinary course of business in
circumstances in which MCK Nevada has imposed confidentiality restrictions);
(vii) suffered any extraordinary losses or waived any
rights of material value, whether or not in the ordinary course of business or
consistent with past practice;
(viii) made capital expenditures or commitments
therefor that aggregate in excess of $50,000;
(ix) made any loans or advances to, guarantees for
the benefit of, or any Investments in, any Persons in excess of $10,000 in the
aggregate;
(x) suffered any damage, destruction or casualty loss
exceeding in, the aggregate $10,000, whether or not covered by insurance; or
(xi) entered into any other material transaction
outside of the ordinary course of business.
(b) To the best knowledge and belief of each Representing
Party, no officer, director, employee or agent of MCK Nevada or any of its
Subsidiaries has been or is authorized to make or receive, and MCK Nevada does
not know of any such person making or receiving any bribe, kickback or other
illegal payment.
5.9 ASSETS. MCK Nevada and each Subsidiary have good and
marketable title to, or a valid leasehold interest in, the material properties
and assets used by them, located on their
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<PAGE> 27
premises or shown on the May Balance Sheet or acquired thereafter, free and
clear of all Liens, except for Permitted Liens, properties and assets disposed
of in the ordinary course of business since the date of the May Balance Sheet
and except for Liens disclosed in reasonable detail on the May Balance Sheet and
Liens for current property taxes not yet due and payable. MCK Nevada's and each
Subsidiary's buildings, equipment and other tangible assets are in good
operating condition in all material respects and are fit for use in the ordinary
course of business. MCK Nevada and each Subsidiary own, or have a valid
leasehold interest in, all material assets necessary for the conduct of their
respective businesses as presently conducted and as presently proposed to be
conducted.
5.10 TAX MATTERS.
(a) MCK Nevada and each Subsidiary have filed all Tax
Returns which they are required to file under applicable laws and regulations;
all such Tax Returns are complete and correct in all material respects and have
been prepared in compliance with all applicable laws and regulations in all
material respects; MCK Nevada and each Subsidiary have paid all Taxes due and
owing by them (whether or not such Taxes are required to be shown on a Tax
Return) and have withheld and paid over to the appropriate taxing authority all
Taxes which they are required to withhold from amounts paid or owing to any
employee, shareholder, creditor or other third party; the accrual for Taxes on
the May Balance Sheet would be adequate to pay all Tax liabilities of MCK Nevada
and its Subsidiaries if their current tax year were treated as ending on the
date of the May Balance Sheet (excluding any amount recorded which is
attributable solely to timing differences between book and Tax income); since
May 31, 1996, MCK Nevada and its Subsidiaries have not incurred any liability
for Taxes other than in the ordinary course of business; and no foreign,
federal, state or local tax audits or administrative or judicial proceedings are
pending or being conducted with respect to MCK Nevada or any Subsidiary, no
information related to Tax matters has been requested by any foreign, federal,
state , provincial or local taxing authority and no written notice indicating an
intent to open an audit or other review has been received by MCK Nevada or any
Subsidiary from any foreign, federal, state or local taxing authority.
(b) Neither MCK Nevada nor any Subsidiary is liable for
the Taxes of another Person that is not a Subsidiary in a material transaction
(i) as a transferee or successor, (ii) by contract or indemnity or (iii)
otherwise. Neither MCK Nevada nor any Subsidiary is a party to any tax sharing
agreement with a Person other than MCK Nevada or a Subsidiary.
(c) Neither MCK Nevada nor any Subsidiary has been a
member of an Affiliated Group other than one in which MCK Nevada was the common
parent, or filed or been included in a combined, consolidated or unitary income
Tax Return, other than one filed by MCK Nevada.
5.11 CONTRACTS AND COMMITMENTS.
(a) Except as expressly contemplated by this Agreement,
neither MCK Nevada nor any Subsidiary is a party to or bound by any written or
oral:
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<PAGE> 28
(i) pension, profit sharing, stock option, employee
stock purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or arrangement, or
any collective bargaining agreement or any other contract with any labor union,
or severance agreements, programs, policies or arrangements;
(ii) contract for the employment of any officer,
individual employee or other Person on a full-time, part-time, consulting or
other basis providing annual compensation in excess of $60,000 or contract
relating to loans to officers, directors or Affiliates;
(iii) contract under which MCK Nevada or Subsidiary
has advanced or loaned any other Person amounts in the aggregate exceeding
$10,000;
(iv) agreement or indenture relating to borrowed
money or other Indebtedness or the mortgaging, pledging or otherwise placing a
Lien on any material asset or material group of assets of MCK Nevada or its
Subsidiaries;
(v) guarantee of any obligation in excess of $10,000;
(vi) lease or agreement under which MCK Nevada or any
Subsidiary is lessee of or holds or operates any property, real or personal,
owned by any other party;
(vii) lease or agreement under which MCK Nevada or
any Subsidiary is lessor of or permits any third party to hold or operate any
property, real or personal, owned or controlled by MCK Nevada or any Subsidiary
except for any lease of real or personal property under which the aggregate
annual rental payments do not exceed $10,000;
(viii) contract or group of related contracts with
the same party or group of affiliated parties the performance of which involves
consideration in excess of $25,000;
(ix) assignment, license, indemnification or
agreement with respect to any intangible property (including, without
limitation, any Intellectual Property);
(x) warranty agreement with respect to its services
rendered or its products sold, leased or licensed which contains terms and
conditions that differ in any material respect from MCK Nevada's standard
warranty terms and conditions (a copy of which standard terms and conditions is
attached to the Disclosure Schedule);
(xi) agreement under which it has granted any Person
any registration rights (including, without limitation, demand or piggyback
registration rights);
(xii) sales, distribution or franchise agreement;
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<PAGE> 29
(xiii) agreement with a term of more than six months
which is not terminable by MCK Nevada or any Subsidiary upon less than 30 days
notice without penalty and which involves consideration in excess of $25,000;
(xiv) contract or agreement prohibiting it from
freely engaging in any business or competing anywhere in the world; or
(xv) any other agreement which is material to its
operations and business prospects or involves a consideration in excess of
$50,000 annually.
(b) All of the contracts, agreements and instruments set
forth or required to be set forth on the Disclosure Schedule have been executed
and delivered and, to the best knowledge and belief of each Representing Party,
are valid, binding and enforceable in accordance with their respective terms.
MCK Nevada and each Subsidiary have performed all material obligations required
to be performed by them under the contracts, agreements and instruments listed
or required to be listed on the Disclosure Schedule and are not in default under
or in breach of nor in receipt of any claim of default or breach under any such
contract, agreement or instrument; no event has occurred which with the passage
of time or the giving of notice or both would result in a default, breach, or
any intention to terminate, or event of noncompliance by MCK Nevada or any
Subsidiary under any contract, agreement or instrument listed or required to be
listed on the Disclosure Schedule; neither MCK Nevada nor any Subsidiary has any
present expectation or intention of not fully performing all such obligations;
neither MCK Nevada nor any Subsidiary has knowledge of any breach or anticipated
breach by the other parties to any contract, agreement, instrument or commitment
listed or required to be listed on the Disclosure Schedule; and, to the
knowledge of MCK Nevada, neither MCK Nevada nor any Subsidiary is a party to any
contract or commitment requiring it to purchase or sell goods or services or
lease property above or below (as the case may be) prevailing market prices and
rates.
(c) A true and correct copy of each of the written
instruments, plans, contracts and agreements, including all amendments (or
currently proposed amendments) and waivers thereto, and an accurate description
of each of the oral arrangements, contracts and agreements which are referred to
on the Disclosure Schedule have been made available to the Purchaser's special
counsel.
5.12 INTELLECTUAL PROPERTY RIGHTS.
(a) The Disclosure Schedule contains a complete and
accurate list of all (i) patented or registered Intellectual Property Rights
owned or used by MCK Nevada or any Subsidiary, (ii) pending patent applications
and applications for registrations of other Intellectual Property Rights filed
by MCK Nevada or any Subsidiary, (iii) material unregistered trade names and
corporate names owned or used by MCK Nevada or any Subsidiary and (iv) material
unregistered trademarks, service marks, copyrights, mask works and computer
software owned or used by MCK Nevada or any Subsidiary. The Disclosure Schedule
also contains a complete and accurate list of all licenses and other rights
granted by MCK Nevada or any Subsidiary to any third party with respect to any
Intellectual Property Rights and all
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<PAGE> 30
licenses and other rights granted by any third party to MCK Nevada or any
Subsidiary with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. MCK Nevada or one of its
Subsidiaries owns all right, title and interest to, or has the right to use
pursuant to a valid license, all Intellectual Property Rights necessary for the
operation of the businesses of MCK Nevada and its Subsidiaries as presently
conducted and as presently proposed to be conducted, free and clear of all
Liens. The loss or expiration of any Intellectual Property Right or related
group of Intellectual Property Rights owned or used by MCK Nevada or any
Subsidiary has not had a material adverse effect on the conduct of MCK Nevada's
and its Subsidiaries' respective businesses, and no such loss or expiration is
threatened, pending or reasonably foreseeable. MCK Nevada and its Subsidiaries
have taken all reasonably necessary actions to maintain and protect the
Intellectual Property Rights which they own. To the best of each Representing
Party's knowledge and belief, the owners of any Intellectual Property Rights
licensed to MCK Nevada or any Subsidiary have taken all reasonably necessary
actions to maintain and protect the Intellectual Property Rights which are
subject to such licenses.
(b) (i) MCK Nevada and its Subsidiaries own all right,
title and interest in and to all of the Intellectual Property Rights listed or
required to be listed on the Disclosure Schedule, free and clear of all Liens,
(ii) there has been no claim made against MCK Nevada or any Subsidiary asserting
the invalidity, misuse or unenforceability of any of such Intellectual Property
Rights, and, to the best of MCK Nevada's knowledge, there is no valid ground for
the same, (iii) neither MCK Nevada nor any Subsidiary has received any notice
of, or is aware of any facts which indicate a likelihood of, any infringement or
misappropriation by, or conflict with, any third party with respect to such
Intellectual Property Rights (including, without limitation, any demand or
request that MCK Nevada or any Subsidiary license any rights from a third
party), (iv) the conduct of MCK Nevada's and each Subsidiary's business has not
infringed, misappropriated or conflicted with and does not infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons, nor would any future conduct as presently contemplated infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons (provided that no Representing Party makes any representation or
warranty pursuant to this Section 5.12(b)(iv) with respect to patents issued
after the Closing, the application for which no Representing Party has any
knowledge) and (v) to the best of each Representing Party's knowledge and
belief, the Intellectual Property Rights owned by or licensed to MCK Nevada or
any Subsidiary have not been infringed, misappropriated or conflicted by other
Persons. The transactions contemplated by this Agreement shall have no material
adverse effect on MCK Nevada's or any Subsidiary's right, title and interest in
and to the Intellectual Property Rights listed or required to be listed on the
Disclosure Schedule.
5.13 LITIGATION, ETC. There are no actions, suits, proceedings,
orders, investigations or claims pending or, to the best of MCK Nevada's
knowledge, threatened against or affecting MCK Nevada or any Subsidiary (or to
the best of MCK Nevada's knowledge, pending or threatened against or affecting
any of the officers, directors or employees of MCK Nevada and its Subsidiaries
with respect to their businesses or proposed business activities), or pending or
threatened by MCK Nevada or any Subsidiary against any third party, at law or in
equity, or before or by any governmental department, commission, board, bureau,
agency or
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<PAGE> 31
instrumentality (including, without limitation, any actions, suits, proceedings
or investigations with respect to the transactions contemplated by this
Agreement); neither MCK Nevada nor any Subsidiary is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of MCK Nevada's knowledge, any governmental investigations or inquiries; and, to
the best of MCK Nevada's knowledge, there is no valid basis for any of the
foregoing. Neither MCK Nevada nor any Subsidiary is subject to any judgment,
order or decree of any court or other governmental agency, and neither MCK
Nevada nor any Subsidiary has received any opinion or memorandum or legal advice
from legal counsel to the effect that it is exposed, from a legal standpoint, to
any liability or disadvantage which may be material to its business.
5.14 BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon MCK Nevada or any Subsidiary. MCK Nevada shall pay, and hold each Purchaser
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorneys' fees and out-of-pocket expenses) arising in connection
with any such claim.
5.15 INSURANCE. Neither MCK Nevada nor any Subsidiary is in default
with respect to its obligations under any insurance policy maintained by it, and
neither MCK Nevada nor any Subsidiary has been denied insurance coverage. MCK
Nevada maintains such insurance coverage for it and its Subsidiaries as is
customary for corporations of similar size engaged in similar lines of business.
MCK Nevada and its Subsidiaries do not have any self-insurance or co-insurance
programs. No Representing Party has any reason to believe that MCK Nevada will
be denied the key-man life insurance on the life of Cal Manz referred to in
Section 2.1(f).
5.16 EMPLOYEES. MCK Nevada is not aware that any executive or key
employee of MCK Nevada or any Subsidiary or any group of employees of MCK Nevada
or any Subsidiary has any plans to terminate employment with MCK Nevada or any
Subsidiary. MCK Nevada and each Subsidiary have complied in all material
respects with all laws relating to the employment of labor (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes), and
MCK Nevada is not aware that it or any Subsidiary has any material labor
relations problems (including, without limitation, any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). None of MCK Nevada, its Subsidiaries or, to the best of MCK
Nevada's knowledge after due inquiry, any of their respective employees is
subject to any noncompete, nondisclosure, confidentiality, employment,
consulting or similar agreements in conflict with the present or proposed
business activities of MCK Nevada and its Subsidiaries.
5.17 EMPLOYEE BENEFITS.
(a) Neither MCK Nevada or any Subsidiary maintains,
contributes to or has any actual or potential liability with respect to any (i)
"defined contribution plan" (as defined in Section 3(34) of ERISA (a "SAVINGS
PLAN"), (ii) "employee welfare benefit plan" (as defined in Section 3(l) of
ERISA) (a "WELFARE PLAN") or (iii) nonqualified deferred compensation,
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<PAGE> 32
incentive, bonus, material fringe benefit, stock bonus or other material benefit
arrangements (collectively (i), (ii) and (iii) above may be referred to as the
"PLANS").
(b) Neither MCK Nevada or any Subsidiary maintains,
contributes to or has any actual or potential liability with respect to any
active or terminated, funded or unfunded (i) multiemployer plan (as defined in
Section 3(37) of ERISA), (ii) defined benefit plan (as defined in Section 3(35)
of ERISA) or (iii) plan or arrangement to provide medical, health, life
insurance or other welfare-type benefits for current or future retired or
terminated employees (except for limited continued health benefit coverage
required to be provided under Section 4980B of the IRC or similar state law).
(c) MCK Nevada has provided to the Purchasers accurate
and complete copies of each of the Plans and any related trusts, insurance
contracts or other agreements, the IRS favorable determination letter issued
with respect to the Savings Plan, IRS Form 5500s (including all attachments) for
the Savings Plan and the Welfare Plans for the most recently completed plan year
and the most recent financial statement with respect to the Savings Plan.
(d) Each of the Welfare Plans and the Savings Plan and
all related funding arrangements comply in form and operation with its terms and
the applicable requirements of ERISA, the IRC and any other laws. The Savings
Plan has received a favorable determination letter that it qualifies under the
IRC (and that its trust is exempt from tax under the IRQ and such favorable
letter includes changes required by the 1986 Tax Reform Act. Nothing has
occurred since the date of such favorable determination letter that could
adversely affect the qualified status of the Savings Plan or the tax exempt
status of the trust.
(e) None of MCK Nevada, any Subsidiary, any trustee or
administrator of any Plan or other person has engaged in any transaction with
respect to any Plan which could subject MCK Nevada, any of its Subsidiaries or
any of its employees to any tax or penalty or other liability imposed by ERISA
or the IRC. No actions, suits, investigations or claims with respect to any of
the Plans (other than routine claims for benefits) are pending or, to the
knowledge of MCK Nevada, threatened, and MCK Nevada is not aware of any facts or
circumstances which could give rise to or be expected to give rise to any such
actions, suits, investigations or claims. MCK Nevada and its Subsidiaries have
complied with the requirements of Section 4980B of the IRC and Section 601 et
seq. of ERISA ("COBRA"). All contributions which are due under each of the Plans
has been made and all other contributions have been properly accrued. MCK Nevada
and its Subsidiaries have complied with all reporting and disclosure obligations
with respect to the Welfare Plans and the Savings Plan.
(f) MCK Canada does not maintain, contribute to or have
any actual or potential liability with respect to any pension plan (as defined
in the Employment Pension Plans Act (Alberta)), bonus, current or deferred
compensation, incentive compensation, stock purchase, stock option, severance or
termination pay, profit sharing or retirement plan, program, agreement or
arrangement for the benefit of any employee.
5.18 REAL PROPERTY HOLDING CORPORATION STATUS. Since its date of
incorporation none of MCK Nevada or any of its Subsidiaries has been, and as of
the date of the Closing shall not
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be, a "United States real property holding corporation", as defined in Section
897(c) (2) of the IRC, and in Section 1.897-2(b) of the Treasury Regulations
issued thereunder. Neither MCK Nevada or any of its Subsidiaries has any current
plans or intentions which would cause MCK Nevada or any of its Subsidiaries to
become a "United States real property holding company," and MCK Nevada has filed
with the IRS all statements, if any, with its United States income tax returns
which are required under Section 1.897-2(h) of the Treasury Regulations.
5.19 COMPLIANCE WITH LAWS. Neither MCK Nevada nor any Subsidiary
has violated any law or any governmental regulation or requirement which
violation has had or would reasonably be expected to have a material adverse
effect upon the financial condition, operating results, assets, operations or
business prospects of MCK Nevada and its Subsidiaries taken as a whole, and
neither MCK Nevada nor any Subsidiary has received notice of any such violation.
MCK Nevada and its Subsidiaries have complied with and are currently in
compliance with all Environmental and Safety Requirements, and neither MCK
Nevada nor any Subsidiary has received any oral or written notice, report or
information regarding any liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) or any corrective, investigatory or remedial
obligations arising under Environmental and Safety Requirements which relate to
MCK Nevada or its Subsidiaries or any of their properties or facilities and no
facts or circumstances exist with respect to the past or present operations or
facilities of MCK Nevada or any Subsidiary which would give rise to a material
liability or material corrective or remedial obligation under any Environmental
and Safety Requirements. Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on MCK
Nevada or its Subsidiaries or otherwise for site investigation or cleanup, or
notification to or consent of any government agencies or third parties under any
Environmental and Safety Requirements.
5.20 AFFILIATED TRANSACTIONS. No officer, director, employee,
shareholder or Affiliate of MCK Nevada or any Subsidiary or any individual
related by blood, marriage or adoption to any such individual or any entity in
which any such Person or individual owns any beneficial interest, is a party to
any agreement, contract, commitment or transaction with MCK Nevada or any
Subsidiary or has any material interest in any material property used by MCK
Nevada or any Subsidiary.
5.21 CUSTOMERS AND SUPPLIERS.
(a) The Disclosure Schedule lists the twenty largest
customers of MCK Nevada and its Subsidiaries (on a consolidated basis) for each
of the two most recent fiscal years and sets forth opposite the name of each
such customer the percentage of consolidated net sales attributable to such
customer. The Disclosure Schedule also lists any additional current customers
which MCK Nevada anticipates shall be among the twenty largest customers for the
current fiscal year.
(b) No material supplier of MCK Nevada or any Subsidiary
during the two most recent fiscal years has indicated that it shall materially
modify or change the existing requirements with respect to, stop or materially
decrease the rate of, supplying materials, products or services to MCK Nevada or
any Subsidiary, and no customer listed on the
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Disclosure Schedule has indicated that it shall materially modify or change the
existing requirements with respect to, stop or materially decrease the rate of,
buying materials, products or services from MCK Nevada or any Subsidiary.
5.22 DISCLOSURE. Neither this Agreement nor any of the exhibits,
schedules, attachments, written statements, documents, certificates or other
items prepared and supplied to any Purchaser by or on behalf of MCK Nevada or
any Subsidiary with respect to the transactions contemplated hereby contain any
untrue statement of a material fact or omit a material fact necessary to make
each statement contained herein or therein not misleading; PROVIDED THAT with
respect to the financial projections furnished to the Purchasers by MCK Nevada
or any Subsidiary, MCK Nevada represents and warrants only that such projections
were based upon assumptions reasonably believed by MCK Nevada to be reasonable
and fair as of the date the projections were prepared in the context of MCK
Nevada's history and current and reasonably foreseeable business conditions.
There is no fact which MCK Nevada has not disclosed to the Purchasers in writing
and of which any of its officers, directors or executive employees is aware and
which has had or would reasonably be expected to have a material adverse effect
upon the existing or expected financial condition, operating results, assets,
customer or supplier relations, employee relations or business prospects of MCK
Nevada and its Subsidiaries taken as a whole.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
As a material inducement to MDI and Manz to enter into this Agreement,
and except as set forth on the attached PURCHASER DISCLOSURE SCHEDULE, each
Purchaser hereby severally represents and warrants (and each of Summit Ventures
IV, L.P., Summit Investors III, L.P. and Summit Subordinated Debt Fund, L.P.
hereby jointly and severally represents and warrants with respect to each other)
to MDI and Manz that:
6.1 ORGANIZATION CORPORATE POWER AND LICENSES. Each Purchaser
(other than Trustee, WSGR Retirement Plan FBO Jeffrey D. Saper) is a partnership
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and is qualified to do business, in every
jurisdiction in which the failure to so qualify has had or would reasonably be
expected to have a material adverse effect on the financial condition, operating
results, assets, operations or business prospects of the Purchasers. Each
Purchaser possesses all requisite power and authority and all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as now conducted and to carry out the transactions
contemplated by this Agreement.
6.2 AUTHORIZATION, NO BREACH. The execution, delivery and
performance of this Agreement, the Registration Agreement, the Stockholders
Agreement, the Pledge Agreement, and all other agreements contemplated hereby to
which a Purchaser is a party have been duly authorized by each Purchaser. This
Agreement, the Registration Agreement, the Stockholders Agreement, the Pledge
Agreement and all other agreements contemplated hereby to which a Purchaser is a
party each constitutes a valid and binding obligation of that Purchaser,
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enforceable against such Purchaser in accordance with its terms subject to the
rules and principles of equity and the rules and principles applicable to
bankruptcy and insolvency and except to the extent that the enforceability of
Section 6 of the Registration Agreement may be limited by public policy. The
execution and delivery by each Purchaser of this Agreement, the Registration
Agreement, the Stockholders Agreement, the Pledge Agreement and all other
agreements contemplated hereby to which that Purchaser is a party, and the
fulfillment of and compliance with the respective terms hereof and thereof by
each Purchaser do not and shall not (a) conflict with or result in a breach of
the terms, conditions or provisions of, (b) constitute a default under, (c)
result in the creation of any lien, security interest, charge or encumbrance
upon a Purchaser's capital stock or assets pursuant to, (d) give any third party
the right to modify, terminate or accelerate any obligation under, (e) result in
a violation of or (f) require any authorization, consent, approval, exemption or
other action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the charter, bylaws
or other organizational documents of a Purchaser (as appropriate), or any law,
statute, rule or regulation to which a Purchaser is subject, or any agreement,
instrument, order, judgment or decree to which a Purchaser is subject.
6.3 LITIGATION ETC. There are no actions, suits, proceedings,
orders, investigations or claims pending or threatened against or affecting any
Purchaser (or to the best of any Purchaser's knowledge, pending or threatened
against or affecting any of the officers, directors or employees of any
Purchaser with respect to the businesses or proposed business activities of the
Purchaser), or pending or threatened by any Purchaser against any third party,
at law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality (including without limitation, any
actions suits, proceedings or investigations with respect to the transactions
contemplated by this Agreement); no Purchaser is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of any Purchaser's knowledge, any governmental investigations or inquiries; and,
to the best of any Purchaser's knowledge, there is not valued basis for any of
the foregoing. No Purchaser is subject to any judgment, order or decree of any
court or other governmental agency, and no purchaser has received any opinion or
memorandum or legal advice from legal counsel to the effect that it is exposed,
from a legal standpoint, to any liability or disadvantage which may be material
to its business.
6.4 BROKERAGE. There are no claims that can be made against MCK
Nevada, MCK Canada, MDI or Manz for brokerage commissions, finders' fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement binding upon any Purchaser.
6.5 DISCLOSURE. The general partner(s) of each Purchaser that is a
partnership exercise de facto and de jure control of each Purchaser, and all
general partners, the individuals or entities that control each general partner
and those individuals' residency, and the jurisdiction of registration where the
general partner is a legal entity, are fully and accurately described in the
Purchaser Disclosure Schedule.
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6.6 INVESTMENT REPRESENTATIONS. Each Purchaser hereby represents
that it is acquiring the Restricted Securities purchased hereunder or acquired
pursuant hereto for its own account with the present intention of holding such
securities for purposes of investment, and that it has no intention of selling
such securities in a public distribution in violation of any applicable
securities laws; PROVIDED THAT nothing contained herein shall prevent any
Purchaser and subsequent holders of Restricted Securities from transferring such
securities in compliance with the provisions of Section 4 hereof. Each
certificate representing Restricted Securities shall be imprinted with a legend
in substantially the following form:
"The securities represented by this certificate were
originally issued on June 27, 1996, and have not been
registered under the United States Securities Act of 1933, as
amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the
Stock and Note Purchase Agreement, dated as of June 27, 1996
and as amended and modified from time to time, between the
issuer and certain investors, and the issuer reserves the
right to refuse the transfer of such securities until such
conditions have been fulfilled with respect to such transfer.
A copy of such conditions shall be furnished by the issuer to
the holder hereof upon written request and without charge."
SECTION 7
DEFINITIONS
7.1 DEFINITIONS. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"$" and "DOLLARS," unless otherwise specified herein or in any
schedule or exhibit attached hereto, shall mean United States dollars.
"AFFILIATE" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"AFFILIATED GROUP" means any affiliated group as defined in
IRC ss. 1504 that has filed a consolidated return for federal income tax
purposes (or any similar group under state, local or foreign law) for a period
during which any of MCK Nevada or any of its Subsidiaries was a member.
"COMMON STOCK" means the Common Stock of MCK Nevada.
"EVENT OF NONCOMPLIANCE" has the meaning set forth in the
Articles of Incorporation.
"ENVIRONMENTAL AND SAFETY REQUIREMENTS" means all federal,
state, provincial, local and foreign statutes, regulations, ordinances and other
provisions having the force or
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effect of law, all judicial and administrative orders and determinations, all
contractual obligations and all common law, in each case concerning public
health and safety, worker health and safety and pollution or protection of the
environment (including, without limitation, all those relating to the presence,
use, production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation).
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means the
conventions, rules and procedures established by the Financial Accounting
Standards Board from time to time that determine and define accepted accounting
practices in the United States.
"INDEBTEDNESS" means at a particular time, without
duplication, (i) any indebtedness for borrowed money or issued in substitution
for or exchange of indebtedness for borrowed money, (ii) any indebtedness
evidenced by any note, bond, debenture or other debt security, (iii) any
indebtedness for the deferred purchase price of property or services with
respect to which a Person is liable, contingently or otherwise, as obligor or
otherwise (other than trade payables and other current liabilities incurred in
the ordinary course of business which are not more than six months past due),
(iv) any commitment by which a Person assures a creditor against loss
(including, without limitation, contingent reimbursement obligations with
respect to letters of credit), (v) any indebtedness guaranteed in any manner by
a Person (including, without limitation, guarantees in the form of an agreement
to repurchase or reimburse), any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss, (vii) any indebtedness secured by a Lien on a Person's
assets and (viii) any unsatisfied obligation for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under the United States Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
"INTELLECTUAL PROPERTY RIGHTS" means all (i) United States and
Canadian patents, United States and Canadian patent applications, United States
and Canadian patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered), industrial
property and copyrightable works and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data, databases and documentation
thereof, (vi) trade secrets and other confidential information (including,
without limitation, ideas, formulas, compositions, inventions (whether
patentable or unpatentable and whether or not reduced to practice), know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals, technical
data, copyrightable works, financial and marketing plans and customer and
supplier lists and information), (vii) other intellectual property rights and
(viii) copies and tangible embodiments thereof (in whatever form or medium).
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"INVESTMENT" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"INVESTOR COMMON STOCK" means (i) any Common Stock issued upon
conversion of the Convertible Stock and (ii) any Common Stock issued or issuable
with respect to the Common Stock referred to in clause (i) above by way of stock
dividends or stock splits or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular shares of Investor Common Stock, such shares shall cease to be
Investor Common Stock when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar rule then in
force) or (c) repurchased by MCK Nevada or any Subsidiary.
"IRC" means the United States Internal Revenue Code of 1986,
as amended, and any reference to any particular IRC section shall be interpreted
to include any revision of or successor to that section regardless of how
numbered or classified.
"IRS" means the United States Internal Revenue Service.
"LIENS" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against MCK Nevada, any
Subsidiary or any Affiliate, any filing or agreement to file a financing
statement as debtor under the Uniform Commercial Code or any similar law,
statute, rule or regulation other than to reflect ownership by a third party of
property leased to MCK Nevada or any Subsidiaries under a lease which is not in
the nature of a conditional sale or title retention agreement, or any
subordination arrangement in favor of another Person (other than any
subordination arising in the ordinary course of business).
"OFFICER'S CERTIFICATE" means a certificate signed by the
president (or equivalent officer or partner) of the Person providing the
certificate or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"PERMITTED LIENS" means:
(a) liens with respect to taxes not yet due and payable
or which are being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established in accordance with generally
accepted accounting principles, consistently applied;
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(b) deposits or pledges made in connection with, or to
secure payment of, utilities or similar services, workers' compensation,
unemployment insurance, old age pensions or other social security obligations;
(c) purchase money security interests in any property
acquired by MCK Nevada or any Subsidiary to the extent permitted by this
Agreement;
(d) interests or title of a lessor under any lease not
prohibited by this Agreement;
(e) mechanics', materialmen's or contractors' liens or
encumbrances or any similar lien or restriction for amounts not yet due and
payable or which are being contested in good faith by appropriate proceedings
and for which appropriate reserves have been established in accordance with
generally accepted accounting principles, consistently applied;
(f) easements, rights-of-way, restrictions and other
similar charges and encumbrances not interfering with the ordinary conduct of
the business of MCK Nevada and its Subsidiaries or detracting in any material
respect from the value of the assets of MCK Nevada and its Subsidiaries; and
(g) liens outstanding on the date hereof which secure
Indebtedness and which are described in the Disclosure Schedule.
"PERSON" includes MCK Nevada and any subsidiary of MCK Nevada,
and also means, where applicable, an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"RESTRICTED SECURITIES" means (i) the Redeemable Stock and
Convertible Stock issued hereunder and (ii) any securities issued with respect
to the securities referred to in clause (i) above by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities when they
have (a) been effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) been distributed
to the public through a broker, dealer or market maker pursuant to Rule 144 (or
any similar provision then in force) under the Securities Act or become eligible
for sale pursuant to Rule 144(k) (or any similar provision then in force) under
the Securities Act or (c) been otherwise transferred and new certificates for
them not bearing the Securities Act legend set forth in Section 6.6 have been
delivered by MCK Nevada in accordance with Section 4.2. Whenever any particular
securities cease to be Restricted Securities, the holder thereof shall be
entitled to receive from MCK Nevada, without expense, new securities of like
tenor not bearing a Securities Act legend of the character set forth in Section
6.6.
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"SECURITIES ACT" means the United States Securities Act of
1933, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION " means the United States
Securities and Exchange Commission and any governmental body or agency
succeeding to the functions thereof
"SECURITIES EXCHANGE ACT" means the United States Securities
Exchange Act of 1934, as amended, or any similar federal law then in force.
"SUBSIDIARY" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
"TAX" OR "TAXES" means federal, state, county, local, foreign
or other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing
with respect to Taxes, including any schedules attached thereto and including
any amendment thereof.
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
SECTION 8
INDEMNIFICATION
8.1 INDEMNIFICATION BY THE SHAREHOLDERS. MCK Nevada, MCK Canada,
MDI and Manz (collectively, the "INDEMNIFYING PARTIES") shall each indemnify and
hold harmless the
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Purchasers and their respective officers, directors, employees, successors, and
assigns in respect of any and all claims, actions, suits or other proceedings
and any and all losses, costs, expenses, liabilities, fines, penalties, interest
and damages, whether or not arising out of any claim, action, suit or other
proceeding (and including reasonable counsel and accountants' fees and expenses
and all other reasonable costs and expenses of investigation, defense or
settlement of claims and amounts paid in settlement) incurred by, imposed on or
borne by the Purchasers or MCK Nevada ("DAMAGES") resulting from the breach of
any of the representations, warranties or covenants made by the Indemnifying
Parties in this Agreement or in any other document or instrument delivered in
connection herewith. The Indemnifying Parties acknowledge and agree that, if MCK
Nevada suffers, incurs or otherwise becomes subject to any Damages as a result
of or in connection with any inaccuracy in or breach of any representation,
warranty, covenant or obligation, then the Purchasers also shall be deemed, by
virtue of their ownership of the stock of MCK Nevada, to have incurred Damages
as a result of and in connection with such inaccuracy or breach in the same
amount and to the same extent as has MCK Nevada. The Indemnifying Parties shall
be jointly and severally liable for any indemnification liability pursuant to
this Section 8.
8.2 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for
indemnification hereunder, the Purchasers shall promptly (and in no event more
than 120 days after the later to occur of incurring the Damages or discovering
the facts giving rise to the claim) notify the Indemnifying Parties of the claim
and, when known, the facts constituting the basis for such claim; provided that
the Purchasers' failure to give such notice shall not affect any rights or
remedies of the Purchasers hereunder with respect to indemnification for Damages
except to the extent that the Indemnifying Parties are materially prejudiced
thereby. In the event of any claim for indemnification hereunder resulting from
or in connection with any claim or legal proceedings by a third party, the
notice to the Indemnifying Parties shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The Purchasers shall
not settle or compromise any claim by a third party for which they are entitled
to indemnification hereunder, without the prior written consent of the
Indemnifying Parties (which shall not be unreasonably withheld) unless suit
shall have been instituted against them and the Indemnifying Parties shall not
have taken control of such suit after notification thereof as provided in
Section 8.3 of this Agreement. Any party who is required to hold harmless,
indemnify, compensate or reimburse any Purchaser pursuant to this Section 8 with
respect to any Damages also shall be liable to such Purchaser for interest on
the amount of such Damages (for the period commencing as of the date on which
such Damages were incurred and ending on the date on which the liability of such
party to such Investor is fully satisfied by such party) at a floating rate
equal to the sum of (a) the rate of interest publicly announced by Bank of
America, N.T. & S.A. from time to time as its prime, base or reference rate plus
(b) four percent (4%).
8.3 DEFENSE BY SHAREHOLDERS. In connection with any claim giving
rise to indemnity hereunder or resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Parties, at their sole cost and expense may, upon written notice to
the Purchasers, assume the defense of any such claim or legal proceeding if they
acknowledge to the Purchasers in writing their obligations to indemnify the
Purchasers
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with respect to all elements of such claim, (provided that such acknowledgment
shall only be an acknowledgment of the terms and conditions of this Section 8 or
an acknowledgment of the obligation to indemnify if liability is found following
all appeals, and such acknowledgment is not an admission of liability in any
way) and thereafter diligently conduct the defense thereof. The Purchasers shall
be entitled to participate in (but not control) the defense of any such action
with their counsel and at their own expense. If the Indemnifying Parties do not
assume or fail to conduct in a diligent manner the defense of any such claim or
litigation resulting therefrom, (a) the Purchasers may defend against such claim
or litigation, in such manner as they may deem appropriate, including, but not
limited to, settling such claim or litigation, after giving notice of the same
to the Indemnifying Parties, on such terms as the Purchasers may deem
appropriate, and (b) the Indemnifying Parties shall be entitled to participate
in (but not control) the defense of such action, with their counsel and at their
own expense. If the Indemnifying Parties thereafter seek to question the manner
in which the Purchasers defended such third party claim or the amount or nature
of any such settlement, the Indemnifying Parties shall have the burden to prove
by a preponderance of the evidence that the Purchasers did not defend or settle
such third party claim in a reasonably prudent manner. Each party agrees to
cooperate fully with the other such cooperation to include, without limitation,
attendance at depositions and the provision of relevant documents as may be
reasonably requested by the Indemnifying Parties, provided that the Indemnifying
Parties will hold the Purchasers harmless from all of their out of pocket
expenses, incurred in connection with such cooperation by the Purchasers.
8.4 LIMITS: Notwithstanding any other provision in this Agreement
or any rule of law or equity:
(a) A Purchaser shall not be entitled to maintain a claim
against any Indemnifying Party in respect of any liability, loss, costs, claims
or damages of any nature suffered or incurred by a Purchaser as a result of a
Purchaser's own gross negligence or willful misconduct, or that of its
employees, agents or contractors, or as a result of any occurrence, matter or
thing the occurrence, existence or non-disclosure of which constitutes a breach
of failure of any representation, warranty, covenant or other obligation of any
Purchaser hereunder;
(b) except in the case of a matter involving fraud on the
part of any Indemnifying Party, a Purchaser shall not be entitled to initiate,
maintain or enforce any claim against any Indemnifying Party in respect of any
matter related to this Agreement or the subject matter hereof, whether asserted
under this Agreement or otherwise, unless the Purchaser shall, in the case of a
claim relating to the subject matter of Section 5.10 hereof, within fifty-four
(54) months of the Closing, or, in all other cases, within two years of the
closing have given each Indemnifying Party notice in writing of such claim,
including particulars of the basis therefor; provided, however, that nothing set
forth in this Section 8.4(b) shall limit claims relating to the subject matter
of Section 5.2 or Section 5.4 hereof,
(c) A Purchaser shall not be entitled to recover any
indirect, consequential or special damages from any Indemnifying Party;
- 37 -
<PAGE> 43
(d) Each Purchaser shall be obligated to use reasonable
efforts to mitigate any liability, loss, costs, claims or damages sustained by
it in connection with any matter for which an Indemnifying Party may have
liability to it;
(e) A Purchaser shall not be entitled to bring any claim
against an Indemnifying Party for the breach of a representation or warranty
contained in Section 5.10 unless the aggregate amount recoverable by the
Purchaser in respect of such claims exceeds $100,000 (provided that at such time
the Purchaser shall only be entitled to bring claims for the portion of the
aggregate amount recoverable that exceeds $100,000);
(f) For all claims other than a claim for the breach of a
representation or warranty contained in Section 5.10, a Purchaser shall not be
entitled to bring any claim against an Indemnifying Party unless and until the
aggregate amount recoverable by the Purchaser in respect of all claims that it
is entitled to bring against an Indemnifying Party equals or exceeds $250,000.00
(provided that at such time as the amount recoverable equals or exceeds
$250,000.00 then a Purchaser shall be entitled to bring claims with respect to
all Damages);
(g) The Indemnifying Parties' collective liability to the
Purchasers for matters related to this Agreement or the subject matter hereof
shall be limited to an amount equal to $20,000,000.00, and no Indemnifying
Parties shall under any circumstances be liable for any amount, whether alone or
in aggregate, in excess of such amount; and
(h) Notwithstanding Section 8.4(g) above, the collective
liability of MDI and Manz to the Purchasers for matters related to this
Agreement or the subject matter hereof shall be limited to an amount equal to
the sum of $14,000,000.00 plus the value of the shares of MCK Canada Class E
Stock held by MDI.
SECTION 9
MISCELLANEOUS
9.1 EXPENSES. MCK Nevada shall pay, and hold each Purchaser and
all holders of Notes, Redeemable Stock, Convertible Stock and Investor Common
Stock harmless against liability for the payment of, (a) the fees (up to a
maximum of $100,000) and expenses of United States and Canadian counsel to the
Purchasers arising in connection with the negotiation and execution of this
Agreement and the consummation of the transactions contemplated hereby (which
fees and expenses shall be payable at the Closing), (b) the reasonable fees and
expenses incurred with respect to any amendments or waivers (whether or not the
same become effective) under or in respect of this Agreement, the agreements
contemplated hereby or the Articles of Incorporation (including, without
limitation, in connection with any proposed merger, sale, recapitalization or
public offering of securities), (c) stamp and other taxes which may be payable
in respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of the Notes or any shares of Redeemable Stock,
Convertible Stock or Investor Common Stock, (d) the reasonable fees and expenses
incurred with respect to the enforcement of the rights granted under this
Agreement, the agreements contemplated hereby and the Articles of Incorporation
and (e) the reasonable fees and expenses incurred by each
- 38 -
<PAGE> 44
such Person in any filing with any governmental agency with respect to its
investment in MCK Nevada or in any other filing with any governmental agency
with respect to MCK Nevada which mentions such Person.
9.2 REMEDIES. Each holder of Notes, Redeemable Stock, Convertible
Stock and Investor Common Stock shall have all rights and remedies set forth' in
this Agreement, the Articles of Incorporation and all rights and remedies which
such holders have been granted at any time under any other agreement or contract
and all of the rights which such holders have under any law. Any Person having
any rights under any provision of this Agreement shall be entitled to enforce
such rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
9.3 TREATMENT OF THE REDEEMABLE STOCK. MCK Nevada covenants and
agrees that (a) so long as federal income tax laws prohibit a deduction for
distributions made by MCK Nevada with respect to preferred stock, it shall treat
all distributions paid by it on the Redeemable Stock as non-deductible dividends
on all of its tax returns and (b) it shall treat the Redeemable Stock as
preferred stock in all of its financial statements and other reports and shall
treat all distributions paid by it on the Redeemable Stock as dividends on
preferred stock in such statements and reports. MCK Nevada agrees that the
"issue price" of the Redeemable Stock for purposes of IRC ss.305 and the
regulations thereunder is equal to $1.00 and that the premium to be paid upon
certain redemptions of the Redeemable Stock as described in the Articles of
Incorporation is solely in the nature of a penalty for premature redemption
within the meaning of Treasury Regulation ss.1.30S-S(b). Accordingly, MCK Nevada
has determined that there will not be constructive distributions under Treasury
Regulation ss. 1.30S-S(b) with respect to the Redeemable Stock.
9.4 CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, MCK Nevada, MCK Canada, MDI or Manz may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if such party has obtained the written consent of a majority in interest of
the Purchasers. No other course of dealing between MCK Nevada and the holder of
any Notes, Redeemable Stock, Convertible Stock or Investor Common Stock or any
delay in exercising any rights hereunder or under the Articles of Incorporation
shall operate as a waiver of any rights of any such holders. This Agreement may
only be amended by a written instrument duly executed and delivered by all of
the parties hereto.
9.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by any Purchaser or on its behalf.
9.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has
- 39 -
<PAGE> 45
been made, the provisions of this Agreement which are for any Purchaser's
benefit as a purchaser or holder of Notes, Redeemable Stock, Convertible Stock
or Investor Common Stock are also for the benefit of, and enforceable by, any
subsequent holder of such Notes, Redeemable Stock, Convertible Stock, or
Investor Common Stock.
9.7 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
9.8 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts (including by means of telecopied signature pages), any
one of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same Agreement.
9.9 DESCRIPTIVE HEADINGS, INTERPRETATION. The descriptive headings
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
9.10 GOVERNING LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Nevada, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Nevada or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Nevada.
9.11 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and shall
be addressed as follows, or at such other address as a party may designate by
ten (10) days' advance written notice to the other parties to this Agreement
pursuant to the provisions of this Section 9.11:
- 40 -
<PAGE> 46
(i) if to a Purchaser, to such Purchaser's
address set forth on the Schedule of
Purchasers, with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304, United States
of America
Facsimile: (415) 493-6811
Attention: Jeffrey D. Saper, Esq.
(ii) if to MCK Canada, MDI or Manz, to:
MCK Telecommunications, Inc.
130 Bowness Center, N.W.
Calgary, Alberta T3B 5M5, Canada
Facsimile: (403) 247-9078
Attention: Mr. Cal Manz
with a copy to:
Macleod Dixon Canterra Tower
3700, 400 Third Avenue S.W.
Calgary, Alberta T2P 4H2, Canada
Facsimile: (403) 264-5973
Attention: John T. Ramsay, Esq.
(iii) if to MCK Nevada, to:
MCK Communications Inc.
2255A Rennaissance Drive
Las Vegas, Nevada 89119
United States of America
9.12 NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event that an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption of
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
- 41 -
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
MCK COMMUNICATIONS INC.
a Nevada corporation
By: /s/ Cal Manz
------------------------------
Cal Manz, President
MCK TELECOMMUNICATIONS INC.
An Alberta corporation
By: /s/ Cal Manz
------------------------------
Cal Manz, President
MANZ DEVELOPMENTS INC.
an Alberta corporation
By: /s/ Cal Manz
------------------------------
Cal Manz, President
/s/ Cal Manz
-----------------------------------
Cal Manz, an individual
[Stock and Note Purchase Agreement]
- 42 -
<PAGE> 48
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.
Its General partner
By: Stamps, Woodsum & Co. IV
Its General partner
By: /s/ Signature Illegible
-------------------------------
Its: General Partner
SUMMIT INVESTORS III, L.P.
By: /s/ Signature Illegible
-------------------------------
Its: Authorized Signatory
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners III, L.P.
Its General partner
By: Stamps, Woodsum & Co. IV
Its General partner
By: /s/ Signature Illegible
-------------------------------
Its: General Partner
[Stock and Note Purchase Agreement]
- 43 -
<PAGE> 49
WS INVESTMENT COMPANY 96A
By: /s/ Signature Illegible
-------------------------------
Its:_______________________________
TRUSTEE, WSGR RETIREMENT PLAN
FBO JEFFREY D. SAPER
By: /s/ Signature Illegible
-------------------------------
Its: Trustee
[Stock and Note Purchase Agreement]
- 44 -
<PAGE> 50
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
ORIGINAL NO. OF PURCHASE NO. OF PURCHASE
PRINCIPAL SHARES OF PRICE FOR SHARES OF PRICE FOR
AMOUNT OF REDEEMABLE REDEEMABLE CONVERTIBLE CONVERTIBLE TOTAL PURCHASE
NAME AND ADDRESS NOTES STOCK STOCK STOCK STOCK PRICE
---------------- --------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Summit Ventures IV. L.P. 600 $ 0 12,700,527 $12,700,527 3,619,556 $1,520,162.85 $14,220,689.85
Atlantic Avenue Suite 2800
Boston, Massachusetts
02210-2227
United States of America
Facsimile: (617) 824-1121
Attention: Mr. Paul K. Zurlo
Summit Investors III, L.P. 99,500 566,139 566,139 164,698 69,170.85 734,809.85
600 Atlantic Avenue
Suite 2800
Boston, Massachusetts
02210-2227
United States of America
Facsimile: (617) 824-1121
Attention: Mr. Paul K. Zurlo
Summit Subordinated 4,875,500 0 0 164,289 68,999.08 4,944,499.08
Debt Fund, L.P.
600 Atlantic Avenue
Suite 2800
Boston, Massachusetts
02210-2227
United States of America
Facsimile: (617) 824-1121
Attention: Mr. Paul K. Zurlo
WS Investment Company 96A 8,750 23,333 23,333 6,944 2,916.38 34,999.38
650 Page Mill Road
Palo Alto, California 94304
United States of America
Facsimile: (415) 493-6811
Attention: Ms. Mary Anne
Pedroni
Trustee, WSGR Retirement Plan 16,250 43,334 43,334 12,897 5,416.56 65,000.56
FBO Jeffrey D. Saper
650 Page Mill Road
Palo Alto, California 94304
United States of America
Facsimile: (415) 493-6811
---------- --------- ---------- --------- ------------- --------------
TOTAL $5,000,000 13,333,33 $13,333.33 3,968,384 $1,666,665.72 $19,999,998.72
========== ========= ========== ========= ============= ==============
</TABLE>
- 1 -
<PAGE> 1
EXHIBIT 2.2
MCK COMMUNICATIONS, INC.
STOCK PURCHASE AGREEMENT
---------------------------------
DATED AS OF JULY 16, 1998
----------------------------------
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
Section 1 AUTHORIZATION AND CLOSING................................... 4
1.1. Authorization of Stock............................. 4
1.2. Purchase and Sale.................................. 4
1.3. The Closing........................................ 4
1.4. Use of Proceeds.................................... 5
Section 2 CONDITIONS TO CLOSING....................................... 5
2.1. Obligation of the Purchasers....................... 5
2.2. Obligations of MCK................................. 7
Section 3 [INTENTIONALLY OMITTED]..................................... 7
Section 4 TRANSFER OF RESTRICTED SECURITIES........................... 8
4.1. General Provisions................................. 8
4.2. Opinion Delivery................................... 8
4.3. Rule 144A.......................................... 8
4.4. Legend Removal..................................... 8
Section 5 REPRESENTATIONS AND WARRANTIES OF MCK....................... 9
5.1. Organization, Corporate Power and Licenses......... 9
5.2. Capital Stock and Related Matters.................. 9
5.3. Subsidiaries, Investments.......................... 10
5.4. Authorization; No Breach........................... 11
5.5. Financial Statements............................... 11
5.6. Absence of Undisclosed Liabilities................. 12
5.7. No Material Adverse Change......................... 12
5.8. Absence of Certain Developments.................... 12
5.9. Assets............................................. 13
5.10. Tax Matters........................................ 14
5.11. Contracts and Commitments.......................... 14
5.12. Intellectual Property Rights....................... 16
5.13. Litigation, etc.................................... 17
5.14. Brokerage.......................................... 18
5.15. Insurance.......................................... 18
5.16. Employees.......................................... 18
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
5.17. Employee Benefits.................................. 18
5.18. Real Property Holding Corporation Status........... 19
5.19. Compliance with Laws............................... 19
5.20. Affiliated Transactions............................ 20
5.21. Customers and Suppliers............................ 20
5.22. Disclosure......................................... 20
Section 6 REPRESENTATIONS AND WARRANTIES OF PURCHASERS................ 21
6.1. Organization, Corporate Power and Licenses......... 21
6.2. Authorization; No Breach........................... 21
6.3. Litigation, etc.................................... 22
6.4. Brokerage.......................................... 22
6.5. Disclosure......................................... 22
6.6. Investment Representations......................... 22
Section 7 DEFINITIONS................................................. 23
7.1. Definitions........................................ 23
Section 8 INDEMNIFICATION............................................. 28
8.1. Indemnification by the Shareholders................ 28
8.2. Claims for Indemnification......................... 28
8.3. Defense by Shareholders............................ 28
8.4. Limits............................................. 29
Section 9 MISCELLANEOUS............................................... 30
9.1. Expenses........................................... 30
9.2. Remedies........................................... 30
9.3. Consent to Amendments.............................. 30
9.4. Survival of Representations and Warranties......... 31
9.5. Successors and Assigns............................. 31
9.6. Severability....................................... 31
9.7. Counterparts....................................... 31
9.8. Descriptive Headings, Interpretation............... 31
9.9. Governmental Law................................... 31
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
9.10. Notices............................................ 31
9.11. No Strict Construction............................. 32
-iii-
<PAGE> 5
LIST OF SCHEDULES
Schedule of Purchasers
Schedule of Option Grants
Disclosure Schedule
Purchaser Disclosure Schedule
LIST OF EXHIBITS
Exhibit A - Amended and Restated Articles of Incorporation
Exhibit B - Amended and Restated Registration Rights Agreement
Exhibit C - Amended and Restated Stockholders Agreement
Exhibit D -Opinion of Counsel to MCK
<PAGE> 6
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of July 16,1998, by and among
MCK Communications Inc., a corporation organized under the laws of the State of
Nevada ("MCK" or the "Company"), and the Persons listed on the SCHEDULE OF
PURCHASERS attached hereto (collectively referred to herein as the "Purchasers"
and individually as a "Purchaser"). Except as otherwise provided herein,
capitalized terms used herein are defined in Section 7 hereof.
The parties hereto hereby agree as follows:
SECTION 1
AUTHORIZATION AND CLOSING
1.1. AUTHORIZATION OF STOCK. MCK has authorized the issuance and
sale to the Purchasers of (a) 28,505 shares of its Series C Redeemable Preferred
Stock (the "Series C Redeemable Stock"), having the rights and preferences set
forth in the Amended and Restated Articles of Incorporation of the Company,
attached hereto as EXHIBIT A (the "Articles of Incorporation"), (b) 1,672,354
shares of its Series D Convertible Preferred Stock (the "Series D Convertible
Stock"), having the rights and preferences set forth in the Articles of
Incorporation and (c) 1,672,354 shares of common stock (the "Common Stock")
issuable upon conversion of the Series D Convertible Stock in accordance with
the terms thereof (such shares, the "Conversion Shares"). The Series C
Redeemable Stock and the Series D Convertible Stock are herein referred to as
the "Purchased Stock."
1.2. PURCHASE AND SALE. At the Closing, MCK shall issue and sell to
each Purchaser and, subject to the terms and conditions set forth herein, each
Purchaser shall purchase from MCK the number of shares of Series C Redeemable
Stock set forth opposite such Purchaser's name on the SCHEDULE OF PURCHASERS
attached hereto, at the aggregate price set forth opposite such Purchaser's name
on such SCHEDULE OF PURCHASERS. Further, at the Closing, MCK shall sell to each
Purchaser and, subject to the terms and conditions set forth herein, each
Purchaser shall purchase from MCK the number of shares of Series D Convertible
Stock set forth opposite such Purchaser's name on the SCHEDULE OF PURCHASERS at
the aggregate price set forth opposite such Purchaser's name on such SCHEDULE OF
PURCHASERS.
1.3. THE CLOSING. The closing of the separate purchases and sales
of the Series C Redeemable Stock and the Series D Convertible Stock (the
"Closing") shall take place at the offices of Goodwin, Procter & Hoar LLP,
Exchange Place, Boston, Massachusetts 02109, at 10:00 a.m. on July 16, 1998, or
at such other place or on such other date as may be mutually agreeable to MCK
and each Purchaser. At the Closing, (a) MCK shall deliver to each Purchaser
stock certificates evidencing the Series C Redeemable Stock and the Series D
Convertible Stock to be purchased by such Purchaser and (b) the Purchasers shall
remit payment of the purchase price for the Series C Redeemable Stock and the
Series D
<PAGE> 7
Convertible Preferred Stock by check or wire transfer of immediately available
funds to MCK.
1.4. USE OF PROCEEDS. MCK agrees that the proceeds from the sale
and issuance of the Series C Redeemable Stock and the Series D Convertible Stock
shall be used to prepay S2,500,000 in principal amount of certain Class A
Subordinated Promissory Notes issued by MCK on June 27, 1996 (the "Subordinated
Notes"), with the remainder of such proceeds to be used for working capital
purposes.
SECTION 2
CONDITIONS TO CLOSING
2.1. OBLIGATION OF THE PURCHASERS. The obligation of each Purchaser
to purchase and pay for the Purchased Stock at the Closing is subject to the
satisfaction as of the Closing of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES, COVENANTS. The
representations and warranties contained in Section 5 hereof shall be true and
correct at and as of the Closing as though then made and MCK shall have
performed all of the covenants required to be performed by it hereunder prior to
the Closing.
(b) ARTICLES OF INCORPORATION. The Articles of
Incorporation shall have been duly amended and restated in substantially the
form set forth in EXHIBIT A attached hereto, shall be in full force and effect
under the laws of the State of Nevada as of the Closing as so amended and
restated and shall not have been further amended or modified.
(c) REGISTRATION RIGHTS AGREEMENT. MCK, the Purchasers
and the other parties to a certain Registration Rights Agreement dated as of
June 27, 1996 shall have entered into an Amended and Restated Registration
Rights Agreement in substantially the form set forth in EXHIBIT B attached
hereto (the "Amended and Restated Registration Rights Agreement"), and the
Amended and Restated Registration Rights Agreement shall be in full force and
effect as of the Closing.
(d) STOCKHOLDERS AGREEMENT. MCK, the Purchasers and the
other parties to a certain Stockholders Agreement dated as of June 27, 1996
shall have entered into an Amended and Restated Stockholders Agreement in
substantially the form set forth in EXHIBIT C attached hereto (the "Amended and
Restated Stockholders Agreement"), and the Amended and Restated Stockholders
Agreement shall be in full force and effect as of the Closing.
-5-
<PAGE> 8
(e) BOARD OF DIRECTORS. MCK shall have taken all action
necessary to provide for the appointment of Brad Farkas to serve as a member of
MCK's Board of Directors.
(f) SECURITIES LAW COMPLIANCE. MCK shall have made all
filings necessary, if any, under all applicable securities laws to consummate
the issuance of the Purchased Stock pursuant to this Agreement in compliance
with such laws.
(g) LEGAL OPINIONS. Each Purchaser shall have received
from Goodwin, Procter & Hoar LLP, counsel for MCK, an opinion with respect to
the matters set forth in EXHIBIT D attached hereto, which shall be addressed to
each Purchaser, dated the date of the Closing and in form and substance
reasonably satisfactory to each Purchaser.
(h) CLOSING DOCUMENTS. MCK shall have delivered to each
Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of
the Closing, stating that the conditions specified in Section 1.1 and
Section 2 have been fully satisfied and that the representations and
warranties set forth in Section 5 hereof are true and correct as of the
Closing Date;
(ii) certified copies of (A) the resolutions duly
adopted by MCK's Board of Directors authorizing the execution, delivery
and performance of this Agreement, the Amended and Restated
Registration Rights Agreement, the Amended and Restated Stockholders
Agreement, and each of the other agreements contemplated hereby, the
filing of the amendment to the Articles of Incorporation referred to in
Section 2.1(b), the issuance and sale of the Purchased Stock and the
consummation of all other transactions contemplated by this Agreement,
and (B) the resolutions duly adopted by MCK's shareholders adopting the
amendment to the Articles of Incorporation referred to in Section
2.1(b);
(iii) certified copies of MCK's Articles of
Incorporation and Bylaws, each as in effect at the Closing;
(iv) copies of all third party and governmental
consents, approvals and filings required in connection with the
consummation of the transactions contemplated hereby (including,
without limitation, all securities law filings and waivers of all
preemptive rights and rights of first refusal);
(v) a certificate of the legal good standing of
MCK from the Secretary of State of the State of Nevada; and
(vi) such other documents relating to the
transactions contemplated by this Agreement as any Purchaser or its
counsel may reasonably request.
-6-
<PAGE> 9
(i) EXPENSES. At the Closing, MCK shall have reimbursed
or made adequate provision for reimbursing the Purchasers for the fees and
expenses of their counsel as provided in Section 9.1 hereof.
(j) PROCEEDINGS. All corporate and other proceedings
taken or required to be taken by MCK in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Purchaser and its counsel.
(k) WAIVER. Any condition specified in this Section 2.1
(except any condition requiring or in the nature of a governmental approval or
consent) may be waived if consented to in writing by each Purchaser.
2.2. OBLIGATIONS OF MCK. The obligation of MCK to deliver
instruments and stock certificates representing the Purchased Stock at the
Closing is subject to the satisfaction as of the Closing of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES: COVENANTS. The
representations and warranties of the Purchasers contained in Section 6 hereof
shall be true and correct at and as of the Closing as though then made and the
Purchasers shall have performed all of the covenants required to be performed by
them hereunder prior to the Closing.
(b) SECURITIES LAW COMPLIANCE. MCK shall have made all
filings under all applicable securities laws necessary to consummate the
issuance of Purchased Stock pursuant to this Agreement in compliance with such
laws.
(c) PAYMENTS. At the Closing, the Purchasers shall
have made the payments required by Sections 1.2 and 1.3 of this Agreement.
(d) PROCEEDINGS. All corporate and other proceedings
taken or required to be taken by each of the Purchasers in connection with the
transactions contemplated hereby to be consummated at or prior to the Closing
and all documents incident thereto shall be reasonably satisfactory in form and
substance to each of MCK and its counsel.
SECTION 3
[INTENTIONALLY OMITTED]
-7-
<PAGE> 10
SECTION 4
TRANSFER OF RESTRICTED SECURITIES
4.1. GENERAL PROVISIONS. Restricted Securities (as defined below)
are transferable by means of (a) public offerings registered under the
Securities Act (as defined below), (b) Rule 144 or Rule 144A under the
Securities Act (or any similar rule or rules then in force) if such rule is
available and (c) subject to the conditions specified in Section 4.2 below, any
other legally available means of transfer.
4.2. OPINION DELIVERY. In connection with the transfer of any
Restricted Securities (other than a transfer described in Section 4.1(a) or (b)
above), the holder thereof shall deliver written notice to MCK describing in
reasonable detail the transfer or proposed transfer, together with an opinion of
counsel which (to MCK's reasonable satisfaction) is knowledgeable in securities
law matters to the effect that such transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the Securities
Act; provided, that in connection with any such transfer by a Purchaser to an
Affiliate of such Purchaser, no such opinion of counsel shall be required. In
addition, if the holder of the Restricted Securities delivers to MCK an opinion
of such counsel, reasonably satisfactory to MCK, that no subsequent transfer of
such Restricted Securities shall require registration under the Securities Act,
MCK shall promptly upon such contemplated transfer deliver new certificates for
such Restricted Securities which do not bear the Securities Act legend set forth
in Section 6.6 below. If MCK is not required to deliver new certificates for
such Restricted Securities not bearing such legend, the holder thereof shall not
transfer the same until the prospective transferee has confirmed to this Company
in writing its agreement to be bound by the conditions contained in this Section
4.2 and Section 6.6.
4.3. RULE 144A. Upon the request of any holder of Restricted
Securities, MCK shall promptly supply to such Person or its prospective
transferees all information regarding MCK required to be delivered in connection
with a transfer pursuant to Rule 144A under the Securities Act.
4.4. LEGEND REMOVAL. If any Restricted Securities become eligible
for sale pursuant to Rule 144(k) under the Securities Act, MCK shall, upon the
request of the holder of such Restricted Securities, remove the legend set forth
in Section 6.6 from the certificates for such Restricted Securities.
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SECTION 5
REPRESENTATIONS AND WARRANTIES OF MCK
As a material inducement to the Purchasers to enter into this Agreement
and purchase the Purchased Stock hereunder, and except as set forth on the
attached DISCLOSURE SCHEDULE, MCK hereby represents and warrants to the
Purchasers that as of the Closing:
5.1. ORGANIZATION, CORPORATE POWER AND LICENSES. MCK is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada and is qualified to do business in every jurisdiction in
which the failure to so qualify has had or would reasonably be expected to have
a material adverse effect on the financial condition, operating results, assets,
operations or business prospects of MCK and its Subsidiaries taken as a whole (a
"Material Adverse Effect"). MCK possesses all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its businesses as now conducted and
presently proposed to be conducted and to carry out the transactions
contemplated by this Agreement. The copies of MCK's and each Subsidiary's
charter documents and bylaws which have been furnished to the Purchasers'
counsel reflect all amendments made thereto at any time prior to the date of
this Agreement and are correct and complete.
5.2. CAPITAL STOCK AND RELATED MATTERS.
(a) As of the date of this Agreement, the authorized
capital stock of MCK consists of (i) 21,000,000 shares of preferred stock:
14,985,733 of which are designated as Series A Redeemable Preferred Stock,
13,333,333 of which were issued as of June 27, 1996 and 1,652,400 of which were
issued as of the date hereof and all of which are outstanding; 3,968,384 of
which are designated Series B Convertible Preferred Stock, all of which were
issued as of June 27, 1996 and are outstanding; 28,505 shares of Series C
Redeemable Stock, none of which is issued or outstanding; and 1,672,354 shares
of Series D Convertible Stock, none of which is issued or outstanding and (ii)
25,000,000 shares of Common Stock, of which 2,491,406 shares are issued and
outstanding (including 1,305,229 shares of Common Stock issued to officers,
directors, employees and one former employee of the Company pursuant to
restricted stock agreements). As of the date of this Agreement, the authorized
capital stock of MCK Canada consists of 12,151,000 shares of Class A Common
Stock, all of which are issued and outstanding, and 20,000 shares of Class E
Redeemable Preferred Stock, all of which are issued and outstanding. Neither MCK
nor any Subsidiary has, or will have as of the Closing, outstanding any stock or
securities convertible or exchangeable for any shares of its capital stock or
containing any profit participation features, nor does it have, or will it have
as of the Closing, outstanding any rights or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock plans, other than options to purchase 673,061 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Stock Option Plan, of which
options to purchase 361,320 shares of Common Stock are presently issued and
outstanding and
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options to purchase 217,046 shares of Common Stock have been issued and
exercised. Neither MCK nor any Subsidiary is, or will be as of the Closing,
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or any warrants, options or
other rights to acquire its capital stock, except pursuant to the Articles of
Incorporation, the Amended and Restated Stockholders Agreement and the Put/Call
Option Agreement dated as of June 27, 1996 by and among MCK, MDI and the escrow
agent named therein. All of the outstanding shares of MCK's capital stock are
validly issued, fully paid and nonassessable. The shares of Purchased Stock
issued pursuant to this Agreement, when issued at the Closing in accordance with
the terms of this Agreement, and the Conversion Shares, when issued upon
conversion of the Series D Convertible Stock in accordance with the terms
thereof, will be validly issued, fully paid and nonassessable.
(b) There are no statutory or contractual shareholders'
preemptive rights or rights of first refusal with respect to the sale or
issuance of the Purchased Stock, which have not been waived in full. MCK has not
violated any applicable securities laws (federal, state, provincial or other) in
connection with the offer, sale or issuance of any of its capital stock, and the
offer, sale and issuance of the Purchased Stock hereunder do not require
registration under the Securities Act or any applicable securities laws. There
are no agreements among MCK's shareholders with respect to the voting or
transfer of MCK capital stock or with respect to any other aspect of MCK's
affairs, except for the Amended and Restated Stockholders Agreement.
(c) The Disclosure Schedule sets forth a true and
complete list of the record holders of debt and equity of MCK showing the number
of shares of Common Stock or other securities of the Company held by each such
holder as of the date hereof and the consideration paid to MCK, if any,
therefor.
5.3. SUBSIDIARIES, INVESTMENTS. The Disclosure Schedule correctly
sets forth the name of each Subsidiary of MCK and the jurisdiction of its
incorporation. Each such Subsidiary is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, possesses
all requisite corporate power and authority and all material licenses, permits
and authorizations necessary to own its properties and to carry on its
businesses as now being conducted and as presently proposed to be conducted and
is qualified to do business in every jurisdiction in which the failure to so
qualify has had or would reasonably be expected to have a Material Adverse
Effect. All of the outstanding shares of capital stock of each Subsidiary are
validly issued, fully paid and nonassessable, and except for shares of Series E
Preferred Stock of MCK Canada owned by MDI, all such shares are owned by MCK or
another Subsidiary free and clear of any Lien and are not subject to any option
or right to purchase any such shares. Neither MCK nor any Subsidiary owns or
holds the right to acquire any shares of stock or any other security or interest
in any other Person.
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5.4. AUTHORIZATION; NO BREACH.
(a) The execution, delivery and performance of this
Agreement, the Amended and Restated Registration Rights Agreement, the Amended
and Restated Stockholders Agreement and all other agreements contemplated hereby
to which MCK is a party, and the amendment of the Articles of Incorporation have
been duly authorized by MCK. This Agreement, the Articles of Incorporation, the
Amended and Restated Registration Rights Agreement, the Amended and Restated
Stockholders Agreement and all other agreements contemplated hereby to which MCK
is a party each constitutes a valid and binding obligation of MCK, enforceable
against MCK in accordance with its terms, subject to the rules and principles of
equity and the rules and principles applicable to bankruptcy and insolvency and
except to the extent that the enforceability of Section 6 of the Amended and
Restated Registration Rights Agreement may be limited by public policy. The
execution and delivery by MCK of this Agreement, the Amended and Restated
Registration Rights Agreement, the Amended and Restated Stockholders Agreement
and all other agreements contemplated hereby to which MCK is a party, the
offering, sale and issuance of the Purchased Stock hereunder, the amendment of
the Articles of Incorporation and the fulfillment of and compliance with the
respective terms hereof and thereof by MCK, do not and shall not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii)
constitute a default under, (iii) result in the creation of any lien, security
interest, charge or encumbrance upon MCK's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of MCK or any Subsidiary, or any
law, statute, rule or regulation to which MCK or any Subsidiary is subject, or
any agreement, instrument, order, judgment or decree to which MCK or any
Subsidiary is subject. None of the Subsidiaries are subject to any restrictions
upon making loans or advances or paying dividends to, transferring property to,
or repaying any Indebtedness owed to, MCK or another Subsidiary.
5.5. FINANCIAL STATEMENTS. MCK has delivered to the Purchasers the
following financial statements:
(a) the consolidated balance sheets of MCK and its
Subsidiaries as of April 30, 1997 and the related statements of income and cash
flows for the twelve-month periods then ended, audited by Price Waterhouse; and
(b) the unaudited consolidated balance sheet of MCK and
its Subsidiaries as of April 30, 1998 (the "Base Balance Sheet"), and the
related statement of income and cash flows for the month then ended.
Each of the foregoing financial statements (including in all cases the
notes thereto, if any) is consistent in all material respects with the books and
records of MCK (which, in turn, are accurate and complete in all material
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respects) and presents fairly in all material respects the consolidated
financial condition, results of operations and cash flows of MCK and its
Subsidiaries in accordance with generally accepted accounting principles applied
on a consistent basis as of the dates and for the periods set forth therein,
subject, in the case of the unaudited financial statements, to the absence of
footnote disclosures and subject, in the case of the unaudited financial
statements referred to in clause (b) above, to changes resulting from normal
year-end adjustments for recurring accruals (none of which would, alone or in
the aggregate, be materially adverse to the financial condition, operating
results, assets, operations or business prospects of MCK and its Subsidiaries
taken as a whole).
5.6. ABSENCE OF UNDISCLOSED LIABILITIES. MCK and its Subsidiaries
do not have any material obligation or liability (whether accrued, absolute,
contingent, unliquidated or otherwise, whether or not known to MCK or any
Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Closing, or any
action or inaction at or prior to the Closing, or any state of facts existing at
or prior to the Closing other than: (a) liabilities set forth on the Base
Balance Sheet or (b) liabilities and obligations which have arisen after April
30, 1998, in the ordinary course of business (none of which is a liability
resulting from breach of contract, breach of warranty, tort, infringement, claim
or lawsuit).
5.7. NO MATERIAL ADVERSE CHANGE. Since April 30, 1998, to the best
knowledge and belief of MCK there has been no material adverse change in the
financial condition, operating results, assets, operations, business, prospects,
employee relations or customer or supplier relations of MCK and its Subsidiaries
taken as a whole.
5.8. ABSENCE OF CERTAIN DEVELOPMENTS.
(a) Except as expressly set forth in this Agreement,
since April 30, 1998 neither MCK nor any Subsidiary has:
(i) issued any notes, bonds or other debt
securities or any capital stock or other equity securities or any
securities convertible, exchangeable or exercisable into any capital
stock or other equity securities;
(ii) borrowed any amount or incurred or become
subject to any material liabilities, except current liabilities
incurred in the ordinary course of business and liabilities under
contracts entered into in the ordinary course of business consistent
with past practice;
(iii) paid any material obligation or liability,
other than current liabilities paid in the ordinary course of business
or the payment of the Subordinated Notes contemplated by Section 1.4
hereof,
(iv) declared or made any payment or distribution
of cash or other property to its shareholders with respect to its
capital stock or other equity securities or purchased or redeemed any
shares of its capital stock or other equity securities
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(including, without limitation, any warrants, options or other rights
to acquire its capital stock or other equity securities);
(v) sold, assigned or transferred any of its
tangible assets, except in the ordinary course of business consistent
with past practice, or canceled any material debts or claims; of
business.
(vi) sold, assigned or transferred any patents or
patent applications, trademarks, service marks, trade names, corporate
names, copyrights or copyright registrations, trade secrets or other
intangible assets, or disclosed any proprietary confidential
information to any Person (other than to the Purchasers and other than
in the ordinary course of business in circumstances in which MCK has
imposed confidentiality restrictions);
(vii) suffered any extraordinary losses or waived
any rights of material value, whether or not in the ordinary course of
business or consistent with past practice;
(viii) made capital expenditures or commitments
therefor that aggregate in excess of $100,000;
(ix) made any loans or advances to, guarantees
for the benefit of, or any Investments in, any Persons in excess of
$25,000 in the aggregate;
(x) suffered any damage, destruction or casualty
loss exceeding in the aggregate $25,000, whether or not covered by
insurance; or
(xi) entered into any other material transaction
outside of the ordinary course of business.
(b) To the best knowledge and belief of MCK, no officer,
director, employee or agent of MCK or any of its Subsidiaries has been or is
authorized to make or receive, and MCK does not know of any such person making
or receiving, any bribe, kickback or other illegal payment.
5.9. ASSETS. MCK and each Subsidiary have good and marketable title
to, or a valid leasehold interest in, the material properties and assets used by
them, located on their premises or shown on the Base Balance Sheet or acquired
thereafter, free and clear of all Liens, except for Permitted Liens, properties
and assets disposed of in the ordinary course of business since the date of the
Base Balance Sheet and except for Liens disclosed in reasonable detail on the
Base Balance Sheet and Liens for current property taxes not yet due and payable.
MCK's and each Subsidiary's buildings, equipment and other tangible assets are
in good operating condition in all material respects and are fit for use in the
ordinary course of business. MCK and each Subsidiary own, or have a valid,
leasehold interest in or license to, all material assets necessary for the
conduct of their respective businesses as presently conducted and as presently
proposed to be conducted.
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5.10. TAX MATTERS.
(a) MCK and each Subsidiary have filed all Tax Returns
which they are required to file under applicable laws and regulations; all such
Tax Returns are complete and correct in all material respects and have been
prepared in compliance with all applicable laws and regulations in all material
respects; MCK and each Subsidiary have paid all Taxes due and owing by them
(whether or not such Taxes are required to be shown on a Tax Return) and have
withheld and paid over to the appropriate taxing authority all Taxes which they
are required to withhold from amounts paid or owing to any employee,
shareholder, creditor or other third party; the accrual for Taxes on the Base
Balance Sheet would be adequate to pay all Tax liabilities of MCK and its
Subsidiaries if their current tax year were treated as ending on the date of the
Base Balance Sheet (excluding any amount recorded which is attributable solely
to timing differences between book and Tax income); since April 30, 1998, MCK
and its Subsidiaries have not incurred any liability for Taxes other than in the
ordinary course of business; and no foreign, federal, state or local tax audits
or administrative or judicial proceedings are pending or being conducted with
respect to MCK or any Subsidiary, no information related to Tax matters has been
requested by any foreign, federal, state, provincial or local taxing authority
and no written notice indicating an intent to open an audit or other review has
been received by MCK or any Subsidiary from any foreign, federal, state or local
taxing authority.
(b) Neither MCK nor any Subsidiary is liable for the
Taxes of another Person other than Subsidiaries or withholding taxes on
employees (i) as a transferee or successor, (ii) by contract or indemnity or
(iii) otherwise. Neither MCK nor any Subsidiary is a party to any tax sharing
agreement with a Person other than MCK or a Subsidiary.
(c) Neither MCK nor any Subsidiary has been a member of
an Affiliated Group other than one in which MCK was the common parent, or filed
or been included in a combined, consolidated or unitary income Tax Return, other
than one filed by MCK.
5.11. CONTRACTS AND COMMITMENTS.
(a) Except as expressly contemplated by this Agreement,
neither MCK nor any Subsidiary is a party to or bound by any written or oral:
(i) pension, profit sharing, stock option,
employee stock purchase or other plan or arrangement providing for
deferred or other compensation to employees or any other employee
benefit plan or arrangement, or any collective bargaining agreement or
any other contract with any labor union, or severance agreements,
programs, policies or arrangements;
(ii) contract for the employment of any officer,
individual employee or other Person on a full-time, part-time,
consulting, or other basis providing annual compensation in excess of
$100,000 or contract relating to loans to officers, directors or
Affiliates;
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(iii) contract under which MCK or any Subsidiary
has advanced or loaned any other Person amounts in the aggregate
exceeding $25,000;
(iv) agreement or indenture relating to borrowed
money or other Indebtedness or the mortgaging, pledging or otherwise
placing a Lien on any material asset or material group of assets of MCK
or its Subsidiaries;
(v) guarantee of any obligation in excess of
$25,000;
(vi) lease or agreement under which MCK or any
Subsidiary is lessee of or holds or operates any property, real or
personal, owned by any other party;
(vii) lease or agreement under which MCK or any
Subsidiary is lessor of or permits any third party to hold or operate
any property, real or personal, owned or controlled by MCK or any
Subsidiary except for any lease of real or personal property under
which the aggregate annual rental payments do not exceed $25,000;
(viii) contract or group of related contracts with
the same party or group of affiliated parties the performance of which
involves consideration in excess of $50,000;
(ix) assignment, license, indemnification or
agreement with respect to any intangible property (including, without
limitation, any Intellectual Property Rights);
(x) warranty agreement with respect to its
services rendered or its products sold, leased or licensed which
contains terms and conditions that differ in any material respect from
MCK's standard warranty terms and conditions (a copy of which standard
terms and conditions is attached to the Disclosure Schedule);
(xi) agreement under which it has granted any
Person any registration rights (including, without limitation, demand
or piggyback registration rights);
(xii) sales, distribution or franchise agreement;
(xiii) agreement with a term of more than six
months which is not terminable by MCK or any Subsidiary upon less than
30 days notice without penalty and which involves stated consideration
in excess of $50,000;
(xiv) contract or agreement prohibiting it from
freely engaging in any business or competing anywhere in the world; or
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(xv) any other agreement which is material to its
operations and business prospects or involves stated consideration in
excess of $50,000 annually.
(b) All of the contracts, agreements and instruments set
forth or required to be set forth on the Disclosure Schedule have been executed
and delivered and, to the best knowledge and belief of MCK, are valid, binding
and enforceable in accordance with their respective terms. MCK and each
Subsidiary have performed all material obligations required to be performed by
them under the contracts, agreements and instruments listed or required to be
listed on the Disclosure Schedule and are not in default under or in breach of
nor in receipt of any claim of default or breach under any such contract,
agreement or instrument except for any such default or breach which has been
waived; no event has occurred which with the passage of time or the giving of
notice or both would result in a default, breach, or any intention to terminate,
or event of noncompliance by MCK or any Subsidiary under any contract, agreement
or instrument listed or required to be listed on the Disclosure Schedule;
neither MCK nor any Subsidiary has any present expectation or intention of not
fully performing all such obligations; neither MCK nor any Subsidiary has
knowledge of any breach or anticipated breach by the other parties to any
contract, agreement, instrument or commitment listed or required to be listed on
the Disclosure Schedule; and, to the knowledge of MCK, neither MCK nor any
Subsidiary is a party to any contract or commitment requiring it to purchase or
sell goods or services or lease property above or below (as the case may be)
prevailing market prices and rates.
(c) A true and correct copy of each of the written
instruments, plans, contracts and agreements, including all amendments (or
currently proposed amendments) and waivers thereto, and an accurate description
of each of the oral arrangements, contracts and agreements which are referred to
on the Disclosure Schedule have been made available to the Purchaser's special
counsel.
5.12. INTELLECTUAL PROPERTY RIGHTS.
(a) The Disclosure Schedule contains a complete and
accurate list of all (i) patented or registered Intellectual Property Rights
owned or used by MCK or any Subsidiary, (ii) pending patent applications and
applications for registrations of other Intellectual Property Rights filed by
MCK or any Subsidiary, (iii) material unregistered trade names and corporate
names owned or used by MCK or any Subsidiary and (iv) material unregistered
trademarks, service marks, copyrights, mask works and computer software owned or
used by MCK or any Subsidiary. The Disclosure Schedule also contains a complete
and accurate list of all licenses and other rights granted by MCK or any
Subsidiary to any third party with respect to any Intellectual Property Rights
and all licenses and other rights granted by any third party to MCK or any
Subsidiary with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. MCK or one of its
Subsidiaries owns all right, title and interest to, or has the right to use
pursuant to a valid license, all Intellectual Property Rights necessary for the
operation of the businesses of MCK and its Subsidiaries as presently conducted
and as presently proposed to be conducted, free and clear of all Liens. The loss
or expiration of
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any Intellectual Property Right or related group of Intellectual Property Rights
owned or used by MCK or any Subsidiary has not had a Material Adverse Effect and
no such loss or expiration is threatened, pending or reasonably foreseeable. MCK
and its Subsidiaries have taken all reasonably necessary actions to maintain and
protect the Intellectual Property Rights which they own. To the best of MCK's
knowledge and belief, the owners of any Intellectual Property Rights licensed to
MCK or any Subsidiary have taken all reasonably necessary actions to maintain
and protect the Intellectual Property Rights which are subject to such licenses.
(b) (i) MCK and its Subsidiaries own all right,
title and interest in and to all of the Intellectual Property Rights listed or
required to be listed on the Disclosure Schedule, free and clear of all Liens,
(ii) there has been no claim made against MCK or any Subsidiary asserting the
invalidity, misuse or unenforceability of any of such Intellectual Property
Rights, and, to the best of MCK's knowledge, there is no valid ground for the
same, (iii) neither MCK nor any Subsidiary has received any notice of, or is
aware of any facts which indicate a likelihood of, any infringement or
misappropriation by, or conflict with, any third party with respect to such
Intellectual Property Rights (including, without limitation, any demand or
request that MCK or any Subsidiary license any rights from a third party), (iv)
the conduct of MCK's and each Subsidiary's business has not infringed,
misappropriated or conflicted with and does not infringe, misappropriate or
conflict with any Intellectual Property Rights of other Persons, nor would any
future conduct as presently contemplated infringe, misappropriate or conflict
with any Intellectual Property Rights of other Persons (provided that MCK makes
no representation or warranty pursuant to this Section 5.12(b)(iv) with respect
to patents issued after the Closing, the application for which it has no actual
knowledge) and (v) to the best of MCK's knowledge and belief, the Intellectual
Property Rights owned by or licensed to MCK or any Subsidiary have not been
infringed, misappropriated or conflicted by other Persons. The transactions
contemplated by this Agreement shall have no material adverse effect on MCK's or
any Subsidiary's right, title and interest in and to the Intellectual Property
Rights listed or required to be listed on the Disclosure Schedule.
5.13. LITIGATION, ETC. There are no actions, suits, proceedings,
orders, investigations or claims pending or, to the best of MCK's knowledge,
threatened against or affecting MCK or any Subsidiary (or to the best of MCK's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of MCK and its Subsidiaries with respect to their
businesses or proposed business activities), or pending or threatened by MCK or
any Subsidiary against any third party, at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suits, proceedings or
investigations with respect to the transactions contemplated by this Agreement);
neither MCK nor any Subsidiary is subject to any arbitration proceedings under
collective bargaining agreements or otherwise or, to the best of MCK's
knowledge, any governmental investigations or inquiries; and, to the best of
MCK's knowledge, there is no valid basis for any of the foregoing. Neither MCK
nor any Subsidiary is subject to any judgment, order or decree of any court or
other governmental agency, and neither MCK nor any Subsidiary has received any
opinion or
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memorandum or legal advice from legal counsel to the effect that it is exposed,
from a legal standpoint, to any liability or disadvantage which may be material
to its business.
5.14. BROKERAGE. There are no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon MCK or any Subsidiary. MCK shall pay, and hold each Purchaser harmless
against, any liability, loss or expense (including, without limitation,
reasonable attorneys' fees and out-of-pocket expenses) arising in connection
with any such claim.
5.15. INSURANCE. Neither MCK nor any Subsidiary is in default with
respect to its obligations under any insurance policy maintained by it, and
neither MCK nor any Subsidiary has been denied insurance coverage. MCK maintains
such insurance coverage for it and its Subsidiaries as is customary for
corporations of similar size engaged in similar lines of business. MCK and its
Subsidiaries do not have any self-insurance or co-insurance programs.
5.16. EMPLOYEES. MCK is not aware that any executive or key employee
of MCK or any Subsidiary or any group of employees of MCK or any Subsidiary has
any plans to terminate employment with MCK or any Subsidiary. MCK and each
Subsidiary have complied in all material respects with all laws relating to the
employment of labor (including, without limitation, provisions thereof relating
to wages, hours, equal opportunity, collective bargaining and the payment of
social security and other taxes), and MCK is not aware that it or any Subsidiary
has any material labor relations problems (including, without limitation, any
union organization activities, threatened or actual strikes or work stoppages or
material grievances). None of MCK, its Subsidiaries or, to the best of MCK's
knowledge after due inquiry, any of their respective employees is subject to any
non-compete, nondisclosure, confidentiality, employment, consulting or similar
agreements in conflict with the present or proposed business activities of MCK
and its Subsidiaries.
5.17. EMPLOYEE BENEFITS.
(a) Neither MCK or any Subsidiary maintains, contributes
to or has any actual or potential liability with respect to any (i) "defined
contribution plan" (as defined in Section 3(34) of ERISA (a "Savings Plan"),
(ii) "employee welfare benefit plan" (as defined in Section 3(1) of ERISA) (a
"Welfare Plan") or (iii) nonqualified deferred compensation, incentive, bonus,
material fringe benefit, stock bonus or other material benefit arrangements
(collectively (i), (ii) and (iii) above may be referred to as the "Plans").
(b) Neither MCK or any Subsidiary maintains, contributes
to or has any actual or potential liability with respect to any active or
terminated, funded or unfunded (i) multi-employer plan (as defined in Section
3(37) of ERISA), (ii) defined benefit plan (as defined in Section 3(35) of
ERISA) or (iii) plan or arrangement to provide medical, health, life insurance
or other welfare-type benefits for current or future retired or terminated
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employees (except for limited continued health benefit coverage required to be
provided under Section 4980B of the IRC or similar state law).
(c) MCK has provided to the Purchasers accurate and
complete copies of each of the Plans and any related trusts, insurance contracts
or other agreements, the IRS favorable determination letter issued with respect
to the Savings Plan, IRS Form 5500s (including all attachments) for the Savings
Plan and the Welfare Plans for the most recently completed plan year and the
most recent financial statement with respect to the Savings Plan.
(d) Each of the Welfare Plans and the Savings Plan and
all related funding arrangements comply in form and operation with its terms and
the applicable requirements of ERISA, the IRC and any other laws. The Savings
Plan has received a favorable determination letter that it qualifies under the
IRC (and that its trust is exempt from tax under the IRC) and such favorable
letter includes changes required by the 1986 Tax Reform Act. Nothing has
occurred since the date of such favorable determination letter that could
adversely affect the qualified status of the Savings Plan or the tax exempt
status of the trust.
(e) None of MCK any Subsidiary, any trustee or
administrator of any Plan or other person has engaged in any transaction with
respect to any Plan which could subject MCK, any of its Subsidiaries or any of
its employees to any tax or penalty or other liability imposed by ERISA or the
IRC. No actions, suits, investigations or claims with respect to any of the
Plans (other than routine claims for benefits) are pending or, to the knowledge
of MCK, threatened, and MCK is not aware of any facts or circumstances which
could give rise to or be expected to give rise to any such actions, suits,
investigations or claims. MCK and its Subsidiaries have complied with the
requirements of Section 4980B of the IRC and Section 601 et seq. of ERISA
("COBRA"). All contributions which are due under each of the Plans have been
made and all other contributions have been properly accrued. MCK and its
Subsidiaries have complied with all reporting and disclosure obligations with
respect to the Welfare Plans and the Savings Plan.
5.18. REAL PROPERTY HOLDING CORPORATION STATUS. Since its date of
incorporation none of MCK or any of its Subsidiaries has been, and as of the
date of the Closing shall not be, a "United States real property holding
corporation", as defined in Section 897(c) (2) of the IRC, and in Section
1.897-2(b) of the Treasury Regulations issued thereunder. Neither MCK or any of
its Subsidiaries has any current plans or intentions which would cause MCK or
any of its Subsidiaries to become a "United States real property holding
company," and NICK has filed with the IRS all statements, if any, with its
United States income tax returns which are required under Section 1.897-2(h) of
the Treasury Regulations.
5.19. COMPLIANCE WITH LAWS. Neither MCK nor any Subsidiary has
violated any law or any governmental regulation or requirement which violation
has had or would reasonably be expected to have a Material Adverse Effect, and
neither MCK nor any
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Subsidiary has received notice of any such violation. MCK and its Subsidiaries
have complied with and are currently in compliance with all Environmental and
Safety Requirements, and neither MCK nor any Subsidiary has received any oral or
written notice, report or information regarding any liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise) or any corrective,
investigatory or remedial obligations arising under Environmental and Safety
Requirements which relate to MCK or its Subsidiaries or any of their properties
or facilities and no facts or circumstances exist with respect to the past or
present operations or facilities of MCK or any Subsidiary which would give rise
to a material liability or material corrective or remedial obligation under any
Environmental and Safety Requirements. Neither this Agreement nor the
consummation of the transactions contemplated by this Agreement shall impose any
obligations on MCK or its Subsidiaries or otherwise for site investigation or
cleanup, or notification to or consent of any government agencies or third
parties under any Environmental and Safety Requirements.
5.20. AFFILIATED TRANSACTIONS. No officer, director, employee,
shareholder or Affiliate of MCK or any Subsidiary or any individual related by
blood, marriage or adoption to any such individual or any entity in which any
such Person or individual owns any beneficial interest, is a party to any
agreement, contract, commitment or transaction with MCK or any Subsidiary or has
any material interest in any material property used by MCK or any Subsidiary.
5.21. CUSTOMERS AND SUPPLIERS.
(a) The Disclosure Schedule lists the twenty largest
customers of MCK and its Subsidiaries (on a consolidated basis) for each of the
two most recent fiscal years and sets forth opposite the name of each such
customer the percentage of consolidated net sales attributable to such customer.
The Disclosure Schedule also lists any additional current customers which MCK
anticipates shall be among the twenty largest customers for the current fiscal
year.
(b) No material supplier of MCK or any Subsidiary during
the two most recent fiscal years has indicated that it shall materially modify
or change the existing requirements with respect to, stop or materially decrease
the rate of, supplying materials, products or services to MCK or any Subsidiary,
and no customer listed on the Disclosure Schedule has indicated that it shall
materially modify or change the existing requirements with respect to, stop or
materially decrease the rate of, buying materials, products or services from MCK
or any Subsidiary.
5.22. DISCLOSURE. Neither this Agreement nor any of the exhibits,
schedules, attachments, written statements, documents, certificates or other
items prepared and supplied to any Purchaser by or on behalf of MCK or any
Subsidiary with respect to the transactions contemplated hereby contain any
untrue statement of a material fact or omit a material fact necessary to make
each statement contained herein or therein not misleading; provided that with
respect to the financial projections furnished to the Purchasers by MCK,
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MCK represents and warrants only that such projections were based upon
assumptions reasonably believed by MCK to be reasonable and fair as of the date
the projections were prepared in the context of MCK's history and current and
reasonably foreseeable business conditions. MCK knows of no information or fact
which has or in the foreseeable future will have a Material Adverse Effect which
has not been disclosed to the Purchasers in writing.
SECTION 6
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Each Purchaser hereby severally represents and warrants to MCK that:
6.1. ORGANIZATION, CORPORATE POWER AND LICENSES. Each Purchaser is a
corporation, partnership or limited liability company, as the case may be, duly
organized, validly existing and in `good standing under the laws of the
jurisdiction of its organization and is qualified to do business in every
jurisdiction in which the failure to so qualify has had or would reasonably be
expected to have a material adverse effect on the financial condition, operating
results, assets, operations or business prospects of the Purchasers. Each
Purchaser possesses all requisite power and authority and all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as now conducted and to carry out the transactions
contemplated by this Agreement.
6.2. AUTHORIZATION; NO BREACH. The execution, delivery and performance
of this Agreement, the Amended and Restated Registration Rights Agreement, the
Amended and Restated Stockholders Agreement and all other agreements
contemplated hereby to which a Purchaser is a party have been duly authorized by
each Purchaser. This Agreement, the Amended and Restated Registration Rights
Agreement, the Amended and Restated Stockholders Agreement, and all other
agreements contemplated hereby to which a Purchaser is a party each constitutes
a valid and binding obligation of that Purchaser, enforceable against such
Purchaser in accordance with its terms, subject to the rules and principles of
equity and the rules and principles applicable to bankruptcy and insolvency and
except to the extent that the enforceability of Section 6 of the Amended and
Restated Registration Rights Agreement may be limited by public policy. The
execution and delivery by each Purchaser of this Agreement, the Amended and
Restated Registration Rights Agreement, the Amended and Restated Stockholders
Agreement and all other agreements contemplated hereby to which that Purchaser
is a party, and the fulfillment of and compliance with the respective terms
hereof and thereof by each Purchaser do not and shall not (a) conflict with or
result in a breach of the terms, conditions or provisions of, (b) constitute a
default under, (c) result in the creation of any lien, security interest, charge
or encumbrance upon a Purchaser's capital stock or assets pursuant to, (d) give
any third party the right to modify, terminate or accelerate any obligation
under, (e) result in a violation of or (f) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental
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body or agency pursuant to, the charter, bylaws, agreement of limited
partnership, limited liability company agreement or other organizational
documents of a Purchaser (as appropriate), or any law, statute, rule or
regulation to which a Purchaser is subject, or any agreement, instrument, order,
judgment or decree to which a Purchaser is subject.
6.3. LITIGATION, ETC. There are no actions, suits, proceedings, orders,
investigations or claims pending or threatened against or affecting any
Purchaser (or to the best of any Purchaser's knowledge, pending or threatened
against or affecting any of the officers, directors or employees of any
Purchaser with respect to the businesses or proposed business activities of the
Purchaser), or pending or threatened by any Purchaser against any third party,
at law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality (including without limitation, any
actions suits, proceedings or investigations with respect to the transactions
contemplated by this Agreement) the adverse determination of which would have a
material adverse effect on the ability of such Purchaser to consummate the
transactions contemplated hereby; no Purchaser is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of any Purchaser's knowledge, any governmental investigations or inquiries; and,
to the best of any Purchaser's knowledge, there is not valued basis for any of
the foregoing. No Purchaser is subject to any judgment, order or decree of any
court or other governmental agency, and no purchaser has received any opinion or
memorandum or legal advice from legal counsel to the effect that it is exposed,
from a legal standpoint, to any liability or disadvantage which may be material
to its business.
6.4. BROKERAGE. There are no claims that can be made against MCK for
brokerage commissions, finders' fees or similar compensation in connection with
the transactions contemplated by this Agreement based on any arrangement or
agreement binding upon any Purchaser.
6.5. DISCLOSURE. The general partner(s) of each Purchaser that is a
partnership exercise de facto and de jure control of each Purchaser, and all
general partners, the individuals or entities that control each general partner
and those individuals' residency, and the jurisdiction of registration where the
general partner is a legal entity, are fully and accurately described in the
Purchaser Disclosure Schedule.
6.6. INVESTMENT REPRESENTATIONS. Each Purchaser hereby represents that
it is acquiring the Restricted Securities purchased hereunder or acquired
pursuant hereto for its own account with the present intention of holding such
securities for purposes of investment, and that it has no intention of selling
such securities in a public distribution in violation of any applicable
securities laws; provided that nothing contained herein shall prevent any
Purchaser and subsequent holders of Restricted Securities from transferring such
securities in compliance with the provisions of Section 4 hereof. Each
certificate representing Restricted Securities shall be imprinted with a legend
in substantially the following form:
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"The securities represented by this certificate were
originally issued on July 16, 1998, and have not been
registered under the United States Securities Act of 1933, as
amended. The transfer of the securities represented by this
certificate is subject to the conditions specified in the
Stock Purchase Agreement, dated as of July 16, 1998 and as
amended and modified from time to time, between the issuer
and certain investors, and the issuer reserves the right to
refuse the transfer of such securities until such conditions
have been fulfilled with respect to such transfer. A copy of
such conditions shall be furnished by the issuer to the
holder hereof upon written request and without charge."
SECTION 7
DEFINITIONS
7.1. DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings set forth below:
"$" and "Dollars," unless otherwise specified herein or in any schedule
or exhibit attached hereto, shall mean United States dollars.
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Affiliated Group" means any affiliated group as defined in IRC ss.
1504 that has filed a consolidated return for federal income tax purposes (or
any similar group under state, local or foreign law) for a period during which
any of MCK or any of its Subsidiaries was a member.
"Common Stock" means the Common Stock of MCK.
"Event of Noncompliance" has the meaning set forth in the Articles of
Incorporation.
"Environmental and Safety Requirements" means all federal, state,
provincial, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law, in
each case concerning public health and safety, worker health and safety and
pollution or protection of the environment (including, without limitation, all
those relating to the presence, use, production, generation, handling,
transport, treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, release, threatened release, control or cleanup of any
hazardous or otherwise regulated materials, substances or
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wastes, chemical substances or mixtures, pesticides., pollutants, contaminants,
toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyl, noise or radiation).
"Generally Accepted Accounting Principles" means the conventions, rules
and procedures established by the Financial Accounting Standards Board from time
to time that determine and define accepted accounting practices in the United
States.
"Indebtedness" means at a particular time, without duplication, (i) any
indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or other-wise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied
obligation for "withdrawal liability" to a "multiemployer plan" as such terms
are defined under the United States Employee Retirement Income Security Act of
1974, as amended ("ERISA").
"Intellectual Property Rights" means all (i) United States and Canadian
patents, United States and Canadian patent applications, United States and
Canadian patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered), industrial
property and copyrightable works and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data, databases and documentation
thereof, (vi) trade secrets and other confidential information (including,
without limitation, ideas, formulas, compositions, inventions (whether
patentable or unpatentable and whether or not reduced to practice), know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals, technical
data, copyrightable works, financial and marketing plans and customer and
supplier lists and information), (vii) other intellectual property rights and
(viii) copies and tangible embodiments thereof (in whatever form or medium).
"Investments" as applied to any Person means (i) any direct or indirect
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or
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ownership interest (including partnership interests and joint venture interests)
of any other Person and (ii) any capital contribution by such Person to any
other Person.
"Investor Common Stock" means (i) any Common Stock issued upon
conversion of the Convertible Stock and (ii) any Common Stock issued or issuable
with respect to the Common Stock referred to in clause (i) above by way of stock
dividends or stock splits or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular shares of Investor Common Stock, such shares shall cease to be
Investor Common Stock when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar rule then in
force) or (c) repurchased by MCK or any Subsidiary.
"IRC" means the United States Internal Revenue Code of 1986, as
amended, and any reference to any particular IRC section shall be interpreted to
include any revision of or successor to that section regardless of how numbered
or classified.
"IRS" means the United States Internal Revenue Service.
"Liens" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, any sale of
receivables with recourse against MCK, any Subsidiary or any Affiliate, any
filing or agreement to file a financing statement as debtor under the Uniform
Commercial Code or any similar law, statute, rule or regulation other than to
reflect ownership by a third party of property leased to MCK or any Subsidiaries
under a lease which is not in the nature of a conditional sale or title
retention agreement, or any subordination. arrangement in favor of another
Person (other than any subordination arising in the ordinary course of
business).
"MDI" means Manz Development Inc., an Alberta, Canada corporation.
"MCK Canada" means MCK Telecommunications Inc., an Alberta, Canada
corporation.
"Officer's Certificate" means a certificate signed by the president (or
equivalent officer or partner) of the Person providing the certificate or its
chief financial officer, stating that (i) the officer signing such certificate
has made or has caused to be made such investigations as are reasonably
necessary in order to permit him to verify the accuracy of the information set
forth in such certificate and (ii) to the best of such officer's knowledge, such
certificate does not misstate any material fact and does not omit to state any
fact necessary to make the certificate not misleading.
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"Permitted Liens" means:
(a) liens with respect to taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings and for which
appropriate reserves have been established in accordance with generally accepted
accounting principles, consistently applied;
(b) deposits or pledges made in connection with, or to secure
payment of, utilities or similar services, workers' compensation, unemployment
insurance, old age pensions or other social security obligations;
(c) purchase money security interests in any property acquired
by MCK or any Subsidiary to the extent permitted by this Agreement;
(d) interests or title of a lessor under any lease not
prohibited by this Agreement;
(e) mechanics', materialmen's or contractors' liens or
encumbrances or any similar lien or restriction for amounts not yet due and
payable or which are being contested in good faith by appropriate proceedings
and for which appropriate reserves have been established in accordance with
generally accepted accounting principles, consistently applied;
(f) easements, rights-of-way, restrictions and other similar
charges and encumbrances not interfering with the ordinary conduct of the
business of MCK and its Subsidiaries or detracting in any material respect from
the value of the assets of MCK and its Subsidiaries; and
(g) liens outstanding on the date hereof which secure
Indebtedness and which are described in the Disclosure Schedule.
"Person" includes MCK and any subsidiary of MCK, and also means, where
applicable, an individual, a partnership, a corporation, a limited liability
company, an association, a joint stock company, a joint venture, an
unincorporated organization and a governmental entity or any department, agency
or political subdivision thereof
"Restricted Securities" means (i) the Series C Redeemable Stock and
Series D Convertible Stock issued hereunder and (ii) any securities issued with
respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) been distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or become eligible for sale pursuant to Rule 144(k) (or any
similar provision then in force) under the Securities Act or
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(c) been otherwise transferred and new certificates for them not bearing the
Securities Act legend set forth in Section 6.6 have been delivered by MCK in
accordance with Section 4.2. Whenever any particular securities cease to be
Restricted Securities, the holder thereof shall be entitled to receive from MCK,
without expense, new securities of like tenor not bearing a Securities Act
legend of the character set forth in Section 6.6.
"Securities Act" means the United States Securities Act of 1933, as
amended, or any similar federal law then in force.
"Securities and Exchange Commission" means the United States Securities
and Exchange Commission and any governmental body or agency succeeding to the
functions thereof.
"Securities Exchange Act" means the United States Securities Exchange
Act of 1934, as amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Tax" or "Taxes" means federal, state, county, local, foreign or other
income, gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including any
amendment thereof
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
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SECTION 8
INDEMNIFICATION
8.1. INDEMNIFICATION BY THE SHAREHOLDERS. MCK (the "Indemnifying
Party") shall indemnify and hold harmless the Purchasers and their respective
officers, directors, employees, successors, and assigns in respect of any and
all claims, actions, suits or other proceedings and any and all losses, costs,
expenses, liabilities, fines, penalties, interest and damages, whether or not
arising out of any claim, action, suit or other proceeding (and including
reasonable counsel and accountants' fees and expenses and all other reasonable
costs and expenses of investigation, defense or settlement of claims and amounts
paid in settlement) incurred by, imposed on or borne by the Purchasers or MCK
("Damages") resulting from the breach of any of the representations, warranties
or covenants made by the Indemnifying Parties in this Agreement or in any other
document or instrument delivered in connection herewith.
8.2. CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for
indemnification hereunder, the Purchasers shall promptly (and in no event more
than 120 days after the later to occur of incurring the Damages or discovering
the facts giving rise to the claim) notify the Indemnifying Party of the claim
and, when known, the facts constituting the basis for such claim; provided that
the Purchasers' failure to give such notice shall not affect any rights or
remedies of the Purchasers hereunder with respect to indemnification for Damages
except to the extent that the Indemnifying Party is materially prejudiced
thereby. In the event of any claim for indemnification hereunder resulting from
or in connection with any claim or legal proceedings by a third party, the
notice to the Indemnifying Party shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The Purchasers shall
not settle or compromise any claim by a third party for which they are entitled
to indemnification hereunder, without the prior written consent of the
Indemnifying Party (which shall not be unreasonably withheld) unless suit shall
have been instituted against them and the Indemnifying Party shall not have
taken control of such suit after notification thereof as provided in Section 8.3
of this Agreement. Any party who is required to hold harmless, indemnify,
compensate or reimburse any Purchaser pursuant to this Section 8 with respect to
any Damages also shall be liable to such Purchaser for interest on the amount of
such Damages (for the period commencing as of the date on which such Damages
were incurred and ending on the date on which the liability of such party to
such Investor is fully satisfied by such party) at a floating rate equal to the
sum of (a) the rate of interest publicly announced by Bank of America, N.T. &
S.A., or any successor thereto, from time to time as its prime, base or
reference rate plus (b) four percent (4%).
8.3. DEFENSE BY SHAREHOLDERS. In connection with any claim giving rise
to indemnity hereunder or resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party, at its sole cost and expense may, upon written notice to the Purchasers,
assume the defense of any such claim
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or legal proceeding if they acknowledge to the Purchasers in writing their
obligations to indemnify the Purchasers with respect to all elements of such
claim, (provided that such acknowledgment shall only be an acknowledgment of the
terms and conditions of this Section 8 or an acknowledgment of the obligation to
indemnify if liability is found following all appeals, and such acknowledgment
is not an admission of liability in any way) and thereafter diligently conduct
the defense thereof. The Purchasers shall be entitled to participate in (but not
control) the defense of any such action with their counsel and at their own
expense. If the Indemnifying Party does not assume or fail to conduct in a
diligent manner the defense of any such claim or litigation resulting therefrom,
(a) the Purchasers may defend against such claim or litigation, in such manner
as they may deem appropriate, including, but not limited to, settling such claim
or litigation, after giving notice of the same to the Indemnifying Party, on
such terms as the Purchasers may deem appropriate, and (b) the Indemnifying
Party shall be entitled to participate in (but not control) the defense of such
action, with their counsel and at their own expense. If the Indemnifying Party
thereafter seek to question the manner in which the Purchasers defended such
third party claim or the amount or nature of any such settlement, the
Indemnifying Party shall have the burden to prove by a preponderance of the
evidence that the Purchasers did not defend or settle such third party claim in
a reasonably prudent manner. Each party agrees to cooperate fully with the other
such cooperation to include, without limitation, attendance at depositions and
the provision of relevant documents as may be reasonably requested by the
Indemnifying Party, provided that the Indemnifying Party will hold the
Purchasers harmless from all of their out of pocket expenses, incurred in
connection with such cooperation by the Purchasers.
8.4. LIMITS. Notwithstanding any other provision in this Agreement or
any rule of law or equity:
(a) A Purchaser shall not be entitled to maintain a claim
against the Indemnifying Party in respect of any liability, loss, costs, claims
or damages of any nature suffered or incurred by a Purchaser as a result of a
Purchaser's own gross negligence or willful misconduct, or that of its
employees, agents or contractors, or as a result of any occurrence, matter or
thing the occurrence, existence or non-disclosure of which constitutes a breach
of failure of any representation, warranty, covenant or other obligation of any
Purchaser hereunder;
(b) except in the case of a matter involving fraud on the part
of the Indemnifying Party, a Purchaser shall not be entitled to initiate,
maintain or enforce any claim against the Indemnifying Party in respect of any
matter related to this Agreement or the subject matter hereof, whether asserted
under this Agreement or otherwise, unless the Purchaser shall, in the case of a
claim relating to the subject matter of Section 5.10 hereof, within fifty-four
months of the Closing, or, in all other cases, within two years of the Closing
have given the Indemnifying Party notice in writing of such claim, including
particulars of the basis therefor; provided, however, that nothing set forth in
this Section 8.4(b) shall limit claims relating to the subject matter of Section
5.2 or Section 5.4 hereof,
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(c) A Purchaser shall not be entitled to recover any indirect,
consequential or special damages from the Indemnifying Party;
(d) Each Purchaser shall be obligated to use reasonable
efforts to mitigate any liability, loss, costs, claims or damages sustained by
it in connection with any matter for which the Indemnifying Party may have
liability to it;
(e) The collective liability to the Purchasers for matters
related to this Agreement or the subject matter hereof shall be limited to an
amount equal to $5,000,000, and the Indemnifying Party shall under no
circumstances be liable for any amount, whether alone or in aggregate, in excess
of such amount.
SECTION 9
MISCELLANEOUS
9.1. EXPENSES. MCK shall pay, and hold each Purchaser harmless against
liability for the payment of, (a) the fees and expenses (up to a maximum of
$20,000) of counsel to the Purchasers arising in connection with the negotiation
and execution of this Agreement and the consummation of the transactions
contemplated hereby (which fees and expenses shall be payable at the Closing),
(b) the reasonable fees and expenses incurred with respect to any amendments or
waivers (whether or not the same become effective) under or in respect of this
Agreement, the agreements contemplated hereby or the Articles of Incorporation
(including, without limitation, in connection with any proposed merger, sale,
recapitalization or public offering of securities), (c) stamp and other taxes
which may be payable in respect of the execution and delivery of this Agreement
or the issuance, delivery or acquisition of any shares of the Purchased Stock,
(d) the reasonable fees and expenses incurred with respect to the enforcement of
the rights granted under this Agreement, the agreements contemplated hereby and
the Articles of Incorporation and (e) the reasonable fees and expenses incurred
by each such Person in any filing with any governmental agency with respect to
its investment in MCK or in any other filing with any governmental agency with
respect to MCK which mentions such Person.
9.2. REMEDIES. Each holder of Purchased Stock shall have all rights and
remedies set forth in this Agreement, the Articles of Incorporation and all
rights and remedies which such holders have been granted at any time under any
other agreement or contract and all of the rights which such holders have under
any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law.
9.3. CONSENT TO AMENDMENTS. Except as otherwise expressly provided
herein, MCK may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if such party has obtained the
written consent of a majority in interest of the Purchasers. No other course of
dealing between MCK and the holder of any
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Purchased Stock or any delay in exercising any rights hereunder or under the
Articles of Incorporation shall operate as a waiver of any rights of any such
holders. This Agreement may only be amended by a written instrument duly
executed and delivered by all of the parties hereto.
9.4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by any Purchaser or on its behalf.
9.5. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for any Purchaser's benefit as a
purchaser or holder of Purchased Stock are also for the benefit of, and
enforceable by, any subsequent holder of such Purchased Stock.
9.6. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
9.7. COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts (including by means of telecopied signature pages), any one
of which need not contain the signatures of more than one party, but all such
counterparts taken together shall constitute one and the same Agreement.
9.8. DESCRIPTIVE HEADINGS, INTERPRETATION. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
9.9. GOVERNMENTAL LAW. All issues and questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the Commonwealth of Massachusetts, without giving effect to
any choice of law or conflict of law rules or provisions (whether of the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Massachusetts.
9.10. NOTICES. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S.
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<PAGE> 34
Postal Service or other applicable postal service, if delivered by first class
mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business
day after the business day of deposit with Federal Express or similar nationally
recognized overnight courier, freight prepaid or (d) one business day after the
business day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed as
follows, or at such other address as a party may designate by ten (10) days'
advance written notice to the other parties to this Agreement pursuant to the
provisions of this Section 9.11:
(i) if to a Purchaser, to such Purchaser's
address set forth on the Schedule of Purchasers, with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Facsimile: (617) 526-6000
Attention: Paul P. Brountas, Esq.
(ii) if to MCK to:
MCK Communications Inc.
313 Washington Street
Newton, MA 02158
Facsimile: (617) 454-6101
Attention: Paul K. Zurlo
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Facsimile: (617) 570-8150
Attention: John J. Egan, Esq.
9.11. NO STRICT CONSTRUCTION. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event that an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 35
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
MCK COMMUNICATIONS INC.
a Nevada corporation
By /s/ Paul Zurlo
--------------------------------
Name:
Title:
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<PAGE> 36
LAZARD TECHNOLOGY PARTNERS LP
By: /s/ Russell Planitzer
----------------------------------
Name: Russell Planitzer
Title: Managing Partner
LAZARD TECHNOLOGY PARTNERS LLC
By: /s/ Russell Planitzer
----------------------------------
Name: Russell Planitzer
Title: Managing Partner
LAZARD TECHNOLOGY INVESTORS (198) LLC
By: /s/ Russell Planitzer
----------------------------------
Name: Russell Planitzer
Title: Managing Partner
FSC CORP.
By: /s/ Signature Illegible
----------------------------------
Name:
Title: Vice President
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<PAGE> 37
THE YARMOUTH TRUST
By: /s/ Robert Morrissey
----------------------------------
Robert Morrissey
Trustee of The Yarmouth Trust
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<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF MCK COMMUNICATIONS, INC.
I, the undersigned, for the purposes of incorporating and organizing
a corporation under the General Corporation Law of the State of Delaware do
execute this Certificate of Incorporation as follows:
ARTICLE I
NAME
The name of the corporation is MCK Communications, Inc. (the
"corporation").
ARTICLE II
REGISTERED OFFICE
The registered office of the corporation in the State of Delaware is
1209 Orange Street, in the City of Wilmington, in the County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
PURPOSES
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
This corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this corporation shall have authority to issue is
Twenty-Five Million (25,000,000) with a par value of $0.001 each, and the total
number of shares of Preferred stock this Corporation shall have authority to
issue is Twenty-One Million (21,000,000) with a par value of $0.001 each. The
Preferred Stock may be issued from time to time in one or more series. The Board
of Directors is authorized to fix the number of shares of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges,
and restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock and, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of shares
constituting any series of Preferred Stock, to increase or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
<PAGE> 2
The designated series of Preferred Stock shall be designated Series A
Redeemable Preferred Stock ("Series A Preferred"), consisting of Fourteen
Million Nine Hundred Eighty-Five Thousand Seven Hundred Thirty-Three
(14,985,733) shares; Series B Convertible Preferred Stock ("Series B
Preferred"), consisting of Three Million Nine Hundred Sixty-Eight Thousand Three
Hundred Eighty-Four (3,968,384) shares; Series C Redeemable Preferred Stock
("Series C Preferred"), consisting of Twenty-Eight Thousand Five Hundred Five
(28,505) shares; and Series D Convertible Preferred Stock ("Series D
Preferred"), consisting of One Million Six Hundred Seventy-Two Thousand Three
Hundred Fifty-Four (1,672,354) shares; and Three Hundred Forty-Five Thousand
Twenty-Four (345,024) shares of Preferred Stock shall be undesignated Preferred
Stock. The Series A Preferred, Series B Preferred, Series C Preferred and Series
D Preferred are sometimes referred to herein collectively as the "Preferred
Stock."
The Corporation shall from time to time in accordance with the laws of
the State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Series B
Preferred and the Series D Preferred.
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective classes of the shares of capital stock or the
holders thereof are as follows:
SECTION 1. DIVIDENDS.
SECTION 1.1 GENERAL OBLIGATION. When and as declared by the
Corporation's Board of Directors, the Corporation shall pay
preferential dividends in cash to the holders of the Preferred Stock as
provided in this Section 1.
(a) Dividends on each share of the Series A Preferred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series A Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series A Original Issue Date to and including
the first to occur of the date on which the Series A
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the Corporation or the redemption of
such share by the Corporation or the date on which such share
is otherwise acquired by the Corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Series A Junior Securities.
(b) Dividends on each share of the Series B Preferred
shall accrue on a daily basis at the rate of eight percent (8
%) per annum of the sum of the Series B Liquidation Value plus
all accumulated and unpaid
2
<PAGE> 3
dividends thereon, from and including the Series B Original
Issue Date to and including the first to occur of the date on
which the Series B Liquidation Value of such share (plus all
accrued and unpaid dividends thereon) is paid to the holder
thereof in connection with the liquidation of the Corporation
or the redemption of such share by the Corporation or the date
on which such share is otherwise acquired by the corporation.
Such dividends shall accrue whether or not they have been
declared and whether or not there are profits, surplus or
other funds of the corporation legally available for the
payment of dividends, and such dividends shall be cumulative
such that all accrued and unpaid dividends shall be fully paid
or declared with funds irrevocably set apart for payment
before any dividends, distributions, redemptions or other
payments may be made with respect to any Common Stock.
(c) Dividends on each share of the Series C Preferred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series C Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series C Original Issue Date to and including
the first to occur of the date on which the Series C
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the corporation or the redemption of
such share by the corporation or the date on which such share
is otherwise acquired by the corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Series C Junior Securities.
(d) Dividends on each share of the Series D Preferred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series D Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series D original Issue Date to and including
the first to occur of the date on which the Series D
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the corporation or the redemption of
such share by the corporation or the date on which such share
is otherwise acquired by the corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Common Stock.
3
<PAGE> 4
(e) No dividends or other distributions shall be made
with respect to the Common Stock in any fiscal year, other
than dividends payable solely in Common Stock, until the
dividends set forth in Sections 1.1 (a), (b), (c) and (d)
above have been declared and paid.
SECTION 1.2 DIVIDEND REFERENCE DATES. To the extent not paid
on June 28 of each year, beginning June 28, 1997 with respect to the
Series A Preferred and Series B Preferred, and June 28, 1999 with
respect to the Series C Preferred and Series D Preferred (the "Dividend
Reference Dates"), all dividends which have accrued on each share of
Preferred Stock outstanding during the twelve-month period ending upon
each such Dividend Reference Date shall be accumulated and shall remain
accumulated dividends with respect to such share of Preferred Stock
until paid to the holder thereof.
SECTION 1.3 DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except
as otherwise provided herein, if at any time the corporation pays less
than the total amount of dividends then accrued with respect to any one
series of the Preferred Stock, such payment shall be distributed pro
rata among the holders of such series based upon the aggregate
Liquidation Value (plus all accrued and unpaid dividends) of the shares
of such series held by each such holder.
SECTION 2. LIQUIDATION.
SECTION 2.1 Upon any liquidation, dissolution or winding up of
the corporation (whether voluntary or involuntary), each holder of
Series C Preferred shall be entitled to be paid, before any
distribution or payment is made upon any Series C Junior Securities, an
amount in cash equal to the aggregate Series C Liquidation Value of all
shares of Series C Preferred held by such holder (plus all accrued and
unpaid dividends thereon), and the holders of Series C Preferred shall
not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the corporation, the corporation's assets
to be distributed among the holders of the Series C Preferred are
insufficient to permit payment to such holders of the aggregate amount
which they are entitled to be paid under this Section 2, then the
entire assets available to be distributed to the corporation's
stockholders shall be distributed pro rata among the holders of Series
C Preferred based upon the aggregate Series C Liquidation Value (plus
all accrued and unpaid dividends) of the shares of Series C Preferred
held by each such holder. Not less than thirty (30) days prior to the
payment date stated therein, the corporation shall mail written notice
of any such liquidation, dissolution or winding up to each record
holder of Series C Preferred, setting forth in reasonable detail the
amount of assets to be paid with respect to each share of Series C
Preferred in connection with such liquidation, dissolution or winding
up.
SECTION 2.2 After payment has been made to the holders of the
Series C Preferred of the full amounts to which they shall be entitled
as set forth in Section 2.1, each holder of Series A Preferred shall be
paid, prior and in preference to any distribution of any of the assets
of the corporation to the holders of Series A Junior
4
<PAGE> 5
Securities, an amount in cash equal to the Series A Liquidation Value
(plus all accrued and unpaid dividends thereon) of all shares of Series
A Preferred held by such holder. If upon any such liquidation,
dissolution or winding up of the corporation, the corporation's assets
to be distributed among the holders of the Series A Preferred are
insufficient to permit payment to such holders of the aggregate amount
which they are entitled to be paid under this Section 2.2, then the
entire assets available to be distributed to the corporation's
stockholders (after payment to the holders of Series C Preferred) shall
be distributed pro rata among the holders of Series A Preferred based
upon the aggregate Series A Liquidation Value (plus all accrued and
unpaid dividends) of the shares of Series A Preferred held by each such
holder. Not less than thirty (30) days prior to the payment date stated
therein, the corporation shall mail written notice of any such
liquidation, dissolution or winding up to each record holder of Series
A Preferred, setting forth in reasonable detail the amount of assets to
be paid with respect to each share of Series A Preferred in connection
with such liquidation, dissolution or winding up.
SECTION 2.3 After payment has been made to the holders of the
Series C Preferred and Series A Preferred of the full amounts to which
they shall be entitled as set forth in Sections 2.1 and 2.2, each
holder of Series B Preferred and Series D Preferred shall be paid,
prior and in preference to any distribution of any of the assets of the
corporation to the holders of the Common Stock, an amount in cash equal
to the Series B Liquidation Value (plus all accrued and unpaid
dividends thereon) of all shares of Series B Preferred held by such
holder or the Series D Liquidation Value (plus all accrued and unpaid
dividends thereon) of all shares of Series D Preferred held by such
holder, as the case may be. If upon any such liquidation, dissolution
or winding up of the corporation, the corporation's assets to be
distributed among the holders of the Series B Preferred and Series D
Preferred are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid under this Section
2.3, then the entire assets available to be distributed to the
corporation's stockholders (after payment on the Series A Preferred and
Series C Preferred) shall be distributed pro rata among the holders of
Series B Preferred and Series D Preferred based upon the aggregate
Series B Liquidation Value or Series D Liquidation Value (plus all
accrued and unpaid dividends) of the shares of Series B Preferred or
Series D Preferred held by each such holder. Not less than thirty (30)
days prior to the payment date stated therein, the corporation shall
mail written notice of any such liquidation, dissolution or winding up
to each record holder of Series B Preferred and Series D Preferred,
setting forth in reasonable detail the amount of assets to be paid with
respect to each share of Series B Preferred and Series D Preferred in
connection with such liquidation, dissolution or winding up.
SECTION 2.4 After payment has been made to the holders of
Preferred Stock of the full amounts to which they shall be entitled as
set forth in Sections 2.1, 2.2 and 2.3 above, then the entire remaining
assets and funds of the corporation legally available for distribution,
if any, shall be distributed ratably among the holders of Common Stock
in a manner such that the amount distributed to each such holder shall
equal the amount obtained by multiplying the entire remaining
5
<PAGE> 6
assets and funds of the corporation legally available for distribution
hereunder by a fraction, the numerator of which shall be the number of
shares of Common Stock then held by such holder and the denominator of
which shall be the total number of shares of Common Stock then
outstanding.
SECTION 2.5 Neither the consolidation or merger of the
corporation into or with any other Person (whether or not the
corporation is the surviving entity), nor the sale or transfer by the
corporation of all or any part of its assets, nor the reduction of the
capital stock of the corporation nor any other form of recapitalization
or reorganization affecting the corporation shall be deemed to be a
liquidation, dissolution or winding up of the corporation within the
meaning of this Section 2.
SECTION 3. PRIORITY OF PREFERRED ON DIVIDENDS AND REDEMPTION.
SECTION 3.1 So long as any shares of Series C Preferred remain
outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of Series C Preferred, the
corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire, directly or indirectly, any Series C
Junior Securities, nor shall the corporation directly or indirectly pay
or declare any dividend or make any distribution upon any Series C
Junior Securities, except, in each case, as otherwise expressly
permitted pursuant to the terms of the Stockholders Agreement.
SECTION 3.2 So long as any shares of Series A Preferred remain
outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of Series A Preferred, the
corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire, directly or indirectly, any Series A
Junior Securities, nor shall the corporation directly or indirectly pay
or declare any dividend or make any distribution upon any Series A
Junior Securities, except, in each case, as otherwise expressly
permitted pursuant to the terms of the Stockholders Agreement.
SECTION 3.3 So long as any share of Series B Preferred or
Series D Preferred remains outstanding, without the prior written
consent of the holders of a majority of the outstanding shares of
Convertible Preferred, the corporation shall not, nor shall it permit
any Subsidiary to, redeem, purchase or otherwise acquire, directly or
indirectly, any Common Stock, nor shall the corporation directly or
indirectly pay or declare any dividend or make any distribution upon
the Common Stock, except, in each case, as otherwise expressly
permitted pursuant to the terms of the Stockholders Agreement.
SECTION 4. REDEMPTIONS.
SECTION 4.1 SCHEDULED REDEMPTIONS.
(a) Scheduled Redemption of Series A Preferred and
Series C Preferred. The corporation shall redeem the
corresponding percentage
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<PAGE> 7
specified below of the outstanding shares of Series A
Preferred and Series C Preferred on June 28 of each year,
commencing in 2001 and ending in 2003 (the "Scheduled
Redemption Dates"), at a price per share equal to the
Liquidation Value of such share plus all accrued and unpaid
dividends thereon:
-----------------------------------------------------------------------
Scheduled Redemption Date Specified Percentage
-----------------------------------------------------------------------
June 28, 2001 33 1/3%
-----------------------------------------------------------------------
June 28, 2002 50%
-----------------------------------------------------------------------
June 28, 2003 100%
-----------------------------------------------------------------------
(b) OPTIONAL REDEMPTION OF SERIES B PREFERRED AND
SERIES D PREFERRED. At any time on or after the seventh
anniversary of the Series B Original Issue Date the
corporation shall, at the request of holders of at least a
majority of the then outstanding shares of Convertible
Preferred, redeem all outstanding shares of Convertible
Preferred at a price per share equal to the Liquidation Value
of such share plus all accrued and unpaid dividends thereon.
Holders of Convertible Preferred requesting redemption
hereunder shall notify the corporation at least thirty (30)
days prior to the date on which such redemption shall take
place. Such notice (the "Convertible Redemption Notice") shall
specify the date of the requested redemption. The corporation
shall reply to the Convertible Redemption Notice within
fifteen (15) days by notifying the holder or holders of
Convertible Preferred requesting redemption hereunder the
number of shares which the corporation may lawfully redeem on
the date specified for redemption.
SECTION 4.2 SPECIAL REDEMPTIONS. In the event of a Change in
Ownership or a Fundamental Change, the corporation shall, upon the
consummation of such transaction, redeem the outstanding shares of
Series C Preferred at a price per share equal to the Series C
Liquidation Value plus all accrued and unpaid dividends thereon.
Immediately following such redemption of the outstanding shares of
Series C Preferred, the corporation shall redeem the outstanding shares
of Series A Preferred at a price per share equal to the Series A
Liquidation Value plus all declared but unpaid dividends thereon.
Immediately following the redemption of the outstanding shares of
Series C Preferred and Series A Preferred in connection with such
Change in Control or Fundamental Change, the corporation shall redeem
the outstanding shares of Convertible Preferred at a price per share
equal to the Liquidation Value of such share plus all declared but
unpaid dividends thereon; provide however, that the holders of
Convertible Preferred may elect to convert such shares into shares of
Common Stock in accordance with Section 5 hereof at any time prior to
the closing of such Change in Control or Fundamental Change.
SECTION 4.3 REDEMPTION WITH PROCEEDS OF PUBLIC OFFERING. Upon
the election of the holders of a majority of the outstanding shares of
Series C Preferred,
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<PAGE> 8
the corporation shall apply the net cash proceeds from any Public
Offering (after deduction of all discounts, underwriters, commissions
and other reasonable expenses) to redeem shares of Series C Preferred
at a price per share equal to the Series C Liquidation Value thereof
plus all accrued and unpaid dividends thereon. Such redemption shall
take place on a date fixed by the holders of a majority of the
outstanding shares of Series C Preferred, which date shall be not more
than ten (10) days after the corporation's receipt of such proceeds.
Redemptions of shares of Series C Preferred pursuant to this paragraph
shall not relieve the corporation of its obligation to redeem
outstanding shares of Series C Preferred on the Scheduled Redemption
Dates or pursuant to Section 4.2 above. Immediately following such
redemption of the outstanding shares of Series C Preferred in
connection with such Public Offering, upon the election of the holders
of a majority of the outstanding shares of Series A Preferred, the
corporation shall apply the remaining net cash proceeds from any Public
Offering (after deduction of all discounts, underwriters, commissions,
other reasonable expenses and the redemption of Series C Preferred, if
any) to redeem shares of Series A Preferred at a price per share equal
to the Series A Liquidation Value thereof plus all accrued and unpaid
dividends thereon. Such redemption shall take place on a date fixed by
the holders of a majority of the outstanding shares of Series A
Preferred, which date shall be not more than ten (10) days after the
redemption of the Series C Preferred above. Redemptions of shares of
Series A Preferred pursuant to this paragraph shall not relieve the
corporation of its obligation to redeem outstanding shares of Series A
Preferred on the Scheduled Redemption Dates or pursuant to Section 4.2
above.
SECTION 4.4 REDEMPTION PAYMENTS. For each share of Preferred
Stock which is to be redeemed hereunder, the corporation shall be
obligated on the Redemption Date to pay to the holder thereof (upon
surrender by such holder at the corporation's principal office of the
certificate representing such share) an amount in immediately available
funds equal to the Liquidation Value of such share (plus all accrued
and unpaid dividends thereon). If the funds of the corporation legally
available for redemption of shares of Series C Preferred on any
Redemption Date are insufficient to redeem the total number of shares
of Series C Preferred to be redeemed on such date, those funds which
are legally available shall be used to redeem the maximum possible
number of shares of Series C Preferred pro rata among the holders of
Series C Preferred to be redeemed based upon the aggregate number of
shares of Series C Preferred held by each such holder in accordance
with Section 4.7 below. At any time thereafter when additional funds of
the corporation are legally available for the redemption of shares of
Series C Preferred, such funds shall immediately be used to redeem the
balance of the shares of Series C Preferred which the corporation has
become obligated to redeem on any Redemption Date but which it has not
so redeemed. Provided that the corporation has fully satisfied its
obligation to redeem shares of Series C Preferred hereunder, at any
time thereafter, when additional funds of the corporation are legally
available for the redemption of shares of Series A Preferred, such
funds shall immediately be used to redeem shares of Series A Preferred
which the corporation has become obligated to redeem on any Redemption
Date but which it has not so redeemed. If the funds of the corporation
legally available for redemption of shares of Series A Preferred
8
<PAGE> 9
are insufficient to redeem the total number of shares of Series A
Preferred to be redeemed on any date, those funds which are legally
available shall be used to redeem the maximum possible number of shares
of Series A Preferred pro rata among the holders of Series A Preferred
to be redeemed based upon the aggregate number of shares of Series A
Preferred held by each such holder in accordance with Section 4.7
below. Provided that the corporation has fully satisfied its obligation
to redeem shares of Series C Preferred and Series A Preferred
hereunder, at any time thereafter, when additional funds of the
corporation are legally available for redemption of shares of Series B
Preferred and Series D Preferred, such funds shall immediately be used
to redeem shares of Series B Preferred and Series D Preferred which the
corporation has become obligated to redeem on any Redemption Date but
which it has not redeemed. If the funds of the corporation legally
available for redemption of shares of Series B Preferred and Series D
Preferred are insufficient to redeem the total number of shares of
Series B Preferred and Series D Preferred to be redeemed on any date,
then, subject to the foregoing, those funds which are legally available
shall be used to redeem the maximum possible number of shares of Series
B Preferred and Series D Preferred pro rata among the holders of Series
B Preferred and Series D Preferred based on the number of shares of
Series B Preferred and Series D Preferred held by each such holder.
SECTION 4.5 REDEMPTION OF SERIES C PREFERRED AND SERIES A
PREFERRED BY THE CORPORATION. Notwithstanding the foregoing, the
corporation may at any time elect to redeem outstanding shares of
Series C Preferred by paying to the holders of such shares the Series C
Liquidation value plus all accrued but unpaid dividends, provided that
the corporation complies with the notice requirement set forth in
Section 4.6 hereof. Provided that all of the outstanding Series C
Preferred have been redeemed, the corporation may also at any time
elect to redeem outstanding shares of Series A Preferred by paying to
the holders of such shares the Series A Liquidation value plus all
accrued but unpaid dividends, provided that the corporation complies
with the notice requirement set forth in Section 4.6 hereof.
SECTION 4.6 NOTICE. Except as otherwise provided herein, the
corporation shall mail written notice of (a) a potential Change in
Ownership, Fundamental Change or Public Offering and (b) each
redemption of any Preferred Stock to each record holder of Preferred
Stock, not more than sixty (60) nor less than thirty (30) days prior to
(x) in the case of an event referred to in (a) above, the date of
closing of such event and (y) in the case of a redemption referred to
in (b) above, the date on which such redemption is to be made. In case
fewer than the total number of shares represented by any certificate
are redeemed, a new certificate representing the number of unredeemed
shares shall be issued to the holder thereof without cost to such
holder within five (5) business days after surrender of the certificate
representing the redeemed shares.
SECTION 4.7 DETERMINATION OF THE NUMBER OF EACH HOLDER'S
SHARES TO BE REDEEMED. The number of shares of any series of Preferred
Stock to be redeemed from each holder thereof in redemptions hereunder
shall be the number of shares determined by multiplying the total
number of shares of such series of Preferred
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Stock to be redeemed by a fraction, the numerator of which shall be the
total number of shares of such series of Preferred Stock then held by
such holder and the denominator of which shall be the total number of
shares of such series of Preferred Stock then outstanding.
SECTION 4.8 DIVIDENDS AFTER REDEMPTION DATE. No share of
Preferred Stock shall be entitled to any dividends accruing after the
date on which the respective Liquidation Value of such share (plus all
accrued and unpaid dividends thereon) is paid to the holder of such
share. On such date, all rights of the holder of such share shall
cease, and such share shall no longer be deemed to be issued or
outstanding.
SECTION 4.9 REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares
of Preferred Stock which are redeemed or otherwise acquired by the
corporation shall be canceled and retired to authorized but unissued
shares and shall not be reissued, sold or transferred.
SECTION 4.10 OTHER REDEMPTIONS OR ACQUISITION. The corporation
shall not, nor shall it permit any Subsidiary to, redeem or otherwise
acquire any shares of Preferred Stock, except as expressly authorized
herein.
SECTION 5. CONVERSION OF SERIES B PREFERRED AND SERIES D PREFERRED. The
holders of Series B Preferred and Series D Preferred shall have conversion
rights as follows (the "Conversion Rights"). The Conversion Rights shall be the
same in all respects for both the Series B Preferred and the Series D Preferred
except with respect to the Issue Date, Conversion Price and liquidation value of
such shares. The Series B Preferred and Series D Preferred are sometimes
referred to herein collectively as the "Convertible Preferred".
(a) RIGHT TO CONVERT. Each share of Series B
Preferred and Series D Preferred shall be convertible, at the
option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or
any transfer agent for the Convertible Preferred, into such
number of fully paid and nonassessable shares of Common Stock
as is determined by dividing (i) in the case of the Series B
Preferred, $0.419986 per share and, in the case of the Series
D Preferred, the Series D Liquidation Value by (ii) the
Conversion Price of such Convertible Preferred, each
determined as hereinafter provided, in effect at the time of
conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series B Preferred
(the "Series B Conversion Price") shall initially be $0.419986
per share of Common Stock and shall be subject to adjustment
as hereinafter provided. The price at which shares of Common
Stock shall be deliverable upon conversion of shares of Series
D Preferred (the "Series D Conversion Price") shall initially
be $1.494899 per share of Common Stock and shall be subject to
adjustment as hereinafter provided.
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Upon conversion, all accrued and unpaid dividends on the shares of
Convertible Preferred so converted shall be paid either in cash or in shares of
Common Stock of the corporation, at the election of the corporation, wherein the
shares of Common Stock shall be valued at the fair market value at the time of
such conversion, as determined in good faith by the Board of Directors of the
corporation.
(b) AUTOMATIC CONVERSION. Each share of Convertible
Preferred shall automatically be converted into shares of
Common Stock at the then effective Conversion Price of such
share, upon the earlier to occur of (i) the closing of an
underwritten Public Offering at an offering price to the
public of at least $10.00 per share (as adjusted for stock
splits, stock dividends, reclassifications and like events)
and in which the corporation receives aggregate gross proceeds
of not less than $15,000,000 (a "Qualifying IPO"), or (ii)
upon the receipt by the corporation of the affirmative vote at
a duly noticed shareholders meeting or pursuant to a duly
solicited written consent of the holders of more than
sixty-six and two-thirds percent (66 2/3%) of the then
outstanding shares of Convertible Preferred in favor of the
conversion of all of the shares of Convertible Preferred into
Common Stock.. In the event of the automatic conversion of the
Convertible Preferred upon a public offering as set forth in
subsection (i) hereof, the Person(s) entitled to receive the
Common Stock issuable upon such conversion of Convertible
Preferred shall not be deemed to have converted such
Convertible Preferred until immediately prior to the closing
of such transaction.
(c) MECHANICS OF CONVERSION. No fractional shares of
Common Stock shall be issued upon conversion of Convertible
Preferred. In lieu of any fractional shares to which the
holder would otherwise be entitled, the corporation shall pay
cash equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Convertible Preferred
shall be entitled to convert the same into full shares of
Common Stock and to receive certificates therefor, he shall
surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer
agent for the Convertible Preferred, and shall give written
notice to the corporation at such office that he elects to
convert the same; PROVIDED, HOWEVER, that in the event of an
automatic conversion pursuant to Section 5(b), the outstanding
shares of Convertible Preferred shall be converted
automatically without any further action by the holders of
such shares and whether or not the certificates representing
such shares are surrendered to the corporation or its transfer
agent; PROVIDED, further, that the corporation shall not be
obligated to issue certificates evidencing the shares of
Common Stock issuable upon such automatic conversion unless
the certificates evidencing such shares of Convertible
Preferred are either delivered to the corporation or its
transfer agent as provided above, or the holder notifies the
corporation or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement
satisfactory to the corporation to indemnify the corporation
from any loss incurred by it in connection with
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<PAGE> 12
such certificates. The corporation shall, as soon as
practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and
deliver at such office to such holder of Convertible
Preferred, a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as
aforesaid and a check payable to the holder in the amount of
any cash amounts payable as the result of a conversion into
fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of
Convertible Preferred to be converted, or in the case of
automatic conversion on the date of closing of the offering or
the effective date of such written consent, and the person or
persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of
Common Stock on such date.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTIVE
ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this
Section 5(d), the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or
warrants to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible
Securities.
(2) "CONVERTIBLE SECURITIES" shall mean any
evidences of indebtedness, Preferred Stock or
other securities convertible into or exchangeable
for Common Stock, other than Series B Preferred
or Series D Preferred.
(3) "ADDITIONAL SHARES OF COMMON" shall mean
all shares of Common Stock issued (or, pursuant
to Section 5(d)(iii), deemed to be issued) by the
corporation after the Series B Original Issue
Date, or Series D Original Issue Date, as the
case may be, other than shares of Common Stock
issued, issuable or, pursuant to Section
5(d)(iii), deemed to be issued: (i) upon
conversion of shares of the Convertible
Preferred; (ii) to officers, directors or
employees of, or consultants to, the corporation
pursuant to a stock grant, option plan or
purchase plan or other employee stock incentive
program or arrangement approved by the Board of
Directors, but not exceeding an aggregate of
1,978,290 shares of Common Stock (net of any
repurchases at cost of such shares or any other
shares of Common Stock originally issued to
officers, directors, employees or consultants to
the corporation, and net of cancellation or
expiration of options), subject to appropriate
adjustment for all stock splits, stock dividends,
subdivisions, combinations, recapitalizations and
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the like; (iii) as a dividend or distribution on
the Convertible Preferred; (iv) in connection
with any transaction for which adjustment is made
pursuant to Section 5(e)(i), (ii) and (iii)
hereof; (v) any shares of Common Stock issued or
issuable, if the holders of sixty-six and
two-thirds percent (66 2/3%) of the Convertible
Preferred, then outstanding agree in writing that
such shares shall not constitute Additional
Shares of Common Stock; or (vi) in connection
with an acquisition by the corporation of another
Person.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No
adjustment in the Conversion Price of the Convertible
Preferred shall be made in respect of the issuance of
Additional Shares of Common unless the consideration per share
for an Additional Share of Common issued or deemed to be
issued by the corporation is less than the Series B Conversion
Price or Series D Conversion Price, respectively, in effect on
the date of, and immediately prior to such issue.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. In the
event that the corporation at any time or from time to time
after the Series B Original Issue Date or Series D Original
Issue Date, respectively, shall issue any options or
Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled
to receive any such options or Convertible Securities, then
the maximum number of shares of Common Stock issuable upon the
exercise of such options or, in the case of Convertible
Securities and options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional
Shares of Common issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close
of business an such record date; PROVIDED, HOWEVER,
that Additional Shares of Common shall not be deemed to have
been issued unless the consideration per share (determined
pursuant to Section 5(d)(v) hereof) of such Additional Shares
of Common would be less than the Series B Conversion Price or
Series D Conversion Price, respectively, in effect on the date
of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case
in which Additional Shares of Common are deemed to be issued:
(1) no further adjustment in the Series B
Conversion Price or Series D Conversion Price
shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion
or exchange of such Convertible Securities, in
each case, pursuant to their respective terms;
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<PAGE> 14
(2) if such Options or Convertible
Securities by their terms provide, with the
passage of time or otherwise, for any increase in
the consideration payable to the corporation, or
decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or
exchange thereof, the Series B Conversion Price
and Series D Conversion Price computed upon the
original issue thereof (or upon the occurrence of
a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon
any such increase or decrease becoming effective,
be recomputed to reflect such increase or
decrease insofar as it affects such Options or
the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such options
or any rights of conversion or exchange under
such Convertible Securities which shall not have
been exercised, the Series B Conversion Price and
Series D Conversion Price computed upon the
original issue thereof (or upon the occurrence of
a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if:
(4) in the case of Convertible securities or
options for Common Stock, the only Additional
Shares of Common issued were shares of Common
Stock, if any, actually issued upon the exercise
of such Options or the conversion or exchange of
such Convertible Securities and the consideration
received therefor was the consideration actually
received by the corporation for the issue of all
such Options, whether or not exercised, plus the
consideration actually received by the
corporation upon such exercise, or for the issue
of all such Convertible Securities which were
actually converted or exchanged, plus the
additional consideration, if any, actually
received by the corporation upon such conversion
or exchange, and
(5) in the case of Options for Convertible
Securities, only the Convertible Securities, if
any, actually issued upon the exercise thereof
were issued at the time of issue of such Options,
and the consideration received by the corporation
for the Additional Shares of Common deemed to
have been then issued was the consideration
actually received by the corporation for the
issue of all such Options, whether or not
exercised, plus the consideration deemed to have
been received by the corporation upon the issue
of the
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<PAGE> 15
Convertible Securities with respect to which
such Options were actually exercised;
(6) no readjustment pursuant to clauses (b)
or (c) above shall have the effect of increasing
the Conversion Price of a share of Convertible
Preferred to an amount which exceeds the lower of
(1) the Conversion Price of such share on the
original adjustment date, or (2) the Conversion
Price of such share that would have resulted from
any issuance of Additional Shares of Common
between the original adjustment date and such
readjustment date; and
(7) in the case of an Option which expires
by its terms not more than thirty (30) days after
the date of issue thereof, no adjustment of the
Conversion Price shall be made until the
expiration or exercise of such option, whereupon
such adjustment shall be made in the same manner
provided in clause (c) above.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON. In the event that
this corporation shall issue Additional Shares of
Common (including Additional Shares of Common deemed
to be issued pursuant to Section 5(d)(iii)) without
consideration or for a consideration per share less
than the Series B Conversion Price or Series D
Conversion Price in effect on the date of and
immediately prior to such issue, then and in such
event such Series B Conversion Price or Series D
Conversion Price, as the case may be, shall be
reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by
multiplying such Conversion Price theretofore in
effect by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of
shares of Common Stock which the aggregate
consideration received by the corporation for the
total number of Additional Shares of Common so issued
would purchase at such Conversion Price in effect
immediately prior to such issue, and the denominator
of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue
plus the number of such Additional Shares of Common
so issued; PROVIDED HOWEVER, that, for the purposes
of this Section 5(d)(iv), all shares of Common Stock
issuable upon exercise, conversion or exchange of
outstanding Options or Convertible Securities, as the
case may be, shall be deemed to be outstanding, and
immediately after any Additional Shares of Common are
deemed issued pursuant to Section 5(d)(iii), such
Additional Shares of Common shall be deemed to be
outstanding.
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(v) DETERMINATION OF CONSIDERATION. For
purposes of this Section 5(d), the consideration
received by the corporation for the issue of any
Additional Shares of Common shall be computed as
follows:
(1) CASH AND PROPERTY. Such
consideration shall: (i) insofar as it
consists of cash, be computed at the
aggregate amount of cash received by the
corporation excluding amounts paid or
payable for accrued interest or accrued
dividends; (ii) insofar as it consists of
property other than cash, be computed at the
fair value thereof at the time of such
issue, as determined in good faith by the
Board; and (iii) in the event Additional
Shares of common are issued together with
other shares or securities or other assets
of the corporation for consideration which
covers both, be the proportion of such
consideration so received, computed as
provided in clauses (i) and (ii) above, as
determined in good faith by the Board.
(2) OPTIONS AND CONVERTIBLE
SECURITIES. The consideration per share
received by the corporation for Additional
Shares of Common deemed to have been issued
pursuant to Section 5(d)(iii), relating to
Options and Convertible Securities, shall be
determined by dividing
(x) the total amount, if
any, received or receivable by the
corporation as consideration for
the issue of such options or
Convertible Securities, plus the
minimum aggregate amount of
additional consideration payable to
the corporation upon the exercise
of such Options or the conversion
or exchange of such Convertible
Securities, or in the case of
Options for Convertible Securities,
the exercise of such Options for
Convertible Securities and the
conversion or exchange of such
Convertible Securities by
(y) the maximum number of
shares of Common Stock issuable
upon the exercise of such Options
or the conversion or exchange of
such Convertible Securities, as
determined in Section 5(d)(iii)
hereof.
(e) ADJUSTMENTS TO CONVERSION PRICE FOR OTHER
DILUTIVE EVENTS.
(i) ADJUSTMENTS FOR SUBDIVISIONS, STOCK
DIVIDENDS, COMBINATIONS OR CONSOLIDATIONS OF COMMON
STOCK. In the event
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<PAGE> 17
that the corporation at any time or from time to time
shall declare or pay, without consideration, any
dividend on Common Stock payable in Common Stock or
in any right to acquire Common Stock for no
consideration, or effects a subdivision or
combination of its outstanding shares of Common Stock
into a greater or smaller number of shares without a
proportionate and corresponding subdivision or
combination of its outstanding shares of Convertible
Preferred, then and in each such event the Conversion
Prices shall be appropriately increased or decreased
proportionally.
(ii) ADJUSTMENTS FOR RECLASSIFICATION,
EXCHANGE AND SUBSTITUTION. If the Common Stock
issuable upon conversion of the Convertible Preferred
shall be changed into the same or a different number
of shares of any other class or classes of stock,
whether by capital reorganization, reclassification
or otherwise (other than in an event provided for in
Section 5(e)(i) above), the Conversion Prices then in
effect shall, concurrently with the effectiveness of
such reorganization or reclassification, be
proportionately adjusted such that the shares of
Convertible Preferred shall be convertible into, in
lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to
receive, a number of shares of such other class or
classes of stock equivalent to the number of shares
of Common Stock that would have been subject to
receipt by the holders upon conversion of shares of
such Convertible Preferred immediately before that
change.
(iii) ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS. In the event that the corporation
shall declare a distribution payable in securities of
other issuers, evidences of indebtedness issued by
this corporation or other issuers, assets (excluding
cash dividends) or options or rights not referred to
in subsection 5(d)(iii) and for which no adjustment
is made pursuant to Section 5(e)(i) or Section
5(e)(ii), the holders of Convertible Preferred shall
be entitled to a proportionate share of any such
distribution as though they were the holders of the
number of shares of Common Stock of the corporation
into which their shares of Convertible Preferred are
convertible as of the record date fixed for the
determination of the holders of Common Stock of the
corporation entitled to receive such distribution.
(f) INTENTIONALLY OMITTED.
(g) NO IMPAIRMENT. Except as provided in
section 6 hereof, the corporation will not, by amendment of
its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the
terms to be
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observed or performed hereunder by the corporation but will at
all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such
action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Convertible Preferred
against impairment.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the
Conversion Price of any Series B Preferred or Series D
Preferred pursuant to this Section 5, the corporation at its
expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to each holder
of Convertible Preferred a certificate setting forth such
adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The
corporation shall, upon the written request at any time of any
holder of such Convertible Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Price
at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such
holder's shares of Convertible Preferred.
(i) NOTICES OF RECORD DATE. In the event that
this corporation shall propose at any time:
(i) to declare any dividend or
distribution upon its Common Stock, whether in cash,
property, stock or other securities, whether or not a
regular cash dividend and whether or not out of
earnings or earned surplus;
(ii) to offer for subscription pro rata
to the holders of any class or series of its stock
any additional shares of stock of any class or series
or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or
(iv) to merge or consolidate with or
into any other corporation, or sell, lease or convey
all or substantially all of its property or business,
or to liquidate, dissolve or wind up; then, in
connection with each such event, this corporation
shall send to the holders of Convertible Preferred:
(1) at least 20 days' prior written
notice of the date on which a record shall
be taken for such dividend, distribution or
subscription rights (and specifying the date
on which the holders of Common Stock shall
be entitled
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thereto) or for determining rights to vote
in respect of the matters referred to in
(iii) and (iv) above; and
(2) in the case of the matters
referred to in (iii) and (iv) above, at
least 20 days' prior written notice of the
date when the same shall take place (and
specifying the date on which the holders of
Common Stock shall be entitled to exchange
their Common Stock for securities or other
property deliverable upon the occurrence of
such event).
Each such written notice shall be delivered
personally or given by first class mail, postage prepaid,
addressed to the holders of Convertible Preferred at the
address for each such holder as shown on the books of this
corporation.
(j) The corporation shall at all times reserve
and keep available, out of its authorized but unissued Common
Stock, solely for the purpose of effecting the conversion of
the Convertible Preferred, the full number of shares of Common
Stock deliverable upon the conversion of all Convertible
Preferred from time to time outstanding. The corporation shall
from time to time (subject to obtaining necessary director and
shareholder consent), in accordance with the laws of the state
of Delaware, increase the number of authorized shares of
Common Stock if at any time the authorized number of shares of
its Common Stock remaining unissued shall not be sufficient to
permit the conversion of all of the shares of Convertible
Preferred at the time outstanding.
(k) The corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of
Convertible Preferred pursuant to this Section 5.
SECTION 6. VOTING RIGHTS.
SECTION 6.1 GENERAL. Except as otherwise provided herein and as
otherwise required by applicable law, the Series A Preferred and Series C
Preferred shall have no voting rights; provide that each holder of Series A
Preferred and Series C Preferred shall be entitled to notice of all meetings of
stockholders at the same time and in the same manner as notice is given to all
stockholders entitled to vote at such meetings.
SECTION 6.2 BOARD OF DIRECTORS.
(a) At each election of directors of the corporation, so
long as any share of Series B Preferred is outstanding, the holders of
Series B Preferred shall be entitled, voting as a single series, to
elect three (3) directors of the corporation. In the case of any
vacancy in the office of a director elected by the holders of Series B
Preferred, a successor shall be
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elected to hold office for the unexpired term of such director by the
affirmative vote of the holders of a majority of the Series B
Preferred, voting as a single class, given at a special meeting of such
stockholders called for that purpose or by the written consent of a
majority of such stockholders. Prior to an annual or special meeting of
the holders of the Series B Preferred convened for the purpose of
electing a director to fill a vacancy on the Board of Directors as
provided above, the acting and incumbent director previously elected by
the holders of the Series B Preferred may appoint a director to serve
as such until the holders of the Series B Preferred duly elect a
successor director.
(b) At each election of directors of the corporation, so
long as any share of Series D Preferred is outstanding, the holders of
Series D Preferred shall be entitled, voting as a single series, to
elect one (1) director of the corporation. In the case of any vacancy
in the office of a director elected by the holders of Series D
Preferred, a successor shall be elected to hold office for the
unexpired term of such director by the affirmative vote of the holders
of a majority of the Series D Preferred, voting as a single class,
given at a special meeting of such stockholders called for that purpose
or by the written consent of a majority of such stockholders. Prior to
an annual or special meeting of the holders of the Series D Preferred
convened for the purpose of electing a director to fill a vacancy on
the Board of Directors as provided above, the acting and incumbent
director previously elected by the holders of the Series D Preferred
may appoint a director to serve as such until the holders of the Series
D Preferred duly elect a successor director.
SECTION 6.3 PROTECTIVE PROVISIONS.
(a) So long as any share of Series A Preferred or Series
C Preferred remains outstanding, the corporation shall not, without the
vote or written consent of the holders of a majority in interest of the
shares of Series A Preferred and Series C Preferred then outstanding,
voting together as a single series:
(1) sell, lease or otherwise dispose
of, or permit any Subsidiary to sell, lease or
otherwise dispose of, more than twenty percent (20%)
of the consolidated assets of the corporation and its
Subsidiaries (computed on the basis of book value,
determined in accordance with generally accepted
accounting principles consistently applied, or fair
market value, determined by the corporation's Board
of Directors in its reasonable good faith judgment)
in any transaction or series of related transactions
(other than sales of inventory in the ordinary course
of business), unless prior to or contemporaneously
with the consummation of such transaction the
corporation redeems all of the outstanding
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shares of Series C Preferred and Series A Preferred
pursuant to the terms of Section 4.2 hereof;
(2) merge or consolidate with any
Person or permit any Subsidiary to merge or
consolidate with any Person (other than a merger or
consolidation between or among Wholly-owned
Subsidiaries), unless prior to or contemporaneously
with the consummation of such transaction the
corporation redeems all of the outstanding shares of
Series C Preferred and Series A Preferred pursuant to
the terms of Section 4.2 hereof (regardless of
whether such transaction would otherwise constitute a
Change in Ownership or a Fundamental Change);
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent or
otherwise) of, (A) any notes or debt securities
containing equity features (including, without
limitation, any notes or debt securities convertible
into or exchangeable for capital stock or other
equity securities issued in connection with the
issuance of capital stock or other equity securities
or containing profit participation features);
provided, that any such authorization, issuance or
entering into of any such agreement for any such
notes or debt securities which are senior to the
Series C Preferred with respect to payment of
dividends, redemptions or distributions upon
liquidation or otherwise shall require the consent of
a majority in interest of the Series C Preferred, or
(B) any capital stock or other equity securities (or
any securities convertible into or exchangeable for
any capital stock or other equity securities) which
are senior to Common Stock with respect to the
payment of dividends, redemptions or distributions
upon liquidation or otherwise;
(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction (including, without limitation, any
reorganization into a limited liability company, a
partnership or any other non-corporate entity which
is treated as a partnership for Canadian or United
States income tax purposes);
(5) increase the number of authorized
shares of Series C Preferred or alter, change or
otherwise impair or adversely affect the rights or
the relative preferences and priorities of the
holders of the Series C Preferred (which such action
shall also require the approval of a majority in
interest of the Series C Preferred); or
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(6) increase the number of authorized
shares of Series A Preferred or alter, change or
otherwise impair or adversely affect the rights or
the relative preferences and priorities of the
holders of the Series A Preferred (which such action
shall also require the approval of a majority in
interest of the Series A Preferred).
(b) So long as any share of Series B Preferred
or Series D Preferred remains outstanding, the corporation
shall not, without the vote or written consent of the holders
of a majority of the shares of Convertible Preferred then
outstanding, voting as a single series:
(1) sell, lease or otherwise dispose
of, or permit any subsidiary to sell, lease or
otherwise dispose of, more than 20% of the
consolidated assets of the corporation and its
Subsidiaries (computed on the basis of book value,
determined in accordance with generally accepted
accounting principles consistently applied, or fair
market value, determined by the corporation's Board
of Directors in its reasonable good faith judgment)
in any transaction or series of related transactions
(other than sales of inventory in the ordinary course
of business), unless prior to or contemporaneously
with the consummation of such transaction the
corporation redeems all of the outstanding shares of
Convertible Preferred pursuant to the terms of
Section 4.2 hereof;
(2) merge or consolidate with any
Person or permit any Subsidiary to merge or
consolidate with any Person (other than a merger or
consolidation between or among Wholly-Owned
Subsidiaries), unless prior to or contemporaneously
with the consummation of such transaction the
corporation redeems all of the outstanding shares of
Convertible Preferred pursuant to the terms of
Section 4.2 hereof (regardless of whether such
transaction would otherwise constitute a Change in
Ownership or a Fundamental Change);
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent or
otherwise) of, (A) any notes or debt securities
containing equity features (including, without
limitation, any notes or debt securities convertible
into or exchangeable for capital stock or other
equity securities issued in connection with the
issuance of capital stock or other equity securities
or containing profit participation features) or (B)
any capital stock or other equity securities (or any
securities convertible into or
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exchangeable for any capital stock or other equity
securities) which are senior to Common Stock with
respect to the payment of dividends, redemptions or
distributions upon liquidation or otherwise;
(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction (including, without limitation, any
reorganization into a limited liability company, a
partnership or any other non-corporate entity which
is treated as a partnership for Canadian or United
States income tax purposes); or
(5) increase the number of authorized
shares of Convertible Preferred or alter, change or
otherwise impair or adversely affect the rights or
the relative preferences and priorities of the
holders of Convertible Preferred.
SECTION 7. EVENTS OF NONCOMPLIANCE.
SECTION 7.1 DEFINITION. An Event of Noncompliance shall have occurred
if:
(a) the corporation fails to make any redemption payment
with respect to the Preferred Stock which it is required to make
hereunder, whether or not such payment is legally permissible or is
prohibited by any agreement to which the corporation is subject;
(b) the corporation breaches or otherwise fails to
perform or observe any covenant or agreement set forth herein or in the
Stockholders Agreement; provided that no Event of Noncompliance shall
have occurred under this subparagraph (b) if the corporation
establishes (to the reasonable satisfaction of the holders of a
majority of the shares of Preferred Stock then outstanding) that (i)
the particular Event of Noncompliance has not been caused by knowing or
purposeful conduct by the corporation or any Subsidiary, (ii) the Event
of Noncompliance is not material to the financial condition, operating
results, operations, assets or business prospects of the corporation
and its Subsidiaries, taken as a whole, and (iii) the Event of
Noncompliance is not material to any holder's investment in the
Preferred Stock;
(c) any representation or warranty contained in the New
Purchase Agreement or the Initial Purchase Agreement or required to be
furnished to any holder of Preferred Stock pursuant to such purchase
agreement, or any information contained in writing required to be
furnished by the corporation or any Subsidiary to any holder of
Preferred Stock pursuant to such purchase agreement, is false or
misleading in any material respect on the date made or furnished;
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<PAGE> 24
(d) the corporation or any Subsidiary makes an assignment
for the benefit of creditors or admits in writing its inability to pay
its debts generally as they become due; or an order, judgment or decree
is entered adjudicating the corporation or any Subsidiary bankrupt or
insolvent; or any order for relief with respect to the corporation or
any subsidiary is entered under the United States Bankruptcy Code; or
the corporation or any Subsidiary petitions or applies to any tribunal
for the appointment of a custodian, trustee, receiver or liquidator of
the corporation or any Subsidiary or of any substantial part of the
assets of the corporation or any Subsidiary, or commences any
proceeding (other than a proceeding for the voluntary liquidation and
dissolution of a Subsidiary) relating to the corporation or any
Subsidiary under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the corporation or any Subsidiary and
either (i) the corporation or any such Subsidiary by any act indicates
its approval thereof, consent thereto or acquiescence therein or (ii)
such petition, application or proceeding is not dismissed within sixty
(60) days;
(e) a judgment in excess of $100,000 is rendered against
the corporation or any Subsidiary and, within sixty (60) days after
entry thereof, such judgment is not discharged or execution thereof
stayed pending appeal, or within sixty (60) days after the expiration
of any such stay, such judgment is not discharged; or
(f) the corporation or any Subsidiary defaults in the
performance of any obligation or agreement if the effect of such
default is to cause an amount exceeding $100,000 to become due prior to
its stated maturity or to permit the holder or holders of any
obligation to cause an amount exceeding $100,000 to become due prior to
its stated maturity.
SECTION 7.2 CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
(a) If an Event of Noncompliance of the type described in
Section 7.1(b) has occurred and continued for a period of thirty (30)
days or any other Event of Noncompliance (other than an Event of
Noncompliance of the type described in Section 7.1(d)) has occurred,
the holder or holders of a majority of the shares of each series of
Preferred Stock then outstanding may demand (by written notice
delivered to the corporation) immediate redemption of all or any
portion of such series of Preferred Stock owned by such holder or
holders at a price per share equal to the Liquidation Value thereof
(plus all accrued and unpaid dividends thereon). The corporation shall
give prompt written notice of such election to the other holders of
Preferred Stock (but in any event within five days after receipt of the
initial demand for redemption), and each such other holder may demand
immediate redemption of all or any portion of such holder's Preferred
Stock by giving written notice thereof to the corporation within
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<PAGE> 25
seven days after receipt of the corporation's notice. The corporation
shall redeem all Preferred Stock as to which rights under this Section
7.2(a) have been exercised within fifteen (15) days after receipt of
the initial demand for redemption.
(b) If an Event of Noncompliance of the type described in
Section 7.1(d) has occurred, all of the Preferred Stock then
outstanding shall be subject to immediate redemption by the corporation
(without any action on the part of the holders of the Preferred Stock)
at a price per share equal to the Liquidation Value thereof (plus all
accrued and unpaid dividends thereon). The corporation shall
immediately redeem all outstanding shares of Preferred Stock upon the
occurrence of such Event of Noncompliance.
(c) If any Event of Noncompliance exists, each holder of
Preferred Stock shall also have any other rights which such holder is
entitled to under any contract or agreement at any time and any other
rights which such holder may have pursuant to applicable law.
SECTION 8. REGISTRATION OF TRANSFER. The corporation shall keep at its
principal office a register for the registration of Preferred Stock. Upon the
surrender of any certificate representing Preferred Stock at such place, the
corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and, in the case
of the Series A Preferred and Series C Preferred, dividends shall accrue on such
Series A Preferred or Series C Preferred represented by such new certificate
from the date to which dividends have been fully paid on such Series A Preferred
or Series C Preferred represented by the surrendered certificate.
SECTION 9. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the corporation (provided that an affidavit of the registered
holder shall be deemed to be reasonably satisfactory) of the ownership and the
loss, theft, destruction or mutilation of any certificate evidencing shares of
Preferred Stock, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the corporation (provided that
if the holder is a financial institution or other institutional investor its own
agreement shall be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the corporation shall (at its expense) execute
and deliver in lieu of such certificate a new certificate of like kind
representing the number of shares of Preferred Stock represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate, and, in the case of the Series A
Preferred and Series C Preferred, dividends shall accrue on the Series A
Preferred or Series C Preferred represented by such new certificate from the
date to which dividends have been fully paid on such lost, stolen, destroyed or
mutilated certificate.
SECTION 10. DEFINITIONS.
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<PAGE> 26
"Change in Ownership" means any sale, transfer or issuance or series of
sales, transfers and/or issuance of shares of the corporation's capital stock by
the corporation or any holders thereof which results in the Controlling
Stockholders ceasing to be the record and beneficial owners of capital stock of
the corporation possessing the voting power (under ordinary circumstances) to
elect a majority of the corporation's Board of Directors or ceasing to be the
record and beneficial owners of at least fifty-one percent (51%) of the
corporation's issued and outstanding Common Stock.
"Common Stock" means the corporation's common Stock, par value $0.001
per share, and any capital stock of any class of the corporation hereafter
authorized which is not limited to a fixed sum or percentage of par or stated
value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the corporation.
"Controlling Stockholders" means MANZ DEVELOPMENTS INC., SUMMIT
VENTURES IV, L.P., SUMMIT INVESTORS III, L.P., LAZARD TECHNOLOGY PARTNERS LP,
LAZARD TECHNOLOGY PARTNERS LLC, LAZARD TECHNOLOGY INVESTORS (1998) LLC and FSC
CORP. and their respective affiliates.
"Conversion Price" means the Series B Conversion Price or the Series D
Conversion Price, as the context so requires.
"Convertible Preferred" means, collectively, the Series B Preferred and
Series D Preferred.
"Fundamental Change" means (a) any sale or transfer of more than twenty
percent (20%) of the assets of the corporation and its Subsidiaries on a
consolidated basis (measured either by book value in accordance with generally
accepted accounting principles consistently applied or by fair market value
determined in the reasonable good faith judgment of the corporation's Board of
Directors) in any transaction or series of transactions (other than sales of
inventory in the ordinary course of business) and (b) any merger or
consolidation to which the corporation is a party, except for a merger in which
the corporation is the surviving corporation, the terms of the Preferred Stock
are not changed and the Preferred Stock are not exchanged for cash, securities
or other property, and after giving effect to such merger the Controlling
Stockholders continue to be the record and beneficial owners of capital stock of
the corporation possessing the voting power (under ordinary circumstances) to
elect a majority of the corporation's Board of Directors and continue to be the
record and beneficial owners of at least fifty-one percent (51%) of the
corporation's issued and outstanding Common Stock.
"Initial Purchase Agreement" means the Stock and Note Purchase
Agreement, dated on or about June 27, 1996, by and among the corporation and
certain Persons, as such agreement may from time to time be amended in
accordance with its terms.
"Liquidation Value" means the Series A Liquidation Value, the Series B
Liquidation Value, the Series C Liquidation Value or the Series D Liquidation
Value, as the context requires.
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<PAGE> 27
"New Purchase Agreement" means the Stock Purchase Agreement dated on
or about July 16, 1998 by and between the corporation or the other parties
thereto, as such agreement may be amended in accordance with its terms.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Series A Preferred, the Series B
Preferred, the Series C Preferred and the Series D Preferred.
"Public Offering" means any offering by the corporation of its
capital stock or equity securities to the public pursuant to an effective
registration statement under the United States Securities Act of 1933, as then
in effect, or any comparable statement under any similar federal statute then in
force.
"Redemption Date" as to any share means the applicable date specified
herein with respect to such redemption; PROVIDED no such date shall be a
Redemption Date unless the Liquidation Value of such Share (plus, in the case of
Series A Preferred and Series C Preferred, all accrued and unpaid dividends
thereon or, in the case of the Series B Preferred and Series C Preferred, all
declared but unpaid dividends) is actually paid in full on such date, and if not
so paid in full, the Redemption Date shall be the date on which such amount is
fully paid.
"Series A Junior Securities" means any capital stock or other equity
securities of the corporation, except for the Series C Preferred and the Series
A Preferred.
"Series A Liquidation Value" shall be equal to $1.00.
"Series A Original Issue Date" shall be, with respect to each share
of Series A Preferred, the date on which the corporation issues such share,
regardless of the number of times a transfer of such share is made on the stock
records maintained by or for the corporation and regardless of the number of
certificates which may be issued to evidence such share. As of July 16, 1998,
the two Series A Original Issue Dates are June 27, 1996 and July 16, 1998.
"Series A Preferred" means the corporation's Series A Redeemable
Preferred Stock, par value $0.001 per share.
"Series B Liquidation Value" shall be equal to $0.0630116.
"Series B Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series B Preferred, regardless of the
number of times a transfer of such share is made on the stock records maintained
by or for the corporation and regardless of the number of certificates which may
be issued to evidence such share.
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<PAGE> 28
"Series B Preferred" means the corporation's Series B Convertible
Preferred Stock, par value $0.001 per share.
"Series C Junior Securities" means any capital stock or other equity
securities of the corporation, except for the Series C Preferred.
"Series C Liquidation Value" shall be equal to $100.
"Series C Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series C Preferred, regardless of the
number of times a transfer of such share is made on the stock records maintained
by or for the corporation and regardless of the number of certificates which may
be issued to evidence such share.
"Series C Preferred" means the corporation's Series C Redeemable
Preferred Stock, par value $0.001 per share.
"Series D Liquidation Value" shall be equal to $1.494899.
"Series D Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series D Preferred, regardless of the
number of times a transfer of such share is made on the stock records maintained
by or for the corporation and regardless of the number of certificates which may
be issued to evidence such share.
"Series D Preferred" means the corporation's Series D Convertible
Preferred Stock, par value $0.001 per share.
"Stockholders Agreement" means the Amended and Restated Stockholders
Agreement dated on or about July 16, 1998 by and between the corporation and the
other parties thereto, as such agreement may be amended in accordance with its
terms.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (a) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (b) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.
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<PAGE> 29
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the issued and outstanding capital stock or other
ownership interests are owned by such Person or another Wholly-owned Subsidiary
of such Person.
SECTION 11. AMENDMENT AND WAIVER. No amendment, modification or
waiver shall be binding or effective with respect to any provision of Sections 1
to 12 hereof without the prior written consent of the holders of a majority of
the shares of each series of Preferred Stock outstanding at the time at which
such action is taken; PROVIDED that no such action shall change (a) the rate at
which or the manner in which dividends on the Series A Preferred or Series C
Preferred accrue or the times at which such dividends become payable on the
amount payable on redemption of the Series A Preferred and Series C Preferred or
upon liquidation of the corporation or the times at which redemption of Series A
Preferred and Series C Preferred is to occur, without the prior written consent
of the holders of at least 66 2/3 % of the Series A Preferred and at least 66
2/3 % of the Series C Preferred then outstanding; (b) the percentage required to
approve any change described in clause (a) above, without the prior written
consent of the holders of at least 66 2/3 % of the Series A Preferred and at
least 66 2/3 % of the Series C Preferred then outstanding; (c) the amounts
payable on redemption of the Series B Preferred or upon liquidation of the
corporation or at the times at which redemption of the Series B Preferred is to
occur, without the prior written consent of the holders of at least 66 2/3 % of
the Series B Preferred then outstanding; or (d) the amounts payable on
redemption of the Series D Preferred or upon liquidation of the corporation or
at the times at which redemption of the Series D Preferred is to occur, without
the prior written consent of the holders of at least 66 2/3% of the Series D
Preferred then outstanding; and provide further, that no change in the terms
hereof may be accomplished by merger or consolidation of the corporation with
another corporation or entity unless the corporation has obtained the prior
written consent of the holders of the applicable percentage of each series of
Preferred Stock, voting separately, then outstanding.
SECTION 12. NOTICES. Except as otherwise expressly provided
hereunder, all notices referred to herein shall be in writing and shall be
delivered by registered or certified mail, return receipt requested and postage
prepaid, or by reputable overnight courier service, charges prepaid, and shall
be deemed to have been given when so mailed or sent (a) to the corporation, at
its principal executive offices and (b) to any stockholder, at such holder's
address as it appears in the stock records of the corporation (unless otherwise
indicated by any such holder).
ARTICLE V
The Board of Directors shall be not less than one (1 nor more than
nine (9) members, the exact number to be fixed by the bylaws of the corporation;
provided, that at least one-fourth (1/4) of the members of the Board of
Directors shall be chosen annually by the shareholders of the corporation.
The names and post office addresses of the current members of the
Board, consisting of six (6) directors, are as follows:
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- -----------------------------------------------------------------------
Name Post Office Address
- -----------------------------------------------------------------------
Gregory Avis Summit Partners
400 Hamilton Avenue, Suite 200
Palo Alto, CA 94301
- -----------------------------------------------------------------------
Michael Balmuth Summit Partners
600 Atlantic Avenue, Suite 2800
Boston, MA 02210
- -----------------------------------------------------------------------
Woody Benson MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
- -----------------------------------------------------------------------
John Landry 85 Old Connecticut Path
Wayland, MA 01778
- -----------------------------------------------------------------------
Cal Manz MCK Communications
130 Bowness Center, N.W.
Calgary, Alberta
Canada T3B 5M5
- -----------------------------------------------------------------------
Paul Severino 680 Strawberry Hill Road
Concord, MA 01742
- -----------------------------------------------------------------------
ARTICLE VI
The capital stock shall not be subject to any further assessment to
pay the debts of the corporation.
ARTICLE VII
This corporation is to have perpetual existence.
ARTICLE VIII
In furtherance, and not in limitation of the power conferred by
statute, the Board of Directors is expressly authorized:
(a) Subject to the bylaws, if any, adopted by the
stockholders, to make, alter or amend the bylaws of the corporation;
(b) To fix the amount to be reserved as working capital
over and above its capital stock paid in; to authorize and cause to be
executed mortgages and liens upon the real and personal property of
this corporation;
(c) To determine whether, and to what extent, and at
times and places, and under what conditions and regulations, the
accounts and books of this corporation (other than the original or
duplicate stock ledger), or any of them, shall be open to inspection of
stockholders, and no stockholder
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<PAGE> 31
shall have any right of inspecting any account, book or document of
this corporation except as conferred by statute, unless authorized by a
resolution of the stockholders or directors;
(d) By resolution, or resolutions, passed by a majority
of the whole board, to designate one or more committees, each committee
to consist of two or more of the directors of the corporation, which,
to the extent provided in said resolution, or resolutions or in the
bylaws of the corporation, shall have, and may exercise the powers of
the Board of Directors in the management of the business affairs of the
corporation. Such committee, or committees, shall have such name or
names, as may be stated in the bylaws of the corporation, or as may be
determined by resolution adopted by the Board of Directors;
(e) To sell, lease or exchange all of the property and
assets of this corporation, including its goodwill and its corporate
franchises, upon such terms and conditions as its Board of Directors
deem expedient and for the best interests of the corporation;
(f) To purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was an
officer, director, employee, representative or agent of the
corporation, or is or was serving at the request of the corporation as
an officer, director, employee, representative or agent of another
corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against him and liability and expenses incurred
by him in his capacity as an officer, director, employee or agent, or
arising out of his status as such, whether or not the corporation has
the authority to indemnify him against such liability and expenses;
(g) To indemnify any person who was or is a part or is
threatened to be made a part to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation,
by reason of the fact that he is or was an officer, director, employee,
representative or agent of the corporation, or is or was serving at the
request of the corporation as an officer, director, employee,
representative or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including
attorneys, fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action,
suit or proceeding if he acted in good faith and in a matter in which
he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful;
(h) To indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
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<PAGE> 32
action or suit by or in the right of the corporation (derivative
actions) to procure a judgment in its favor by reason of the fact that
he is or was an officer, director, employee, representative or agent of
the corporation, or is or was serving at the request of the corporation
as an officer, director, employee, representative or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses, including amounts paid in settlement and attorneys'
fees actually and reasonably incurred by him in connection with the
defense or settlement of the action or suite if he acted in good faith
and in a manner which he reasonably believed to be in or not opposed to
the best interest of the corporation. No officer, director, employee,
representative or agent of the corporation may be indemnified in a
derivative action for any claim, issue or matter as to which such
person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the
extent that the court in which the action or suit was brought or other
court of competent jurisdiction determines upon application that in
view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses as the court deems
proper;
(i) Determination that indemnification of an officer or
director is improper must be made by the unanimous vote of the
shareholders who were not parties to the act, suit or proceeding; and
(j) No officer or director of the corporation shall be
personally liable to the corporation or the shareholders for breach of
his fiduciary duty as an officer or director, except for those acts or
omissions which involve intentional misconduct, fraud, a known
violation of the law or the payment out of dividends in violation of
Delaware General Corporation Law ss. 174.
This corporation may, in its bylaws, confer powers upon its
directors in addition to the foregoing, and in addition to the powers
and authorities expressly conferred upon them by statute.
ARTICLE IX
Both stockholders and directors shall have power, if the bylaws so
provide, to hold their meetings, and to have one or more offices within or
without the State of Delaware and to keep the books of this corporation (subject
to the requirements of the Delaware General Corporation Law) outside of the
State of Delaware at such places as may from time-to-time be designated by the
Board of Directors.
ARTICLE X
This corporation reserves the right to amend, alter, change or repeal
any provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by
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<PAGE> 33
statute or by these Articles of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
Dated: August 19, 1999
/s/ Paul K. Zurlo
--------------------------------------------
Paul K. Zurlo
Incorporator
313 Washington Street
Newton, Massachusetts 02458
33
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
of
MCK COMMUNICATIONS, INC.
ARTICLE I
STOCKHOLDERS
1. ANNUAL MEETING. The annual meeting of stockholders shall be held
each year at the place, date and time determined by the Board of Directors or
the President, provided that the date of the meeting is within six months after
the end of the fiscal year of the corporation. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the
Certificate of Incorporation (the "Certificate of Incorporation") or by these
By-laws, may be specified by the Board of Directors or the President. If no
annual meeting has been held on the date fixed above, a special meeting in lieu
thereof may be held or there may be action by written consent of the
stockholders on matters to be voted on at the annual meeting, and such special
meeting or written consent shall have for the purposes of these By-Laws or
otherwise all the force and effect of an annual meeting.
2. SPECIAL MEETINGS. Special meetings of stockholders may be called by
the President or by the Board of Directors. Special meetings shall be called by
the Secretary, or in case of death, absence, incapacity or refusal of the
Secretary, by any other officer, upon written application of one or more
stockholders who hold at least twenty-five percent in interest of the capital
stock entitled to vote at such meeting. The call for the meeting shall state the
place, date, hour and purposes of the meeting. Only the purposes specified in
the notice of special meeting shall be considered or dealt with at such special
meeting.
3. NOTICE OF MEETINGS. A written notice stating the place, date and
hour of all meetings of stockholders, and in the case of special meetings, the
purposes of the meeting shall be given by the Secretary (or other person
authorized by these By-Laws or by law) not less than ten nor more than sixty
days before the meeting to each stockholder entitled to vote thereat and to each
stockholder who, under the Certificate of Incorporation or under these By-laws
is entitled to such notice, by delivering such notice to him or by mailing it,
postage prepaid, and addressed to such stockholder at his address as it appears
in the records of the corporation. Notice need not be given to a stockholder if
a written waiver of notice is executed before or after the meeting by such
stockholder, if communication with such stockholder is unlawful, or if such
stockholder attends the meeting in question, unless such attendance was for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. If a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place are announced at the
meeting at which the adjournment is taken, except that if the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
<PAGE> 2
4. QUORUM. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, whether or not a quorum is present. The stockholders
present at a duly constituted meeting may continue to transact business until
adjournment notwithstanding the withdrawal of enough stockholders to reduce the
voting shares below a quorum.
5. VOTING AND PROXIES. Stockholders shall have one vote for each share
of stock entitled to vote owned by them of record according to the books of the
corporation unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy or
express directly or by written proxy their consent or dissent to a corporate
action taken without a meeting, but no proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period or is
irrevocable and coupled with an interest. Proxies shall be filed with the
Secretary of the meeting, or of any adjournment thereof. Except as otherwise
limited therein, proxies shall entitle the persons authorized thereby to vote at
any adjournment of such meeting.
6. ACTION AT MEETING. When a quorum is present, any matter before the
meeting shall be decided by vote of the holders of a majority of the shares of
stock voting on such matter except where a larger vote is required by law, by
the Certificate of Incorporation or by these By-laws. Any election by
stockholders shall be determined by a plurality of the votes cast, except where
a larger vote is required by law, by the Certificate of Incorporation or by
these By-laws. The corporation shall not directly or indirectly vote any share
of its own stock; provided, however, that the corporation may vote shares which
it holds in a fiduciary capacity to the extent permitted by law.
7. ACTION WITHOUT A MEETING. Any action required or permitted by law to
be taken at any annual or special meeting of stockholders, may be taken without
a meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
all of the outstanding shares of stock having not less than the minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office, by hand or by
certified mail, return receipt requested or to the corporation's principal place
of business or to the officer of the corporation having custody of the minute
book. Every written consent shall bear the date of signature and no written
consent shall be effective unless, within sixty days of the earliest dated
consent delivered pursuant to these By-laws, written consents signed by a
sufficient number of stockholders entitled to take action are delivered to the
corporation in the manner set forth in these By-laws. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
8. STOCKHOLDER LISTS. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten 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.
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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 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.
ARTICLE II
DIRECTORS
1. POWERS. The business of the corporation shall be managed by or under
the direction of a Board of Directors who may exercise all the powers of the
corporation except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws. In the event of a vacancy in the Board of
Directors, the remaining Directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2. ELECTION AND QUALIFICATION. Unless otherwise provided in the
Certificate of Incorporation or in these By-laws, the number of Directors which
shall constitute the whole board shall be determined by vote of the Board of
Directors or by the stockholders at the annual meeting. Directors need not be
stockholders.
3. VACANCIES: REDUCTION OF BOARD. A majority of the Directors then in
office, although less than a quorum, or a sole remaining Director, may fill
vacancies in the Board of Directors occurring for any reason and newly created
directorships resulting from any increase in the authorized number of Directors.
In lieu of filling any vacancy the stockholders or the Board of Directors may
reduce the number of Directors.
4. ENLARGEMENT OF THE BOARD. The Board of Directors may be enlarged by
the stockholders at any meeting or by vote of a majority of the Directors then
in office.
5. TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws, Directors shall hold office until their
successors are elected and qualified or until their earlier resignation or
removal. Any Director may resign by delivering his written resignation to the
corporation. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
6. REMOVAL. To the extent permitted by law, a Director may be removed
from office with or without cause by vote of the holders of a majority of the
shares of stock entitled to vote in the election of Directors. A Director may be
removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
7. MEETINGS. Regular meetings of the Board of Directors may be held
without notice at such time, date and place as the Board of Directors may from
time to time determine. Special meetings of the Board of Directors may be
called, orally or in writing, by the President, Treasurer or two or more
Directors, designating the time, date and place thereof. Directors may
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participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by means of which all Directors
participating in the meeting can hear each other, and participation in a meeting
in accordance herewith shall constitute presence in person at such meeting.
8. NOTICE OF MEETINGS. Notice of the time, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Secretary, or Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the officer or one of the Directors
calling the meeting. Notice shall be given to each Director in person or by
telephone or by telegram sent to his business or home address at least
twenty-four hours in advance of the meeting, or by written notice mailed to his
business or home address at least forty-eight hours in advance of the meeting.
Notice need not be given to any Director if a written waiver of notice is
executed by him before or after the meeting, or if communication with such
Director is unlawful. A notice or waiver of notice of a meeting of the Board of
Directors need not specify the purposes of the meeting.
9. QUORUM. At any meeting of the Board of Directors, a majority of the
Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
a. ACTION AT MEETING. At any meeting of the Board of Directors
at which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless a larger number is required
by law, by the Certificate of Incorporation or by these By-laws.
b. ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
a written consent thereto is signed by all the Directors and filed with the
records of the meetings of the Board of Directors. Such consent shall be treated
as a vote of the Board of Directors for all purposes.
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c. COMMITTEES. The Board of Directors, by vote of a majority
of the Directors then in office, may establish one or more committees, each
committee to consist of one or more Directors, and may delegate thereto some or
all of its powers except those which by law, by the Certificate of
Incorporation, or by these By-laws may not be delegated. Except as the Board of
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but in the absence of such rules its business shall be
conducted so far as possible in the same manner as is provided in these By-laws
for the Board of Directors. All members of such committees shall hold their
committee offices at the pleasure of the Board of Directors, and the Board may
abolish any committee at any time. Each such committee shall report its action
to the Board of Directors who shall have power to rescind any action of any
committee without retroactive effect.
ARTICLE III
OFFICERS
1. ENUMERATION. The officers of the corporation shall consist of a
President, a Treasurer, a Secretary, and such other officers, including one or
more Vice Presidents, Assistant Treasurers and Assistant Secretaries, as the
Board of Directors may determine.
2. ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at their first meeting following the annual
meeting of stockholders. Other officers may be chosen by the Board of Directors
at such meeting or at any other meeting.
3. QUALIFICATION. No officer need be a stockholder or Director. Any two
or more offices may be held by the same person. Any officer may be required by
the Board of Directors to give bond for the faithful performance of his duties
in such amount and with such sureties as the Board of Directors may determine.
4. TENURE. Except as otherwise provided by the Certificate of
Incorporation or by these By-laws, each of the officers of the corporation shall
hold his office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer may resign by delivering his written
resignation to the corporation, and such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
5. REMOVAL. The Board of Directors may remove any officer with or
without cause by a vote of a majority of the entire number of Directors then in
office; provided, that an officer may be removed for cause only after reasonable
notice and opportunity to be heard by the Board of Directors.
6. VACANCIES. Any vacancy in any office may be filled for the unexpired
portion of the term by the Board of Directors.
7. PRESIDENT AND VICE PRESIDENT. The President shall be the chief
operating officer of the corporation and shall have general charge of its
business operations, subject to the direction of the Board of Directors. The
President shall preside, when present, at all meetings of
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stockholders and the Board of Directors. The Board of Directors shall have the
authority to appoint a temporary presiding officer to serve at any meeting of
the stockholders or Board of Directors if the President is unable to do so for
any reason.
Any Vice President shall have such powers and shall perform such duties
as the Board of Directors may from time to time designate. In the absence of the
President or in the event of his inability or refusal to act, the Vice President
(or in the event there be more than one Vice President, the Vice Presidents in
the order designated by the directors, or in the absence of any designation,
then in the order of their election) shall perform the duties of the President,
and when so acting, shall have all the powers and responsible of and be subject
to all the restrictions upon the President.
8. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall, subject to
the direction of the Board of Directors, have general charge of the financial
affairs of the corporation and shall cause to be kept accurate books of account.
He shall have custody of all funds, securities, and valuable documents of the
corporation, except as the Board of Directors may otherwise provide.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
9. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall record the
proceedings of all meetings of the stockholders and the Board of Directors in
books kept for that purpose. In his absence from any such meeting an Assistant
Secretary, or if he is absent, a temporary secretary chosen at the meeting,
shall record the proceedings thereof.
The Secretary shall have charge of the stock ledger (which may,
however, be kept by any transfer or other agent of the corporation) and shall
have such other duties and powers as may be designated from time to time by the
Board of Directors or the President.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
10. OTHER POWERS AND DUTIES. Subject to these By-laws, each officer of
the corporation shall have in addition to the duties and powers specifically set
forth in these By-laws, such duties and powers as are customarily incident to
his office, and such duties and powers as may be designated from time to time by
the Board of Directors.
ARTICLE IV
CAPITAL STOCK
1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate of the capital stock of the corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate
shall be signed by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary. Such signatures
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may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed on such certificate shall
have 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 he were such officer, transfer agent or registrar at the time of its
issue. Every certificate for shares of stock which are subject to any
restriction on transfer and every certificate issued when the corporation is
authorized to issue more than one class or series of stock shall contain such
legend with respect thereto as is required by law. The corporation shall be
permitted to issue fractional shares.
2. TRANSFERS. Subject to any restrictions on transfer, shares of stock
may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate therefor properly endorsed
or accompanied by a written assignment or power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the corporation or its transfer agent may
reasonably require.
3. RECORD HOLDERS. Except as may otherwise be required by law, by the
Certificate of Incorporation or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to, notify the corporation of
his post office address.
4. RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not precede the date on which it is established, and which shall not be more
than sixty nor less than ten days before the date of such meeting, more than ten
days after the date on which the record date for stockholder consent without a
meeting is established, nor more than sixty days prior to any other action. In
such case only stockholders of record on such record date shall be so entitled
notwithstanding any transfer of stock on the books of the corporation after the
record date.
If no record date is fixed, (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 entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is necessary,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office in this state, to its principal place of business, or
to an officer or
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agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded, and (c) 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.
5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
INDEMNIFICATION
1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall
indemnify, to the fullest extent permitted by the General Corporation Law of the
State of Delaware any person who was or is a party or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, and whether by or in the right of the corporation,
its stockholders, a third party or otherwise (a "Proceeding"), by reason of the
fact that he is or was a Director or officer of the corporation, or is or was a
Director or officer of the corporation serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against all expense (including, but not limited to,
attorneys' fees), liability, loss, judgments, fines, excise taxes, penalties and
amounts paid in settlement actually and reasonably incurred by him in connection
with such Proceeding, including expenses incurred in seeking such
indemnification. In addition, the corporation shall grant such indemnification
to each of its Directors and officers with respect to any matter in a Proceeding
as to which his liability is limited pursuant to Section 9 of the Certificate of
Incorporation of the corporation. However, such indemnification shall exclude
(i) indemnification with respect to any improper personal benefit which a
Director or officer is determined to have received and of the expenses of
defending against an improper personal benefit claim unless the Director or
officer is successful on the merits in said defense, and (ii) indemnification of
present or former officers, directors, employees or agents of a constituent
corporation absorbed in a merger or consolidation transaction with this
corporation with respect to their activities prior to said transaction, unless
specifically authorized by the Board of Directors or stockholders of this
corporation. Such indemnification shall include prompt payment of expenses
incurred by a Director or officer in defending a Proceeding in advance of the
final disposition of such Proceeding, upon receipt of an undertaking by or on
behalf of the Director or officer to repay such amounts if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation under
this Article V, which undertaking shall be an unsecured general obligation of
the Director or officer and may be accepted without regard to his ability to
make repayment.
2. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The corporation may, to the
extent authorized from time to time by the Board of Directors, grant rights to
indemnification and to an advancement of expenses, pursuant to the provisions of
this Article V, to any person who was or is a party or is threatened to be made
a party to or is otherwise involved in any Proceeding by
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reason of the fact that he is or was an 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.
3. NATURE OF INDEMNIFICATION RIGHTS. The indemnification rights
provided in this Article V shall be a contract right and shall not be deemed
exclusive of any other rights to which any person, whether or not entitled to be
indemnified hereunder, may be entitled under any statute, by-law, agreement,
vote of stockholders or Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of such a person. A Director or officer shall be entitled to the
benefit of any amendment of the Delaware General Corporation Law which enlarges
indemnification rights hereunder, but any such amendment which adversely affects
indemnification rights with respect to prior activities shall not apply to him
without his consent unless otherwise required by law. Each person who is or
becomes a Director or officer of the corporation shall be deemed to have served
or to have continued to serve in such capacity in reliance upon the indemnity
provided for in this Article V.
4. AMENDMENT. The provisions of this Article may be amended as provided
in Article VI; however, no amendment or repeal of such provisions which
adversely affects the rights of a Director or officer under this Article V with
respect to his acts or omissions prior to such amendment or repeal, shall apply
to him without his consent.
ARTICLE VI
MISCELLANEOUS PROVISIONS
1. FISCAL YEAR. Except as otherwise determined by the Board of
Directors, the fiscal year of the corporation shall end on April 30 of each
year.
2. SEAL. The Board of Directors shall have power to adopt and alter the
seal of the corporation.
3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or Treasurer, or
by any other officer of the corporation designated by the Board of Directors,
except as the Board of Directors may generally or in particular cases otherwise
determine.
4. VOTING OF SECURITIES. Unless otherwise provided by the Board of
Directors, the or President or Treasurer may waive notice of and act on behalf
of this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or shareholders of any
other corporation or organization, any of whose securities are held by this
corporation.
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5. RESIDENT AGE. The Board of Directors may appoint a resident agent
upon whom legal process may be served in any action or proceeding against the
corporation.
6. CORPORATE RECORDS. The original or attested copies of the
Certificate of Incorporation, By-laws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock and
transfer records, which shall contain the names of all stockholders, their
record addresses and the amount of stock held by each, shall be kept at the
principal office of the corporation, at the office of its counsel, or at an
office of its transfer agent.
7. CERTIFICATE OF INCORPORATION. All references in these By-laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
8. AMENDMENTS. These By-laws may be amended or repealed or additional
By-laws adopted by the stockholders or by the Board of Directors; provided, that
(a) the Board of Directors may not amend or repeal Article V or this Section 8
of Article VI or any provision of these By-laws which by law, by the Certificate
of Incorporation or by these By-laws requires action by the stockholders, and
(b) any amendment or repeal of these By-laws by the Board of Directors and any
By-law adopted by the Board of Directors may be amended or repealed by the
stockholders.
Adopted August 19, 1999
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EXHIBIT 10.1
MCK COMMUNICATIONS, INC.
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS AGREEMENT is made of July 16,1998, by and among MCK Communications,
Inc., a Nevada corporation (the "COMPANY"), each of the Persons listed on the
SCHEDULE OF INVESTORS attached hereto (the "INVESTORS") and Manz Developments
Inc., an Alberta corporation ("MDI"). The Investors and MDI are collectively
referred to herein as the "STOCKHOLDERS" and individually as a "STOCKHOLDER".
Except as otherwise provided herein, capitalized terms used herein are defined
in paragraph 8 hereof. Defined terms used herein and not otherwise defined shall
have the meaning ascribed to them in the Initial Purchase Agreement (as defined
below) and/or the New Purchase Agreement (as defined below).
RECITALS
1. The Company, certain of the Investors (the "INITIAL INVESTORS") and MDI
previously entered into a Stockholders Agreement dated as of June 27, 1996 (the
"ORIGINAL STOCKHOLDERS AGREEMENT") in connection with the purchase by the
Initial Investors of shares of the Company's Series A Redeemable Preferred Stock
("SERIES A REDEEMABLE STOCK") and Series B Convertible Preferred Stock ("SERIES
B CONVERTIBLE STOCK") pursuant to a certain Stock and Note Purchase Agreement
among the Initial Investors, the Company and certain other Persons dated as of
June 27, 1996 (the "INITIAL PURCHASE AGREEMENT").
2. In connection with and as an inducement to certain other Investors (the
"NEW INVESTORS") entering into that certain Stock Purchase Agreement, of even
date herewith, by and between the Company and the New Investors (the "NEW
PURCHASE AGREEMENT"), pursuant to which the New Investors propose to purchase
shares of the Company's Series C Redeemable Preferred Stock ("SERIES C
REDEEMABLE STOCK") and Series D Convertible Preferred Stock ("SERIES D
CONVERTIBLE STOCK"), the parties to the Original Stockholders Agreement desire
to amend and restate such Original Stockholders Agreement and allow the New
Investors to be parties to this Agreement, on the terms specified herein.
3. The parties hereto enter into this Agreement for the purposes, among
others, of (i) electing four representatives designated by the Investors to the
Company's Board of Directors (the "Board"), (ii) assuming continuity in the
management and ownership of the Company and (iii) limiting the manner and terms
by which MDI's shares of the Company's Common Stock (the "COMMON STOCK") may be
transferred.
4. The Series A Redeemable Stock and the Series C Redeemable Stock are
sometimes referred to herein collectively as the "REDEEMABLE PREFERRED." The
Series B Convertible Stock and the Series D Convertible Stock are sometimes
referred to herein collectively as the "CONVERTIBLE PREFERRED."
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Agreement hereby agree as follows:
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1. AMENDMENT AND RESTATEMENT. The Company, the Initial Investors and MDI
hereby amend and restate the Original Stockholders Agreement in its entirety as
follows.
2. BOARD OF DIRECTORS.
(a) From and after the Closing (as defined in the New Purchase
Agreement) and until the provisions of this Section 2 cease to be effective,
each holder of Stockholder Shares (as defined in Section 8 below) shall vote all
of his or its Stockholder Shares and any other voting securities of the Company
over which such holder has voting control and shall take all other necessary or
desirable actions within his or its control (whether in his or its capacity as a
stockholder, director, member of a board committee or officer of the Company or
otherwise, and including, without limitation, attendance at meetings in person
or by proxy for purposes of obtaining a quorum and execution of written consents
in lieu of meetings), and the Company shall take all necessary or desirable
actions within its control (including, without limitation, calling special Board
and stockholder meetings), so that:
(i) the authorized number of directors on the Board shall not
exceed seven (7) directors;
(ii) two (2) representatives designated by the Initial Investors
(the "SERIES B INVESTOR DIRECTORS"), and one (1) additional representative
designated by the Initial Investors, which representative shall not be an
employee of the Company (the "INVESTOR OUTSIDE DIRECTOR") (all three (3) to be
determined on the basis of a vote of a majority of the Stockholder Shares held
by all of the Initial Investors), shall be elected to the Board;
(iii) one (1) representative designated by the New Investors (the
"SERIES D INVESTOR DIRECTOR" and, together the Series B Investor Directors and,
the "INVESTOR DIRECTORS") shall be elected to the Board;
(iv) one (1) representative designated by a majority of the other
members of the Board shall be elected to the Board (the "INDEPENDENT DIRECTOR");
(v) so long as MDI and its Permitted Transferees (as defined
below) own an aggregate of at least 10% of the outstanding Stockholder Shares,
one (1) representative designated by MDI or such Permitted Transferees (the
"FOUNDER DIRECTOR"), who shall initially be Cal Manz;
(vi) the person serving as Chief Executive Officer of the Company
from time to time shall be elected to the Board;
(vii) the board of directors of each of the Company's Subsidiaries
(a "SUB BOARD") shall consist of at least three (3) members, of which (A) two
(2) members shall be Investor Directors and (B) so long as MDI or its Permitted
Transferees own an aggregate of at least 10% of the outstanding Stockholder
Shares, one member shall be the Founder Director; provided, however, that the
authorized number of directors of a Sub Board shall not exceed four
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(4) directors during such time as MDI or its Permitted Transferees own an
aggregate of at least 10% of the outstanding Stockholder Shares without the
consent of the Founder Director;
(viii) (A) a three (3) member Compensation Committee shall be
established to determine the compensation of the Company's officers and shall
include one of the Initial Investor Directors, the Investor Outside Director and
the Founder Director and (B) any other committees established by the Board or a
Sub Board shall include at least one of the Investor Directors;
(ix) (A) the removal from the Board or a Sub Board (with or
without cause) of any Investor Director or Investor Outside Director shall be at
the written request of the Investors who designated such Investor Director
(determined on the basis of a vote of the holders of a majority of the
Stockholder Shares held by such Investors), but only upon such written request
and under no other circumstances and (B) subject to Section 2(a)(iv)(B) above,
the removal from the Board or a Sub Board (with or without cause) of the Founder
Director (determined on the basis of a vote of the Stockholder Shares held by
MDI and members of the MDI Family Group, as defined below), but only upon such
written request and under no other circumstances; and
(x) in the event that any Investor Director or Investor Outside
Director ceases to serve as a member of the Board or a Sub Board during his term
of office, the resulting vacancy on the Board or the Sub Board shall be filled
by a representative designated by the Investors who designated such Investor
Director or Investor Outside Director as provided hereunder.
(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by the Investor Directors, the Investor Outside Director, the
Independent Director and the Founder Director in connection with attending the
meetings of the Board, any Sub Board and any committee thereof. So long as any
Investor Director, Investor Outside Director, Independent Director or Founder
Director serves on the Board and for three (3) years thereafter, the Company
shall maintain directors and officers indemnity insurance coverage, and the
Company's Amended and Restated Articles of Incorporation (the "ARTICLES OF
INCORPORATION") and Bylaws, as amended, and each of the Company's Subsidiaries'
charter documents shall provide for indemnification and exculpation of directors
to the fullest extent permitted under applicable law.
(c) (i) Prior to an annual or special meeting of the Stockholders to
designate a representative to fill a vacancy resulting from the death,
resignation or removal of an Investor Director or an Investor Outside Director
pursuant to the terms of this Section 2, the acting and incumbent directors
elected by the Investors who designated such Investor Director or Investor
Outside Director shall appoint a director to serve as such until the Investors
who designated such Investor Director or Investor Outside Director duly elect a
successor director.
(ii) Subject to Section 2(a)(iv)(B) above, prior to an annual or
special meeting of the Stockholders to designate a representative to fill a
vacancy resulting from the death, resignation or removal of the Founder Director
pursuant to the terms of this Section 2, the
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acting and incumbent director(s) nominated by the Founder Director shall appoint
a director to serve as such until MDI duly elects a successor director.
(d) This Section 2 shall terminate automatically and be of no further
force and effect upon the earlier to occur of: (i) the fifteenth anniversary of
the date hereof; (ii) a Public Offering; and (iii) the sale of all or
substantially all of the assets or capital stock of the Company, whether by
means of merger, purchase, tender offer or otherwise.
(e) The parties hereto agree that notwithstanding anything to the
contrary in the Articles of Incorporation or Bylaws of the Company with respect
to the subject matter of this Section 2, the provisions of this Section 2 shall
govern the relationship of the parties with respect to such subject matter.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each Stockholder represents
and warrants that (i) such Stockholder is the record owner of the number of
Stockholder Shares set forth opposite its name on the SCHEDULE OF INVESTORS AND
EXISTING STOCKHOLDERS attached hereto, (ii) this Agreement has been duly
authorized, executed and delivered by such Stockholder and constitutes the valid
and binding obligation of such Stockholder, enforceable in accordance with its
terms, subject to the rules and principles of equity and the rules and
principles applicable to bankruptcy and insolvency, and (iii) such Stockholder
has not granted and is not a party to any proxy, voting trust or other agreement
which is inconsistent with, conflicts with or violates any provision of this
Agreement. No holder of Stockholder Shares shall grant any proxy or become party
to any voting trust or other agreement that is inconsistent with, conflicts with
or violates any provision of this Agreement.
4. COVENANTS. The following covenants of the Company are in replacement
for, and not supplemental to, the Covenants found in Section 3 of the Initial
Purchase Agreement. The Initial Investors, MDI and the Company hereby agree that
this Agreement shall be deemed to modify the Initial Purchase Agreement to
remove Section 3 from such Initial Purchase Agreement. Terms used in this
Section 4 but not defined herein, have the meanings ascribed to them in the
Initial Purchase Agreement. The following Covenants shall be waivable, in part
or in whole, by a vote of the majority of the Stockholder Shares held by all of
the Investors, voting on an as converted basis; provided, however, that these
covenants may be waived by vote of the holders of less than all of the
Stockholder Shares only in a manner which affects all holders of Stockholder
Shares in the same fashion.
(a) FINANCIAL STATEMENTS AND OTHER INFORMATION. So long as any Notes or
Redeemable Preferred remain outstanding, the Company shall deliver to each
Investor and to each transferee of an Investor:
(i) as soon as available but in any event within 30 days after the
end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such monthly period and for the period from the beginning of
the fiscal year to the end of such month, and unaudited consolidated balance
sheets of the Company and its Subsidiaries as of the end of such monthly
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period, setting forth in each case comparisons to the Company's annual budget
and to the corresponding period in the preceding fiscal year, and all such
statements shall be prepared in accordance with generally accepted accounting
principles, consistently applied, subject to the absence of footnote disclosures
and to normal year-end adjustments for recurring accruals, and shall be
certified by the Company's chief financial officer;
(ii) within 90 days after the end of each fiscal year,
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year, setting forth in
each case comparisons to the Company's annual budget and to the preceding fiscal
year, all prepared in accordance with generally accepted accounting principles,
consistently applied, and, with respect to the consolidated portions of such
statements (but not with respect to the annual budget), accompanied by an
opinion containing no exceptions or qualifications of a "Big Six" accounting
firm;
(iii) at least 30 days but not more than 90 days prior to the
beginning of each fiscal year, an annual budget prepared on a monthly basis for
the Company and its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows and balance sheets), and promptly upon
preparation thereof any other significant budgets prepared by the Company and
any revisions of such annual or other budgets, and within 30 days after any
monthly period in which there is a material adverse deviation from the annual
budget, a certificate of an officer of the Company explaining the deviation;
(iv) promptly (but in any event within five business days) after
the discovery or receipt of notice of any Event of Noncompliance, any default
under any material agreement to which it or any of its Subsidiaries is a party
or any other material adverse change, event or circumstance affecting the
Company or any Subsidiary (including, without limitation, the filing of any
material litigation against the Company or any Subsidiary or the existence of
any dispute with any Person which involves a reasonable likelihood of such
litigation being commenced), an Officer's Certificate specifying the nature and
period of existence thereof, and
(v) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this Section 4(a) may reasonably request.
Each of the financial statements referred to in Sections 4(a)(i) or 4(a)(ii)
above shall present fairly in all material respects the consolidated financial
condition, results of operations and cash flows of the Company in accordance
with generally accepted accounting principles applied on a consistent basis as
of the dates and for the periods set forth therein, subject, in the case of the
unaudited financial statements, to changes resulting from normal year-end
adjustments for recurring accruals (none of which would, alone or in the
aggregate, be materially adverse to the financial condition, operating results,
assets, operations or business prospects of the Company and its Subsidiaries
taken as a whole). Notwithstanding the foregoing, the provisions of this Section
4(a) and Section 4(b) below shall cease to be effective so long as the Company
is subject to the periodic reporting requirements of the Securities Exchange Act
and continues to comply with such requirements. Except as otherwise required by
law or judicial order or decree or by any governmental agency or
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authority, each Person entitled to receive information regarding the Company and
its Subsidiaries under this Section 4(a) and Section 4(b) below shall use the
same standards and controls which such Person uses to maintain the
confidentiality of its own confidential information (but in no event less than
reasonable care) to maintain the confidentiality of all nonpublic information of
the Company or any of its Subsidiaries obtained by it pursuant to this Section
4(a) and Section 4(b) below; PROVIDED THAT each such Person may disclose such
information in connection with the sale or transfer of any Notes, Redeemable
Preferred, Convertible Preferred or Investor Common Stock if such Person's
transferee agrees in writing to be bound by the provisions hereof. For purposes
of this Agreement and the Amended and Restated Registration Rights Agreement,
all holdings of Notes, Redeemable Preferred, Convertible Preferred and Investor
Common Stock by Persons who are Affiliates of each other (which, for this
purpose, shall also include Persons which have received distributions of
Redeemable Preferred, Convertible Preferred or Investor Common Stock from a
partnership holding such securities) shall be aggregated for purposes of meeting
any threshold tests under this Agreement and the Amended and Restated
Registration Rights Agreement.
(b) INSPECTION OF PROPERTY. So long as any of the Notes or the
Redeemable Preferred remaining outstanding, the Company shall permit any
representatives designated by any Investor or any transferee of an Investor,
upon reasonable notice and during normal business hours and at such other times
as any such Person may reasonably request, to (a) visit and inspect any of the
properties of the Company and its Subsidiaries, (b) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and (c) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, key employees and independent
accountants of the Company and its Subsidiaries.
(c) NEGATIVE COVENANTS. So long as any Notes or Redeemable Preferred
remain outstanding, the Company shall not, without the prior consent of
Investors holding at least two-thirds (66 2/3%) in interest of the Convertible
Preferred:
(i) directly or indirectly declare or pay any dividends or make
any distributions upon any of its capital stock or other equity securities other
than the Redeemable Preferred pursuant to the terms of the Articles of
Incorporation;
(ii) directly or indirectly redeem, purchase or otherwise acquire,
or permit any Subsidiary to redeem, purchase or otherwise acquire, any of the
Company's or any Subsidiary's capital stock or other equity securities
(including, without limitation, warrants, options and other nights to acquire
such capital stock or other equity securities), other than (i) the Redeemable
Preferred or Convertible Preferred pursuant to the terms of the Articles of
Incorporation and (ii) repurchases at cost of Common Stock from former employees
of the Company its Subsidiaries upon termination of employment or directly or
indirectly redeem, purchase or make any payments with respect to any stock
appreciation rights, phantom stock plans or similar rights or plans;
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(iii) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, (i) any notes or debt securities
containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other equity
securities, issued in connection with the issuance of capital stock or other
equity securities or containing profit participation features) or (ii) any
capital stock or other equity securities (or any securities convertible into or
exchangeable for any capital stock or other equity securities) which are senior
to Common Stock with respect to the payment of dividends, redemptions or
distributions upon liquidation or otherwise;
(iv) make, or permit any Subsidiary to make, any loans or advances
to, guarantees for the benefit of, or Investments in, any Person (other than a
Wholly-Owned Subsidiary), except for (i) reasonable advances to employees in the
ordinary course of business, (ii) acquisitions permitted pursuant to Section
4(c)(viii) below and (iii) Investments not exceeding $20,000 in any twelve-month
period or $50,000 at any time in the aggregate;
(v) merge or consolidate with any Person or permit any Subsidiary
to merge or consolidate with any Person (other than a merger or consolidation
between or among Wholly-Owned Subsidiaries) (a "COMPANY MERGER"), unless prior
to or contemporaneously with the consummation of such transaction the Company
repays all outstanding Indebtedness pursuant to the Notes and redeems all of the
outstanding Redeemable Preferred pursuant to the terms of the Articles of
Incorporation;
(vi) sell, lease or otherwise dispose of, or permit any Subsidiary
to sell, lease or otherwise dispose of, more than 20% of the consolidated assets
of the Company and its Subsidiaries (computed on the basis of book value,
determined in accordance with generally accepted accounting principles
consistently applied, or fair market value, determined by the Company's Board of
Directors, including the Investor Directors, in its reasonable good faith
judgment) in any transaction or series of related transactions (other than sales
of inventory in the ordinary course of business) (a "COMPANY SALE"), unless
prior to or contemporaneously with the consummation of such transaction the
Company repays all outstanding Indebtedness pursuant to the Notes and redeems
all of the outstanding Stock pursuant to the terms of the Articles of
Incorporation;
(vii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other
non-corporate entity which is treated as a partnership for federal income tax
purposes);
(viii) acquire, or permit any Subsidiary to acquire, any interest
in any company or business (whether by a purchase of assets, purchase of stock,
merger or otherwise), or enter into any joint venture that is not a strategic
alliance within the Company's ordinary course of business as previously
conducted, involving an aggregate consideration (including, without limitation,
the assumption of liabilities whether direct or indirect) exceeding $50,000 in
any one transaction or series of related transactions or exceeding $100,000 in
any twelve-month period;
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(ix) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than the
development, production, marketing and sales of products for the
telecommunications industry and similar or related businesses;
(x) become subject to, or permit any of its Subsidiaries to become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict (i) the right of any Subsidiary to make loans or
advances or pay dividends to, transfer property to, or repay any Indebtedness
owed to, the Company or another Subsidiary or (ii) the Company's right to
perform the provisions of this Agreement, the Amended and Restated Registration
Rights Agreement, the New Purchase Agreement, the Pledge Agreement, the Articles
of Incorporation or the Bylaws (including, without limitation, provisions
relating to the declaration and payment of dividends on and the making of
redemptions of the Redeemable Preferred);
(xi) make any amendment to the Articles of Incorporation or Bylaws
or file any resolution of the board of directors with any governmental agency
containing any provisions which would increase the number of authorized shares
of the Redeemable Preferred or adversely affect or otherwise impair the rights
or the relative preferences and priorities of the holders of the Redeemable
Preferred under the New Purchase Agreement, the Articles of Incorporation, the
Bylaws, the Registration Rights Agreement, the Pledge Agreement or this
Agreement;
(xii) enter into, amend, modify or supplement, or permit any
Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, employees, shareholders or Affiliates or with any
individual related by blood, marriage or adoption to any such individual or with
any entity in which any such Person or individual owns a beneficial interest,
except for customary employment arrangements and benefit programs on reasonable
terms and except as otherwise expressly contemplated by this Agreement;
(xiii) establish or acquire any Subsidiaries other than
Wholly-Owned Subsidiaries;
(xiv) except as expressly provided for in any budget approved by
the Board of Directors, create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness exceeding
an aggregate principal amount of $100,000 outstanding at any time on a
consolidated basis;
(xv) except as expressly provided for in any budget approved by
the Board of Directors, create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, any Liens other than
Permitted Liens;
(xvi) except as expressly provided for in any budget approved by
the Board of Directors, make any capital expenditures (including, without
limitation, payments with respect to capitalized leases, as determined in
accordance with generally accepted accounting
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principles consistently applied) exceeding $100,000 in the aggregate on a
consolidated basis during any twelve-month period;
(xvii) except as expressly provided for in any budget approved by
the Board of Directors, enter into any leases or other rental agreements
(excluding capitalized leases, as determined in accordance with generally
accepted accounting principles consistently applied) under which the amount of
the aggregate lease payments for all such agreements exceeds $100,000 on a
consolidated basis for any twelve-month period;
(xviii) amend or modify any stock option plan or employee stock
ownership plan as in existence as of July 16, 1998, adopt any new stock option
plan or employee stock ownership plan or issue any shares of Common Stock to its
or its Subsidiaries' employees other than pursuant to the Stock Option and Grant
Plan referred to in Section 4(d)(vi) below; or
(xix) issue or sell, or permit any Subsidiary to issue or sell,
any shares of the capital stock, or rights to acquire shares of the capital
stock, of any Subsidiary to any Person other than the Company or a Wholly-Owned
Subsidiary.
(d) AFFIRMATIVE COVENANTS. So long as any Notes or Redeemable Preferred
remain outstanding, the Company shall, and shall cause each Subsidiary to:
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material licenses,
authorizations and permits necessary to the conduct of its businesses;
(ii) maintain and keep its material properties in good repair,
working order and condition, and from time to time make all repairs, renewals
and replacements necessary for the conduct of its businesses;
(iii) pay and discharge when payable all material taxes,
assessments and governmental charges imposed upon its properties or upon the
income or profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all material claims for labor, materials or
supplies which if unpaid would by law become a Lien upon any of its property,
unless and to the extent that the same are being contested in good faith and by
appropriate proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have been
established on its consolidated financial statements with respect thereto;
(iv) comply with all other material obligations which it incurs
pursuant to any contract or agreement, whether oral or written, express or
implied, as such obligations become due, unless and to the extent that the same
are being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
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<PAGE> 10
(v) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be expected to
have a material adverse effect upon the financial condition, operating results,
assets, operations or business prospects of the Company and its Subsidiaries
taken as a whole;
(vi) maintain a Stock Option Plan and restricted stock plans or
arrangements for the benefit of the employees and directors of the Company and
its Subsidiaries pursuant to which 673,061 shares of Common Stock will be
reserved for issuance;
(vii) apply for and continue in force at the expense of the
Company adequate insurance covering risks of such types and in such amounts as
are customary for corporations of similar size engaged in similar lines of
business;
(viii) possess and maintain all material Intellectual Property
Rights necessary to the conduct of their respective businesses and own all
right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights;
(ix) maintain proper books of record and account which present
fairly in all material respects its financial condition and results of
operations and make provisions on its consolidated financial statements for all
such proper reserves as in each case are required in accordance with generally
accepted accounting principles, consistently applied; and
(x) enter into and maintain nondisclosure and, on a best efforts
basis, noncompete agreements with its key employees.
(e) COMPLIANCE WITH AGREEMENTS. The Company shall perform and observe
(a) all of its obligations to each holder of the Redeemable Preferred and all of
its obligations to each holder of the Investor Common Stock set forth in the
Articles of Incorporation, the Bylaws and the Stockholders Agreement and (b) all
of its obligations to each holder of Registrable Securities (as such term is
defined in the Amended and Restated Registration Rights Agreement) set forth in
the Amended and Restated Registration Rights Agreement.
(f) CURRENT PUBLIC INFORMATION. After the Company has filed a
registration statement with the Securities and Exchange Commission pursuant to
the requirements of either the Securities Act or the Securities Exchange Act,
the Company shall file all reports required to be filed by it under the
Securities Act and the Securities Exchange Act and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, all to the extent
required to enable holders of Restricted Securities to sell such Restricted
Securities pursuant to (a) Rule 144 adopted by the Securities and Exchange
Commission under the Securities Act (as such rule may be amended from time to
time) or any similar rule or regulation hereafter adopted by the Securities and
Exchange Commission or (b) a registration statement on Form S-2 or S-3 or any
similar registration form hereafter adopted by the Securities and Exchange
Commission. Upon request, the Company shall deliver to any holder of Restricted
Securities a written statement as to whether it has complied with such
requirements.
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(g) PREEMPTIVE RIGHTS.
(i) Except for issuances of Common Stock (i) to the Company's
employees as contemplated by, and in accordance with, Section 4(d)(vi) above,
(ii) in connection with the acquisition of another company or business in
accordance with Section 4(c)(viii) above, (iii) pursuant to a public offering
registered under the Securities Act, or (iv) pursuant to the New Purchase
Agreement, if the Company authorizes the issuance or sale of any shares of
Common Stock or any securities containing options or rights to acquire any
shares of Common Stock (other than as a dividend on the outstanding Common Stock
or conversion or exercise of outstanding securities), the Company shall first
offer to sell to each Investor (or any transferee of shares of Convertible
Preferred or Investor Common Stock) (a "HOLDER") a portion of such stock or
securities equal to the quotient determined by dividing (x) the sum of (A) the
number of shares of Common Stock issuable upon conversion of the Convertible
Preferred held by such Holder plus (B) the number of shares of Common Stock held
by such Holder by (y) the sum of (A) the total number of shares of Common Stock
issuable upon conversion of the outstanding Convertible Preferred plus (B) the
total number of shares of Common Stock then outstanding. Each Holder shall be
entitled to purchase such stock or securities at the most favorable price and on
the most favorable terms as such stock or securities are to be offered or sold
to any other Persons. The purchase price for all stock and securities offered to
the Holders shall be payable in cash or, to the extent otherwise required
hereunder, notes issued by such holders.
(ii) In order to exercise its purchase rights hereunder, a Holder
must within 15 days after receipt of written notice from the Company (which
notice shall describe in reasonable detail the stock or securities being
offered, the purchase price thereof, the payment terms and such Holder's
percentage allotment) deliver a written notice to the Company describing its
election hereunder. If all of the stock and securities offered to the Holders is
not fully subscribed by such Holders, the remaining stock and securities shall
be reoffered by the Company to the Holders purchasing their full allotment upon
the terms set forth in this paragraph, except that such Holders must exercise
their purchase rights within five days after receipt of such reoffer.
(iii) Upon the expiration of the offering periods described above,
the Company shall be entitled to sell such stock or securities which the Holders
have not elected to purchase during the 90 days following such expiration on
terms and conditions no more favorable to the purchasers thereof than those
offered to such Holders. Any stock or securities offered or sold by the Company
after such 90-day period must be reoffered to the Holders pursuant to the terms
of this Section 3.8.
(iv) The rights of the Holders under this Section 4(h) shall
terminate upon the effectiveness of a registration statement filed by the
Company with the Securities and Exchange Commission under the Securities Act;
PROVIDED THAT if the registration statement is withdrawn or abandoned before any
shares of Common Stock are sold thereunder, the provisions of this Section 4(h)
shall remain in full force and effect.
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(v) The Initial Investors hereby waive any preemptive rights that
they may have had under the Initial Purchase Agreement with respect to the
issuance of Convertible Preferred shares to the New Investors under the New
Purchase Agreement and hereby consent to all actions taken by the Company in
connection with such issuance.
(h) USE OF PROCEEDS FROM INITIAL PUBLIC OFFERINGS. The Company shall
cause the managing underwriters responsible for the Company's initial public
offering of Common Stock registered under the Securities Act to consent to the
use by the Company of the net proceeds from such offering to retire the Notes
and redeem the Redeemable Preferred pursuant to the terms of the Articles of
Incorporation.
5. RESTRICTIONS ON TRANSFER OF STOCKHOLDER SHARES.
(a) TRANSFER OF STOCKHOLDER SHARES. MDI shall not sell, transfer,
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest in
any Stockholder Shares (a "TRANSFER"), except pursuant to (i) a Public Sale or a
sale to the Company which does not otherwise violate the provisions of the
Initial Purchase Agreement ("EXEMPT TRANSFERS") or (ii) the provisions of this
Section 5. Prior to making any Transfer other than an Exempt Transfer, MDI shall
deliver written notice (the "TRANSFER NOTICE") to the Company and the Investors.
The Transfer Notice shall disclose in reasonable detail the identity of the
prospective transferees, the number of shares to be Transferred and the terms
and conditions of the proposed Transfer. MDI shall not consummate any Transfer
until 30 days after the Sale Notice has been given to the Company and the
Investors (the "ELECTION PERIOD"), unless the parties to the Transfer have been
finally determined pursuant to this Section 5 prior to the expiration of such
30-day period. The date of the first to occur of such events is referred to
herein as the "AUTHORIZATION DATE."
(b) FIRST REFUSAL RIGHTS APPLICABLE TO MDI. The Investors may purchase
MDI's Stockholder Shares to be Transferred upon the same terms and conditions as
those set forth in the Transfer Notice by delivering written notice of such
election to MDI within 20 days after the Transfer Notice has been given to the
Investors. If more than one Investor elects to purchase or otherwise acquire
such Stockholder Shares, the Stockholder Shares to be Transferred shall be
allocated among the Investors pro rata according to the number of Stockholder
Shares owned by each such Investor. If the Investors have not elected to
purchase or otherwise acquire all of the Stockholder Shares specified in the
Transfer Notice, MDI may Transfer such Stockholder Shares specified in the
Transfer Notice, subject to the provisions of Section 5(c) below, at a price and
on terms no more favorable to the transferees thereof than specified in the
Transfer Notice during the 30-day period immediately following the Authorization
Date, or the period specified in the Transfer Notice, whichever shall last
elapse. Any Stockholder Shares not Transferred within such period shall be
subject to the provisions of this Section 5(b) upon any subsequent Transfer. If
any of the Investors have elected to purchase any Stockholder Shares hereunder,
the Transfer of such Stockholder Shares shall be consummated as soon as
practical after the delivery of the election notice(s) to MDI, but in any event
within 15 days after the expiration of the Election Period.
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(c) PARTICIPATION RIGHTS. If the Investors have not elected to purchase
or otherwise acquire all of the Stockholder Shares specified in the Transfer
Notice to be Transferred pursuant to Section 5(b) above, each Investor may elect
to participate in the contemplated Transfer by delivering written notice to MDI
and the Company within 25 days after receipt by such Investor of the Transfer
Notice. If any Investor has elected to participate in such Transfer, MDI and
each of the electing Investors shall be entitled to Transfer, at the same price
and on the same terms, a number of Stockholder Shares equal to the product
obtained by multiplying (i) the quotient determined by dividing (x) the number
of Stockholder Shares held by such Investor by (y) the aggregate number of
Stockholder Shares owned by MDI and all electing Investors by (ii) the number of
Stockholder Shares to be Transferred in the contemplated Transfer.
Notwithstanding the foregoing, the Investors electing to participate in a
Transfer pursuant to this Section 5(c) shall be entitled, as a group, to
Transfer (on a pro rata basis among such Investors) fifty percent (50%) of the
Stockholder Shares to be Transferred if such participation would result in the
Transfer of a greater number of Stockholder Shares by each electing Investor
than would result from the application of the formula set forth in the previous
sentence; in such case. MDI shall Transfer the remaining 50% of the Stockholder
Shares proposed to be Transferred. If MDI effects a Transfer hereunder, it shall
use its best efforts to obtain the agreement of the prospective transferees to
the participation of the Investors in the contemplated Transfer and shall not
Transfer any Stockholder Shares to the prospective transferee(s) if such
transferee(s) refuse(s) to allow the participation of the Investors.
(d) CERTAIN PERMITTED TRANSFERS. The restrictions contained in this
Section 5 shall not apply with respect to Transfers of Stockholder Shares held
by MDI (i) to persons pursuant to applicable laws of descent and distribution or
(ii) among MDI's Family Group (collectively referred to herein as "PERMITTED
TRANSFEREE"); provided that (x) such restrictions shall continue to be
applicable to the Stockholder Shares after any such Transfer, (y) the
transferees of such Stockholder Shares shall agree in writing to be bound by the
provisions of this Agreement as a condition precedent to any such Transfer, and
(z) such transferees shall thereafter be deemed to be "MDI" for purposes of this
Agreement. MDI's "Family Group" means the spouse and descendants (whether
natural or adopted) of Cal Manz and any trust solely for the benefit of Cal Manz
and/or his spouse and/or descendants.
(e) TERMINATION OF RESTRICTIONS. The restrictions set forth in this
Section shall continue with respect to each Stockholder Share following any
Transfer thereof (other than a Transfer pursuant to Section 5(b)); provided that
all such restrictions shall terminate upon the consummation of a Public
Offering.
6. LEGEND. Each certificate evidencing Stockholder Shares and each
certificate issued in exchange for or upon the Transfer of any Stockholder
Shares (if such shares remain Stockholder Shares after such Transfer) shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"The securities represented by this certificate are subject to an
Amended and Restated Stockholders Agreement dated as of July 16, 1998,
among the issuer of such securities (the "COMPANY") and
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certain of the Company's stockholders, as amended and modified from
time to time. A copy of such Stockholders Agreement shall be furnished
without charge by the Company to the holder hereof upon written
request."
The Company shall imprint such legend on certificates evidencing Stockholder
Shares outstanding as of the date hereof. The legend set forth above shall be
removed from the certificates evidencing any shares which cease to be
Stockholder Shares in accordance with Section 7 hereof.
7. TRANSFERS, FUTURE SALES. Prior to MDI transferring any Stockholder
Shares (other than pursuant to an Exempt Transfer) and prior to the Company
issuing any of the Company's equity securities (or options or other rights to
acquire such equity securities or securities convertible into or exchangeable
for such equity securities) to any Person (other than pursuant to a Public
Offering), MDI or the Company, as the case may be, shall cause the prospective
transferee to be bound by this Agreement and to execute and deliver to the
Company and the other holders of Stockholder Shares a counterpart of this
Agreement. Transferees of Stockholder Shares held by Investors shall be deemed
to be Investors hereunder. Transferees of Stockholder Shares held by MDI and
transferees of equity securities (as described above) from the Company shall be
bound by the same restrictions as MDI hereunder.
8. Definitions.
"EVENT OF NONCOMPLIANCE" has the meaning set forth in the Articles of
Incorporation.
"INVESTOR COMMON STOCK" has the meaning set forth in the Articles of
Incorporation.
"LIENS" has the meaning set forth in the Articles of Incorporation.
"PERMITTED LIENS" has the meaning set forth in the Articles of
Incorporation.
"INDEBTEDNESS" means at a particular time, without duplication, (i) any
indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and
-14-
<PAGE> 15
(viii) any unsatisfied obligation for "withdrawal liability" to a "multiemployer
plan" as such terms are defined under the United States Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PUBLIC SALE" means any sale of Stockholder Shares to the public
pursuant to an offering registered under the Securities Act or to the public
through a broker, dealer or market maker pursuant to the provisions of Rule 144
adopted under the Securities Act.
"PUBLIC OFFERING" means any offering by the Company of its Common
Stock to the public pursuant to an effective registration statement under the
Securities Act, as then in effect, or any comparable statement under any similar
federal statute then in force.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCKHOLDER SHARES" means (i) any Common Stock purchased or
otherwise acquired by any Stockholder, any shares of Common Stock issued or
issuable upon conversion of Convertible Preferred, any Convertible Preferred
which are convertible into Common Stock, whether converted or not, and (ii) any
capital stock or other equity securities issued or issuable directly or
indirectly with respect to the Common Stock referred to in clause (i) above by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As to
any particular shares constituting Stockholder Shares, such shares shall cease
to be Stockholder Shares when they have been (x) effectively registered under
the Securities Act and disposed of in accordance with the registration statement
covering them or (y) sold to the public through a broker, dealer or market maker
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act.
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the limited liability company partnership or other similar ownership interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority of
limited liability company, partnership, association or other business entity
gains or losses or shall be or control the managing director or general partner
of such limited liability company, partnership, association or other business
entity.
-15-
<PAGE> 16
"WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
9. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted Transfer
of any Stockholder Shares in violation of any provision of this Agreement shall
be void, and the Company shall not record such Transfer on its books or treat
any purported transferee of such Stockholder Shares as the owner of such shares
for any purpose.
10. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Stockholders unless such modification,
amendment or waiver is approved in writing by the Company and the Investors
holding a majority of the Stockholder Shares then held by the Investors;
provided, that no such modification, amendment or waiver which would have a
material adverse effect on MDI or any affiliate of MDI shall be effective unless
approved in writing by MDI; and provided, further, that no such modification,
amendment or waiver of Section 2(a)(i), 2(a)(iii), 2(a)(ix)(A) or 2(a)(x) shall
be effective unless such modification, amendment or waiver is also approved in
writing by a majority of the Series D Convertible Stock; and provided, further,
that no such modification, amendment or waiver of Section 2(a)(i), 2(a)(ii),
2(a)(ix)(A) or 2(a)(x) shall be effective unless such modification, amendment or
waiver is also approved in writing by a majority of the Series B Convertible
Stock. The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
11. SEVERABILITY. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this
Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
12. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this
Agreement embodies the complete agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
13. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Stockholders and any subsequent
holders of Stockholder Shares and the respective successors and assigns of each
of them, so long as they hold Stockholder Shares.
-16-
<PAGE> 17
14. COUNTERPARTS. This Agreement may be executed in multiple counterparts
(including by means of telecopied signature pages), each of which shall be an
original and all of which taken together shall constitute one and the same
agreement.
15. REMEDIES. The parties hereto shall be entitled to enforce their rights
under this Agreement specifically, to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights existing in
their favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement and
that the Company and any Stockholder may in its sole discretion apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting a bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.
16. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) five days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (b) upon delivery, if delivered
by hand, (c) one business day after the business day of deposit with Federal
Express or similar nationally recognized overnight courier, freight prepaid or
(d) one business day after the business day of facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed as follows, or at such other address as a party
may designate by ten (10) days' advance written notice to the other parties to
this Agreement pursuant to the provisions of this Section 16:
(i) if to an Investor, to such Investor's address set forth on the
Schedule of Investors.
(ii) if to the Company, to:
MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
Facsimile: (617) 454-6101
Attention: Paul K. Zurlo
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Facsimile: (617) 523-1231
Attention: John J. Egan III, Esq.
(iii) if to MDI, to the address set forth on the SCHEDULE OF
INVESTORS AND EXISTING STOCKHOLDERS, with a copy to:
-17-
<PAGE> 18
Macleod Dixon Barristers and Solicitors
Canterra Tower
3700-400 Third Avenue S.W.
Calgary, Alberta T2P 4H2
Attention: T. Ramsay, Esq.
17. GOVERNING LAW. All issues and questions concerning the construction,
validity, interpretation and enforcement of this Agreement and the exhibits and
schedules hereto shall be governed by, and construed in accordance with, the
laws of the State of Nevada, without giving effect to any choice of law or
conflict of law rules or provisions (whether of the State of Nevada or any other
Jurisdiction) that would cause the application of the laws of any Jurisdiction
other than the State of Nevada.
18. BUSINESS DAYS. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or legal holiday in the
state in which the Company's chief executive office is located, the time period
shall automatically be extended to the business day immediately following such
Saturday, Sunday or legal holiday.
19. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
20. RATIFICATION AND WAIVER. The Initial Investors acknowledge that in
connection with the amendment and restatement of the Original Stockholders
Agreement and the amendment and restatement of the Articles of Incorporation,
the Initial Investors are consenting to the amendment of certain terms of the
Series A Redeemable Stock and the Series B Convertible Stock and their rights
with respect thereto. The Initial Investors also agree that, to the extent such
amendments and restatements constitute amendments of such terms and rights, such
amendments also constitute ratifications and waivers of past actions taken by or
on behalf of the Company.
-18-
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
MCK COMMUNICATIONS, INC.
By: /s/ Steven J. Benson
--------------------------------------
MANZ DEVELOPMENTS INC.
By: /s/ Cal Manz
--------------------------------------
Cal Manz, President
-19-
<PAGE> 20
LAZARD TECHNOLOGY PARTNERS LP
By: /s/ Russell Planitzer
--------------------------------------
Name: Russell Planitzer
Title: Managing Principal
LAZARD TECHNOLOGY PARTNERS LLC
By: /s/ Russell Planitzer
--------------------------------------
Name: Russell Planitzer
Title: Managing Principal
LAZARD TECHNOLOGY INVESTORS
(1998) LLC
By: /s/ Russell Planitzer
--------------------------------------
Name: Russell Planitzer
Title: Managing Principal
FSC CORP.
By: /s/ Signature Illegible
---------------------------------------
Name:
Title:
-20-
<PAGE> 21
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.
Its General Partner
By: Stamps, Woodsum & Co. IV
Its General Partner
By: /s/ Signature Illegible
--------------------------------------
Its:
--------------------------------------
SUMMIT INVESTORS III, L.P.
By: /s/ Signature Illegible
--------------------------------------
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners III, L.P.
Its General Partner
By: Stamps, Woodsum & Co. III
Its General Partner
By: /s/ Signature Illegible
--------------------------------------
Its:
--------------------------------------
WS INVESTMENT COMPANY 96A
By: /s/ Jeffrey D. Saper
--------------------------------------
Its:
--------------------------------------
TRUSTEE, WSGR RETIREMENT PLAN
FBO JEFFREY D. SAPER
By: /S/ Signature Illegible
--------------------------------------
Its:
--------------------------------------
-21-
<PAGE> 22
THE YARMOUTH TRUST
By: /s/ Robert Morrissey
--------------------------------------
Robert Morrissey
Trustee of The Yarmouth Trust
-22-
<PAGE> 23
SCHEDULE OF INVESTORS AND EXISTING STOCKHOLDERS
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Redeemable Convertible Redeemable Convertible Common
Name and Address Preferred Preferred Preferred Preferred Stock
- ---------------- ---------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Summit Ventures IV, L.P. 14,274,503 3,619,556 -- -- --
600 Atlantic Avenue, Suite 2800
Boston Massachusetts 02210-2227
Summit Investors III, L.P. 636,301 164,698 -- -- --
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
Summit Subordinated Debt Fund, L.P. -- 164,289 -- -- --
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
Trustee, WSGR Retirement Plan 48,704 12,897 -- -- --
FBO Jeffrey D. Saper
650 Page Mill Road
Palo Alto, California 94304
WS Investment Company 96A 26,225 6,944 -- -- --
650 Page Mill Road
Palo Alto, California 94304
Lazard Technology Partners LP -- -- 19,155 1,123,822 --
30 Rockefeller Plaza
New York, NY 10020
Lazard Technology Partners LLC -- -- 3,367 197,512 --
30 Rockefeller Plaza
New York, NY 10020
Lazard Technology Investors (1998) LLC -- -- 1,422 83,444 --
30 Rockefeller Plaza
New York, NY 10020
FSC Corp. -- -- 2,851 167,235 --
100 Federal Street
Boston, MA 02110
Manz Developments Inc. -- -- -- -- 2,031,616
MCK Telecommunications, Inc.
130 Bowness Center, N.W
Calgary, Alberta, Canada T3 B 5M5
Attention: Mr. Cal Manz
</TABLE>
<PAGE> 24
<TABLE>
<S> <C> <C> <C> <C> <C>
The Yarmouth Trust -- -- 1,710 100,341 --
Two International Place
Boston, MA 02116
Attn: Robert Morrissey
</TABLE>
-2-
<PAGE> 1
EXHIBIT 10.2
MCK COMMUNICATIONS, INC.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of July 16, 1998, by and among MCK
Communications, Inc., a Nevada corporation (the "COMPANY"), the parties listed
as Investors on the SCHEDULE OF INVESTORS attached hereto (collectively, the
"INVESTORS"), and Manz Developments, Inc., an Alberta Corporation ("MDI").
RECITALS
The Company, certain of the Investors (the "INITIAL INVESTORS") and MDI
previously entered into a Registration Agreement dated as of June 27, 1996 (the
"ORIGINAL REGISTRATION AGREEMENT"). In connection with and as an inducement to
certain other Investors (the "NEW INVESTORS") entering into a certain Stock
Purchase Agreement, of even date herewith, by and between the Company and the
New Investors (the "NEW PURCHASE AGREEMENT"), the parties to the Original
Registration Agreement desire to amend and restate such Original Registration
Agreement and allow the New Investors to be parties to this Agreement, on the
terms specified herein.
The parties to this Agreement are parties to either a Stock and Note
Purchase Agreement dated June 27, 1996 (the "INITIAL PURCHASE AGREEMENT") or the
New Purchase Agreement. In order to induce the Investors to enter into such
agreements, the Company has agreed to provide the registration rights set forth
in this Agreement. The execution and delivery of this Agreement is a condition
to the Closing under the New Purchase Agreement.
The parties hereto hereby agree as follows:
1. AMENDMENT AND RESTATEMENT. The Company, the Initial Investors and MDI
hereby amend and restate the Original Registration Agreement in its entirety as
follows.
2. DEMAND REGISTRATIONS.
(a) REQUESTS FOR REGISTRATION. The holders of a majority of the
Registrable Securities may request registration under the Securities Act of all
or any portion of their Registrable Securities on Form S-1 or any similar
long-form registration ("LONG-FORM REGISTRATIONS"), and the holders of at least
25% of the Registrable Securities may request registration under the Securities
Act of all or any portion of their Registrable Securities on Form S-2 or S-3 or
any similar short-form registration ("SHORT-FORM REGISTRATIONS"), if available.
All registrations requested pursuant to this Section 2(a) are referred to herein
as "DEMAND REGISTRATIONS." Each request for a Demand Registration shall specify
the approximate number of Registrable Securities requested to be registered and
the anticipated per share price range for such offering. Within ten days after
receipt of any such request, the Company shall give written notice of such
requested registration to all other holders of Registrable Securities and,
subject to Section 2(e) below, shall include in such registration all
Registrable Securities with respect to
<PAGE> 2
which the Company has received written requests for inclusion therein within 15
days after the receipt of the Company's notice.
(b) LONG-FORM REGISTRATIONS. The holders of Registrable Securities
shall be entitled to request two Long-Form Registrations, PROVIDED THAT the
aggregate offering value of the Registrable Securities requested to be
registered in any Long-Form Registration must equal at least $5,000,000. A
registration shall not be considered one of the permitted Long-Form
Registrations until the registration statement has become effective, and neither
the last or any subsequent Long-Form Registration shall count as one of the
permitted Long-Form Registrations unless the holders of Registrable Securities
are able to register and sell at least 90% of the Registrable Securities
requested to be included in such registration, PROVIDED THAT in any event the
Company shall pay all Registration Expenses in connection with any registration
initiated as a Long-Form Registration whether or not it has become effective and
whether or not such registration has counted as one of the permitted
Company-paid Long-Form Registrations.
(c) SHORT-FORM REGISTRATIONS. In addition to the Long-Form
Registrations provided pursuant to Section 2(b), the holders of Registrable
Securities shall be entitled to request an unlimited number of Short-Form
Registrations in which the Company shall pay all Registration Expenses; PROVIDED
the aggregate offering value of the Registrable Securities requested to be
registered in any Short-Form Registration must equal at least $1,000,000. Demand
Registrations shall be Short-Form Registrations whenever the Company is
permitted to use any applicable short form. After the Company has become subject
to the reporting requirements of the Securities Exchange Act, the Company shall
use its best efforts to make Short-Form Registrations on Form S-3 available for
the sale of Registrable Securities.
(d) DEMAND EXPENSES. All Registration Expenses of the holders of
Registrable Securities incurred in connection with a Demand Registration shall
be paid by the Company.
(e) PRIORITY ON DEMAND REGISTRATIONS. The Company shall not include in
any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of a majority of the
Registrable Securities included in such registration. If a Demand Registration
is an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold in an orderly manner in such offering within a price range
acceptable to the holders of a majority of the Registrable Securities initially
requesting registration, the Company shall include in such registration prior to
the inclusion of any securities which are not Registrable Securities the number
of Registrable Securities requested to be included which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering, pro rata among the respective holders thereof on the basis of the
amount of Registrable Securities owned by each such holder.
(f) RESTRICTIONS ON DEMAND REGISTRATIONS. The Company shall not be
obligated to effect any Demand Registration within 180 days after the effective
date of a previous Demand Registration or a previous registration in which the
holders of Registrable Securities were given the right to include their
Registrable Securities pursuant to this Section 2 or Section 3. The Company may
postpone for up to 90 days the filing or the effectiveness of a registration
2
<PAGE> 3
statement for a Demand Registration if the Company's Board of Directors
determines in its reasonable good faith judgment that such Demand Registration
would reasonably be expected to have a material adverse effect on any proposal
or plan by the Company or any of its Subsidiaries to engage in any acquisition
of assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer, reorganization or similar transaction; PROVIDED
THAT in such event, the holders of Registrable Securities initially requesting
such Demand Registration shall be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration shall not count as one of the
permitted Demand Registrations hereunder and the Company shall pay all
Registration Expenses in connection with such registration. The Company may
delay a Demand Registration pursuant to this Section 1(f) only once in any
twelve-month period.
(g) SELECTION OF UNDERWRITERS. The holders of a majority of the
Registrable Securities initially requesting registration hereunder shall have
the right to select the investment banker(s) and manager(s) to administer the
offering, subject to the Company's approval, which shall not be unreasonably
withheld.
(h) OTHER REGISTRATION RIGHTS. Except as provided in this Agreement,
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of a majority of the Registrable Securities.
3. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register any
of its securities under the Securities Act (other than pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "PIGGYBACK REGISTRATION"), the Company
shall give prompt written notice to all holders of Registrable Securities and
MDI Shares of its intention to effect such a registration and, subject to
Sections 3(c) and 3(d) below, shall include in such registration all Registrable
Securities and MDI Shares with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice.
(b) PIGGYBACK EXPENSES. All Registration Expenses of the holders of
Registrable Securities incurred in connection with a Piggyback Registration
shall be paid by the Company.
(c) PRIORITY ON PRIMARY REGISTRATION. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without adversely affecting the marketability
of the offering, the Company shall include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of shares owned by each
such holder, (iii) third, the MDI Shares and (iv) fourth, other securities
requested to be included in such registration.
3
<PAGE> 4
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is
an underwritten secondary registration on behalf of holders of the Company's
securities and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting the marketability of the offering, the Company shall include
in such registration (i) first, the securities requested to be included therein
by the holders requesting such registration and the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such securities on the basis of the number of securities owned by each such
holder, (ii) second, the MDI Shares and (iii) third, other securities requested
to be included in such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten offering, the selection of investment banker(s) and manager(s) for
the offering must be approved by the holders of a majority of the Registrable
Securities included in such Piggyback Registration. Such approval shall not be
unreasonably withheld.
(f) OTHER REGISTRATIONS. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
Section 2 or pursuant to this Section 3, and if such previous registration has
not been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-8 or any successor form), whether on its
own behalf or at the request of any holder or holders of such securities, until
a period of at least 120 days has elapsed from the effective date of such
previous registration.
4. HOLDBACK AGREEMENTS.
(a) In connection with any underwritten public offering of the
Company's Common Stock, MDI and each holder of Registrable Securities shall not,
unless the underwriters managing the registered public offering otherwise agree,
effect any public sale or distribution (including sales pursuant to Rule 144
under the Securities Act) of equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such securities (except as
part of such underwritten registration), during the seven days prior to and, in
connection with the Company's initial public offering, the 180 day period
beginning on the date of the offering or, in connection with subsequent
underwritten public offerings of the Company's Common Stock, the 90 day period
beginning on the date of the offering.
(b) The Company (i) shall not effect any public sale or distribution of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
180 day period beginning on the effective date of, any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) shall cause each holder of at least 1% of its Common
Stock, or any securities convertible into or exchangeable or exercisable for
Common Stock, purchased from the Company at any time after the date of this
Agreement (other than in a registered public offering) to agree not to effect
any public sale or distribution (including sales pursuant to Rule 144) of any
such securities during
4
<PAGE> 5
such period (except as part of such underwritten registration, if otherwise
permitted), unless the underwriters managing the registered public offering
otherwise agree.
5. REGISTRATION PROCEDURES. Whenever the holders of Registrable Securities
have requested that any Registrable Securities be registered pursuant to this
Agreement, the Company shall use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of disposition thereof, and pursuant thereto the Company shall as expeditiously
as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective; PROVIDED
THAT before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company shall furnish to the counsel selected by the
holders of a majority of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which documents
shall be subject to the review and comment of such counsel;
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 180 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller; PROVIDED THAT the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction,
(e) notify each seller of such Registrable Securities, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company shall prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such
5
<PAGE> 6
Registrable Securities, such prospectus shall not contain an untrue statement of
a material fact or omit to state any fact necessary to make the statements
therein not misleading,
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designation of all such Registrable Securities covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11 Aa2-1 promulgated pursuant to the Securities Exchange Act or,
failing that, to secure NASDAQ authorization for such Registrable Securities
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register as such with respect to such Registrable
Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including effecting a stock split or a combination of
shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as, soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11 (a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
reasonable judgment, might be deemed to be an underwriter or a controlling
person of the Company, to participate in the preparation of such registration or
comparable statement and to require the insertion therein of material, furnished
to the Company in writing, which in the reasonable judgment of such holder and
its counsel should be included; and
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for
6
<PAGE> 7
sale in any jurisdiction, the Company shall use its best efforts promptly to
obtain the withdrawal of such order.
6. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, fees and disbursements of custodians,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other Persons retained by the Company (all such expenses being herein called
"REGISTRATION EXPENSES") shall be borne as provided in this Agreement; in
addition, the Company shall pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit or quarterly
review, the expense of any liability insurance and the expenses and fees for
listing the securities to be registered on each securities exchange on which
similar securities issued by the Company are then listed or on the NASD
automated quotation system.
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company shall reimburse the holders of Registrable Securities
included in such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of a majority of the Registrable Securities
initially requesting such registration and for the reasonable fees and
disbursements of each additional counsel retained by any holder of Registrable
Securities for the purpose of rendering a legal opinion on behalf of such holder
in connection with any underwritten Demand Registration or Piggyback
Registration.
(c) To the extent that Registration Expenses are not paid by the
Company, each holder of securities included in any registration hereunder shall
pay those Registration Expenses allocable to the registration of such holder's
securities so included, and any Registration Expenses not so allocable shall be
borne by all sellers of securities included in such registration in proportion
to the aggregate selling price of the securities to be so registered.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities and MDI Shares, its officers and directors
and each Person who controls such holder (within the meaning of the Securities
Act) against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the
7
<PAGE> 8
Securities Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities and MDI Shares.
(b) In connection with any registration statement in which a holder of
Registrable Securities or MDI Shares is participating, each such holder shall
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, shall indemnify the Company,
its directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; PROVIDED that the obligation to indemnify
shall be individual, not joint and several, for each holder and shall be limited
to the net amount of proceeds received by such holder from the sale of
Registrable Securities or MDI Shares pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person's right to indemnification hereunder to the extent
that such failure has not prejudiced the indemnifying party) and (ii) unless in
such indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld.) An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement shall remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and shall survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
8. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate
in any registration hereunder which is underwritten unless such Person (i)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, custody agreements, indemnities, underwriting agreements
8
<PAGE> 9
and other documents required under the terms of such underwriting arrangements;
PROVIDED THAT no holder of Registrable Securities or MDI Shares included in any
underwritten registration shall be required to make any representations or
warranties to the Company or the underwriters (other than representations and
warranties regarding such holder and such holder's intended method of
distribution) or to undertake any indemnification obligations to the Company or
the underwriters with respect thereto, except as otherwise provided in Section 7
hereof.
9. DEFINITIONS.
(a) "REGISTRABLE SECURITIES" means (i) Common Stock issuable upon
conversion of the Series D Convertible Stock and the Convertible Stock issued
under the Initial Purchase Agreement, (ii) any Common Stock issued or issuable
with respect to the securities referred to in clause (i) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, and (iii) any
other shares of Common Stock held by Persons holding securities described in
clauses (i) or (ii) above. As to any particular Registrable Securities, such
securities shall cease to be Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force) or repurchased by the Company or any Subsidiary.
(b) "MDI SHARES" means (i) up to 1,015,808 shares of Common Stock held
by MDI, and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular MDI Shares, such
securities shall cease to be MDI Shares when they have been distributed to the
public pursuant to an offering registered under the Securities Act or sold to
the public through a broker, dealer or market maker in compliance with Rule 144
under the Securities Act (or any similar rule then in force) or repurchased by
the Company or any Subsidiary.
(c) Unless otherwise stated, other capitalized terms contained herein
have the meanings set forth in the Initial Purchase Agreement and the New
Purchase Agreement.
10. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company shall not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company shall not
take any action, or permit any change to occur, with respect to its securities
which would materially and adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would materially and adversely
affect the marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) REMEDIES. Any Person having rights under any provision of this
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any
9
<PAGE> 10
breach of any provision of this Agreement and to exercise all other rights
granted by law. The parties hereto agree and acknowledge that money damages may
not be an adequate remedy for any breach of the provisions of this Agreement and
that any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or prevent
violation of the provisions of this Agreement.
(d) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company, holders of a majority of the Registrable
Securities and MDI.
(e) SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of and
enforceable by, any subsequent holder of Registrable Securities.
(f) SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts (including by means of telecopied signature pages), any one
of which need not contain the signatures of more than one party, but all such
counterparts taken together shall constitute one and the same Agreement.
(h) DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(i) GOVERNING LAW. All issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of Nevada, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of Nevada or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Nevada.
(j) NOTICES. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (i) five (5) days after
deposit with the U.S. Postal Service or other applicable postal service, if
delivered by first class mail, postage prepaid, (ii) upon delivery, if delivered
by hand, (iii) one business day after the business day of deposit with Federal
Express or similar nationally recognized overnight courier, freight prepaid or
(iv) one business day after the business day of facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed as follows, or
10
<PAGE> 11
at such other address as a party may designate by ten (10) days' advance written
notice to the other parties to this Agreement pursuant to the provisions of this
Section 10(j):
(x) if to an Investor, to such Investor's address set forth on
the Schedule of Investors.
(y) if to the Company to:
MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
Facsimile: (617) 454-6101
Attention: Paul K. Zurlo
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Facsimile: (617) 523-1231
Attention: John J. Egan III, Esq.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
MCK COMMUNICATIONS, INC.
By: /s/ Steven J. Benson
-----------------------------------
Name:
Title:
MANZ DEVELOPMENTS INC.
By: /s/ Cal Manz
-----------------------------------
Name:
Title:
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.
Its General Partner
By: Stamps, Woodsum & Co. IV
Its General Partner
By: /s/ Signature Illegible
----------------------------------
Its:
----------------------------------
SUMMIT INVESTORS III, L.P.
By: /s/ Signature Illegible
----------------------------------
Name:
Title:
<PAGE> 13
SUMMIT SUBORDINATED DEBT L.P.
By: Summit Partners III, L.P.
Its General Partner
By: Stamps, Woodsum & Co. III
Its General Partner
By: /s/ Signature Illegible
------------------------------------
Its:
------------------------------------
WS INVESTMENT COMPANY 96A
By: /s/ Jeffrey D. Saper
------------------------------------
Its:
------------------------------------
TRUSTEE, WSGR RETIREMENT PLAN
FBO JEFFREY D. SAPER
By: /s/ Signature Illegible
------------------------------------
Its:
------------------------------------
<PAGE> 14
LAZARD TECHNOLOGY PARTNERS LP
By: /s/ Russell Planitzer
--------------------------------
Name: Russell Planitzer
Title: Managing Principal
LAZARD TECHNOLOGY PARTNERS LLC
By: /s/ Russell Planitzer
--------------------------------
Name: Russell Planitzer
Title: Managing Principal
LAZARD TECHNOLOGY INVESTORS
(1998) LLC
By: /s/ Russell Planitzer
--------------------------------
Name: Russell Planitzer
Title: Managing Principal
FSC CORP.
By: /s/ Signature Illegible
--------------------------------
Name:
Title: Vice President
<PAGE> 15
THE YARMOUTH TRUST
By: /s/ Robert Morrissey
---------------------------------
Robert Morrissey
Trustee of The Yarmouth Trust
<PAGE> 16
SCHEDULE OF INVESTORS
NAME AND ADDRESS
- ----------------
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
Attn: Michael Balmuth
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
Attn: Michael Balmuth
Summit Subordinated Debt Fund, L.P.
600 Atlantic Avenue, Suite 2800
Boston, Massachusetts 02210-2227
Attn: Michael Balmuth
Trustee, WSGR Retirement Plan
FBO Jeffrey D. Saper
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 496-4084
WS Investment Company 96A
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 496-4084
Lazard Technology Partners LP
30 Rockefeller Plaza
New York, NY 10020
Facsimile: (212) 332-5964
Lazard Technology Partners LLC
30 Rockefeller Plaza
New York, NY 10020
Facsimile: (212) 332-5964
Lazard Technology Investors
(1998) LLC
30 Rockefeller Plaza
New York, NY 10020
Facsimile: (212) 332-5964
<PAGE> 17
FSC Corp.
100 Federal Street
Boston, MA 02110
The Yarmouth Trust
Two International Place
Boston, MA 02116
Attn: Robert Morrissey
<PAGE> 1
EXHIBIT 10.3
MCK COMMUNICATIONS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary and to promote the success of the
Company's business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at the
time of grant of an option and subject to the applicable provisions of Section
422 of the Code and the regulations promulgated thereunder.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board of Directors
in accordance with Section 4 of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means MCK Communications Inc., a Nevada corporation.
(g) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory
services and is compensated for such services, and any director
of the Company whether compensated for such services or not. If
and in the event the Company registers any class of any equity
security pursuant to the Exchange Act, the term Consultant shall
thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means that the
employment or consulting relationship with the Company, any
Parent or Subsidiary is not interrupted or terminated. Continuous
Status as an Employee or Consultant shall not be considered
interrupted 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. A leave of absence approved by the Company shall
include sick leave, military leave, or any other personal
<PAGE> 2
leave. For purposes of Incentive Stock Options, no such leave may
exceed 90 days, unless reemployment upon expiration of such leave
is guaranteed by statute or contract, including Company policies.
If reemployment upon expiration of a leave of absence approved by
the Company is not so guaranteed, on the 181st day of such leave
any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax
purposes as a Nonstatutory Stock Option.
(i) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(j) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company shall not
be sufficient to constitute "employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "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 stocked
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, its
Fair Market Value 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; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good
faith by the Administrator.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of
the Code.
(n) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(o) "OPTION" means a stock option granted pursuant to the Plan.
2
<PAGE> 3
(p) "OPTIONED STOCK" means the Common Stock subject to an Option.
(q) "OPTIONEE" means an Employee or Consultant who receives an
Option.
(r) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(s) "PLAN" means this Amended and Restated 1996 Stock Option Plan.
(t) "SECTION 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(u) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 11 below.
(v) "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 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,270,445 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
authorized by the Administrator, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated); provided, however, that Shares that have actually been
issued under the Plan shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are repurchased by the Company at their original purchase price, such Shares
shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon which the
Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a committee appointed by the Board.
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS
SUBJECT TO SECTION 16(b). With respect to Option grants made
to Employees who are also Officers or Directors subject to
Section 16(b) of the Exchange Act, the Plan shall be
administered by (A) the Board, if the Board may administer
the Plan in a manner complying with the rules under Rule
16b-3 relating to the disinterested administration of
employee benefit plans under which Section 16(b) exempt
discretionary grants and awards of equity securities are to
be made,
3
<PAGE> 4
or (B) a committee designated by the Board to administer the
Plan, which committee shall be constituted to comply with
the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section
16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee
shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board
may increase the size of the Committee and appoint
additional members, remove members (with or without cause)
and substitute new members, fill vacancies (however caused),
and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by
the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section
16(b) exempt discretionary grants and awards of equity
securities are to be made.
(ii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With respect
to Option grants made to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan
shall be administered by (A) the Board or (B) a committee
designated by the Board, which committee shall be
constituted to satisfy the legal requirements, if any,
relating to the administration of incentive stock option
plans of state corporate and securities laws, of the Code,
and of any stock exchange or national market system upon
which the Common Stock is then listed or traded (the
"Applicable Laws"). Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by
the Board. The Board may increase the size of the Committee
and appoint additional members, remove members (with or
without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee
and thereafter directly administer the Plan, all to the
extent permitted by Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties
delegated by the Board to such Committee, and subject to the
approval of any relevant authorities, including the approval, if
required, of any stock exchange or national market system upon
which the Common Stock is then listed, the Administrator shall
have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(1) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
4
<PAGE> 5
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award 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 may include, but are not limited to,
the exercise price, the time or times when Options may be
exercised, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding
any Option or the Shares relating thereto, based in each
case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 9(e) instead of Common
Stock;
(viii) 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 has declined since the
date the Option was granted;
(ix) to provide for the early exercise of Options for the
purchase of unvested Shares, subject to such terms and
conditions as the Administrator may determine; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations
and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an
Option may, if otherwise eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designation, to the extent
that the aggregate Fair Market Value of the Shares with respect
to which Incentive Stock Options
5
<PAGE> 6
are exercisable for the first time by the Optionee during any
calendar year (under all plans of the Company and any Parent or
Subsidiary) exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with
respect to the continuation of the Optionee's employment or
consulting relationship with the Company, nor shall it interfere
in any way with the Optionee's right or the Company's right to
terminate the Optionee's employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement which, for greater certainty where applicable, shall
include the term stated in the Notice of Grant attached to each Option
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by
the Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing
more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share
exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
6
<PAGE> 7
(ii) In the case of a Nonstatutory Stock Option, the per share
exercise price shall be determined by the Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive
Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4)
other Shares which (x) 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 (y) have a Fair
Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which such Option shall be
exercised, (5) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of
the Option and delivery to the Company of the sale or loan
proceeds required to pay the exercise price, or (6) any
combination of the foregoing methods of payment. In making its
determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration
may be reasonably expected to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under
such conditions as determined by the Administrator, including
performance criteria with respect to the Company and/or the
Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
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 stock
certificate evidencing such 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 Company shall issue (or cause to
be issued) such stock certificate promptly upon 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 the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in may manner shall result in a decrease in the
number of Shares which thereafter may be 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.
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<PAGE> 8
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Upon
termination of an Optionee's Continuous Status as an Employee or
Consultant, 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 Notice of Grant, and only
to the extent that the Optionee was entitled to exercise it at
the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice
of Grant). In the absence of a specified time in the Notice of
Grant, the Option shall remain exercisable for three (3) months
following the Optionee's termination. In the case of an Incentive
Stock Option, such period of time for exercise shall not exceed
three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the
Optionee's entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to
the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
(c) DISABILITY OF OPTIONEE. In the event of termination of an
Optionee's Continuous Status as an Employee or Consultant as a
result of his or her Disability, the Optionee may, but only
within twelve (12) months from the date of such termination (and
in no event later than the expiration date of the term of his or
her Option as set forth in the Option Agreement), exercise the
Option to the extent the Optionee was otherwise entitled to
exercise it on the date of such termination. To the extent that
the Optionee is not entitled to exercise the Option on the date
of termination, or if the Optionee does not exercise the Option
to the extent so entitled within the time specified herein, the
Option shall terminate, and the Shares covered by the Option
shall revert to the Plan.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Notice
of Grant), by the Optionee's estate or by a person who has
acquired the right to exercise the Option by bequest or
inheritance, but only to the extent that the Optionee was
entitled to exercise the Option at the date of death. If, at the
time of death, the Optionee was not entitled to exercise his or
her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If,
after death, the Optionee's estate or a person who
8
<PAGE> 9
acquires the right to exercise the Option by bequest or
inheritance does not exercise the Option 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.
(f) RULE 16b-3. Options granted to persons subject to Section 16(b)
of the Exchange Act must comply with Rule 16b-3 and shall contain
such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16
of the Exchange Act with respect to Plan transactions.
10. TRANSFERABILITY OF OPTIONS.
(a) Incentive Stock Options 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.
(b) Non-Qualified Stock Options may be transferred, without
consideration for such transfer, to members of the Optionee's
immediate family, to trusts for the benefit of such family
members, to partnerships in which such family members are the
only partners, or to charitable organizations so long as the
transferee agrees in writing to be bound by the terms and
conditions of this Plan and the applicable Option Agreement.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(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 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
9
<PAGE> 10
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 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 have
the right to exercise the Option as to all of the Optioned Stock,
including Shares as to which it would not otherwise be
exercisable. If an Option is exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be
fully 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 it following the merger or
sale of assets, the Option confers the right to purchase or
receive, for each Share of Optioned Stock subject to the Option
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 was
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
subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per
share consideration received by holders of Common Stock in the
merger or sale of assets.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
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<PAGE> 11
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment,
alteration, suspension or discontinuation shall be made which
would impair the rights of any Optionee under any grant
theretofore made, without his or her consent. In addition, to the
extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act or with Section 422 of the Code (or any other
applicable law or regulation, including the requirements of any
stock exchange or national market system upon which the Common
Stock is then listed), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a
degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted,
and such Options shall remain in full force and effect as if this
Plan had not been amended or terminated, unless mutually agreed
otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. 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 pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or national market system
upon which the Common Stock is then listed or traded, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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.
16. AGREEMENTS. Options shall be evidenced by written agreements in such
form as the Administrator shall approve from time to time.
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<PAGE> 12
17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
<PAGE> 1
EXHIBIT 10.4
MCK COMMUNICATIONS, INC.
1999 STOCK OPTION AND GRANT PLAN
Section 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the MCK Communications, Inc. 1999 Stock
Option and Grant Plan (the "Plan"). The purpose of the Plan is to encourage and
enable the officers, employees, directors, consultants, advisors and other key
persons of MCK Communications, Inc. (the "Company") and its Subsidiaries (as
defined below) upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category
of grant under the Plan, shall include Incentive Stock Options, Non-Qualified
Stock Options, Restricted Stock Awards, and Unrestricted Stock Awards.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" has the meaning specified in Section 2.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 13.
"Fair Market Value" of the Stock on any given date means (i) if the
Stock is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall not be less than the average of the highest bid and lowest asked prices of
the Stock reported for such date or, if no bid and asked prices were reported
for such date, for the last day preceding such date for which such prices were
reported; or (ii) if the Stock is admitted to trading on a national securities
exchange or the NASDAQ National Market System, then clause (i) shall not apply
and the Fair Market Value on any date shall not be less than the closing price
reported for the Stock on such exchange or system for such date or, if no sales
were reported for such date, for the last date preceding such date for which a
sale was reported; or (iii) if the Stock is not publicly traded on a securities
exchange or traded in the over-the-counter market or, if traded or quoted, there
are no transactions or quotations within the last ten trading days or trading
has been halted for
<PAGE> 2
extraordinary reasons, the Fair Market Value on any given date shall be
determined in good faith by the Committee with reference to the rules and
principles of valuation set forth in Section 20.2031-2 of the Treasury
Regulations; and (iv) notwithstanding the foregoing, the Fair Market Value of
the Stock on the effective date of the Initial Public Offering shall be the
offering price to the public of the Stock on such date.
"Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is neither an
employee or officer of the Company or any Subsidiary.
"Initial Public Offering" means the first underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Stock to the public.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of
Stock granted pursuant to Section 5.
"Restricted Stock Award" means any Award granted pursuant to
Section 6.
"Stock" means the Common Stock, par value $.001 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning with
the Company, if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to
Section 7.
Section 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS.
(a) COMMITTEE. The Plan shall be administered by the Board of
Directors of the Company, or at the discretion of the Board, by a committee of
the Board consisting of not less than two Directors; provided, however, that if
each member of the Committee is not (i) a "Non-Employee Director" within the
meaning of Rule 16b-3(a)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and (ii) an "Outside Director" within the meaning of
Section 162(m) of the Code and the regulations promulgated thereunder, any
Awards
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<PAGE> 3
granted to individuals subject to the reporting requirements of Section 16 of
the Exchange Act shall be approved by the Board of Directors. All references
herein to the Committee shall be deemed to refer to the entity then responsible
for administration of the Plan at the relevant time (i.e., either the Board of
Directors or a committee of the Board, as applicable).
(b) POWERS OF COMMITTEE. The Committee shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(1) to select the officers, employees, Independent Directors,
consultants, advisers and key persons of the Company and its Subsidiaries to
whom Awards may from time to time be granted;
(2) to determine the time or times of grant, and the extent, if
any, of Incentive Stock Options, Non-Qualified Stock Options, Stock appreciation
Rights, Restricted Stock Awards, Unrestricted Stock Awards, Performance Share
Awards and Dividend equivalent Rights, or any combination of the foregoing,
granted to any one or more participants;
(3) to determine the number of shares of Stock to be covered by
any Award;
(4) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the Plan,
of any Award, which terms and conditions may differ among individual Awards and
participants, and to approve the form of written instruments evidencing the
Awards;
(5) to accelerate at any time the exercisability or vesting of
all or any portion of any Award and/or to include provisions in Awards providing
for such acceleration,
(6) to impose any limitations on Awards granted under the Plan,
including limitations on transfers repurchase provisions and the like and to
exercise repurchase rights or obligations;
(7) subject to the provisions of Section 5(a)(3), to extend at
any time the period in which Stock Options may be exercised;
(8) to determine at any time whether, to what extent, and under
what circumstances Stock and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the participant and
whether and to what extent the Company shall pay or credit amounts constituting
interest (at rates determined by the Committee) or dividends or deemed dividends
on such deferrals; and
(9) at any time to adopt, alter and repeal such rules, guidelines
and practices for administration of the Plan and for its own acts and
proceedings as it shall deem advisable, to interpret the terms and provisions of
the Plan and any Award (including related written instruments); to make all
determinations it deems advisable for the administration of the Plan; to decide
all disputes arising in connection with the Plan; and to otherwise supervise the
administration of the plan.
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<PAGE> 4
All decisions and interpretations of the Committee shall be binding
on all persons, including the Company and Plan participants.
(c) DELEGATION OF AUTHORITY TO GRANT AWARDS. The Committee, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Committee's authority and duties with respect to Awards, including
the granting thereof, to individuals who are not subject to the reporting and
other provisions of Section 16 of the Act or "covered employees" within the
meaning of Section 162(m) of the Code. Any such delegation by the Committee
shall include a limitation as to the amount of Awards that may be granted during
the period of delegation and shall contain guidelines as to the determination of
the exercise price of any Option, the price of other Awards and the vesting
criteria. The Committee may revoke or amend the terms of a delegation at any
time but such action shall not invalidate any prior actions of the Committee's
delegate or delegates that were consistent with the terms of the Plan.
Section 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) STOCK ISSUABLE. The maximum number of shares of Stock reserved
and available for issuance under the Plan shall be 2,000,000 shares of Stock.
For purposes of the foregoing limitations, the shares of Stock underlying any
Awards which are forfeited, canceled, reacquired by the Company, satisfied
without the issuance of Stock or otherwise terminated (other than by exercise)
shall be added back to the shares of Stock available for issuance under the
Plan. Subject to such overall limitation, shares of Stock may be issued up to
such maximum number pursuant to any type or types of Award; provided, however,
that from and after the date the plan is subject to Section 162(m) of the Code,
Awards with respect to no more than 500,000 shares of Stock may be granted to
any one individual participant during any one calendar year period. The shares
available for issuance under the Plan may be authorized but unissued shares of
Stock or shares of Stock reacquired by the Company.
(b) RECAPITALIZATIONS. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, the outstanding shares of
Stock are increased or decreased or are exchanged for a different number or kind
of shares or other securities of the Company or any successor company, or
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of Stock or
other securities, the Committee shall make an appropriate or proportionate
adjustment in (i) the maximum number of shares reserved for issuance under the
Plan, (ii) the number of Stock Options, or other Awards that can be granted to
any one individual participant, (iii) the number and kind of shares or other
securities subject to any then outstanding Awards under the Plan, and (iv) the
price for each share subject to any then outstanding Stock Options or other
Awards under the Plan, without changing the aggregate exercise price (i.e., the
exercise price multiplied by the number of shares) as to which such Stock
Options remain exercisable and the repurchase price for shares subject to
repurchase. The adjustment by the Committee shall be final, binding and
conclusive. No fractional shares of
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<PAGE> 5
Stock shall be issued under the Plan resulting from any such adjustment, but the
Committee in its discretion may make a cash payment in lieu of fractional
shares.
(c) MERGERS AND OTHER TRANSACTIONS. In the case of (i) the dissolution
or liquidation of the Company, (ii) a merger, reorganization or consolidation
between the Company and another person or entity (other than a holding company
or subsidiary of the Company) as a result of which the holders of the Company's
outstanding voting stock immediately prior to the transaction hold less than a
majority of the outstanding voting stock of the surviving entity immediately
after the transaction, (iii) the sale of all or substantially all of the assets
of the Company to an unrelated person or entity, or (iv) the sale of all of the
Stock of the Company to an unrelated person or entity (in each case, a
"Transaction"), fifty percent (50%) of the outstanding Awards held by
participants, to the extent not fully vested and exercisable, shall become
fully vested and exercisable, except (with respect to specific Awards) as the
Committee otherwise determines at the time of grant of such Awards. In
addition, unless provision is made in connection with the Transaction for the
assumption of the Awards heretofore granted, or the substitution of such
Awards of new Awards of the successor entity or parent thereof, with
appropriate adjustment as to the number and kind of shares and, if appropriate,
the per share exercise prices, as provided in Section 3(b) above all of the
remaining outstanding Awards held by participants, to the extent not fully
vested and exercisable, shall become fully vested and exercisable, except
(with respect to specific awards) as the Committee otherwise determines at the
time of grant of such Awards. Upon the effectiveness of the transaction, the
Plan and all Awards ("Contractual Awards") granted hereunder shall, unless
assumed by the successor entity, terminate. In the event of such termination,
each optionee shall be permitted to exercise for a period of at least 15 days
prior to the date of such termination all outstanding Awards held by such
optionee which are then exercisable.
(d) SUBSTITUTE AWARDS. The Committee may grant Awards under the Plan
in substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Committee may direct that the substitute
awards be granted on such terms and conditions as the Committee considers
appropriate in the circumstances.
Section 4. ELIGIBILITY.
Participants in the Plan will be such officers and other employees,
Independent Directors, consultants, advisors and other key persons of the
Company and its Subsidiaries who are responsible for or contribute to the
management, growth or profitability of the Company and its Subsidiaries as are
selected from time to time by the Committee, in its sole discretion.
Section 5. STOCK OPTIONS.
Any Stock Option granted under the Plan shall be pursuant to a stock
option agreement which shall be in such for as the Committee may from time to
time approve. Option agreements need not be identical.
Stock Options granted under the plan may be either Incentive Stock
Options or Non-Qualified Stock Options. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary that is a "subsidiary
corporation" within the meaning of Section
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<PAGE> 6
424(f) of the Code. Non-Qualified Stock Options may be granted to officers,
employees, Independent Directors, advisors, consultants and other key persons of
the Company and its Subsidiaries. To the extent that any Option does not qualify
as an Incentive Stock Option, it shall be deemed a Non-Qualified Stock option.
No Incentive Stock Option shall be granted under the Plan after
August 19, 2009.
(a) TERMS OF STOCK OPTIONS. Stock Options granted under the plan
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan as
the Committee shall deem desirable:
(1) EXERCISE PRICE. The exercise price per share for the Stock
covered by a Stock Option shall be determined by the Committee at the time of
grant but shall not be less than 100% of the Fair Market Value in the case of
Incentive Stock Options. If an employee owns or is deemed to own (by reason of
the attribution rules applicable under Section 424(d) of the Code) more than 10%
of the combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is granted to
such employee, the option price of such Incentive Stock Option shall be not less
than 110% of the Fair Market Value on the grant date.
(2) GRANT OF DISCOUNT OPTIONS IN LIEU OF CASH COMPENSATION. Upon
the request of a participant and with the consent of the Committee, such
participant may elect each calendar year to receive a Non-Qualified Stock Option
in lieu of any cash bonus or other compensation to which he may become entitled
during the following calendar year, but only if such participant makes an
irrevocable election to waive receipt of all or a portion of such cash
compensation. Such election shall be made on or before the date set by the
Committee which date shall be no later than 15 days (or such shorter period
permitted by the Committee) preceding January 1 of the calendar year for which
the cash compensation would otherwise be paid. A Non-Qualified Stock Option
shall be granted to each participant who made such an irrevocable election on
the date the waived cash compensation would otherwise be paid. The exercise
price per share shall be determined by the Committee. The number of shares of
Stock subject to the stock Option shall be determined by dividing the amount of
the waived cash compensation by the difference between the Fair Market Value of
the Stock on the date the Stock Option is granted and the exercise price per
share of the Stock Option. The Stock Option shall be granted for a whole number
of shares so determined; the value of any fractional share shall be paid in
cash.
(3) OPTION TERM. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the Option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 424(d) of the Code) more than
10% of the combined voting power of all classes of Stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is granted to
such employee, the term of such Option shall be no more than five years from the
date of grant.
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(4) EXERCISABILITY; RIGHTS OF A STOCKHOLDER. Stock Options shall
become vested and exercisable at such time or times, whether or not in
installments, as shall be determined by the Committee at or after the grant
date; provided, however, that Stock Options granted in lieu of cash compensation
shall be exercisable in full as of the grant date. The Committee may at any time
accelerate the exercisability of all or any portion of any Stock Option. An
optionee shall have the rights of a stockholder only as to shares acquired upon
the exercise of a Stock Option and not as to unexercised Stock Options.
(5) METHOD OF EXERCISE. Stock Options may be exercised in whole
or in part, by giving written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be made by
one or more of the following methods; provided, however, that the methods set
forth in subsections (B) and (C) below shall become available only after the
closing of the Initial Public Offering:
(i) In cash by certified or bank check or other
instrument acceptable to the Committee,
(ii) In the form of shares of Stock that are not then
subject to restrictions under any Company plan and that have been held by the
optionee free of such restrictions for at least six months, if permitted by the
Committee in its discretion. such surrendered shares shall be valued at Fair
Market Value on the exercise date;
(iii) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check payable and acceptable to the
Company to pay the purchase price; provided that in the event the optionee
chooses to pay the purchase price as so provided, the optionee and the broker
shall comply with such procedures and enter into such agreements of indemnity
and other agreements as the Committee shall prescribe as a condition of such
payment procedure; or
(iv) By the optionee delivering to the Company a
promissory note if the Board has authorized the loan of funds to the optionee
for the purpose of enabling or assisting the optionee to effect the exercise of
his Stock Option; provided that at least to much of the exercise price as
represents the par value of the Stock shall be paid other than with a promissory
note.
Payment instruments will be received subject to collection. The
delivery of certificates representing the shares of Stock to be purchased
pursuant to the exercise of a Stock Option will be contingent upon receipt from
the optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price for
such shares and the fulfillment of any other requirements contained in the Stock
Option or applicable provisions of laws.
(6) TERMINATION. Unless otherwise provided in the option
agreement or determined by the Committee, upon the optionee's termination of
employment (or Other
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business relationship) with the Company and its Subsidiaries, the optionee's
rights in his Stock Options shall automatically terminate.
(7) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent
required for "incentive stock option" treatment under Section 422 of the Code,
the aggregate Fair Market Value (determined as of the time of grant) of the
shares of Stock with respect to which Incentive Stock Options granted under this
Plan and any other plan of the Company or its parent and subsidiary corporations
become exercisable for the first time by an optionee during any calendar year
shall not exceed $100,000. To the extent that any Stock Option exceeds this
limit, it shall constitute a Non-Qualified Stock Option.
(b) RELOAD OPTIONS. At the discretion of the Committee, Options
granted under the Plan may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of number of shares of stock in
accordance with Section 5(a)(5)(ii) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with the same expiration
date as the original Option being exercised, and with such other terms as the
Committee may provide) to purchase that number of shares of Stock equal to the
number delivered to exercise the original Option.
(c) NON-TRANSFERABILITY OF OPTIONS. No Stock option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee; provided, however, that an optionee
may transfer, without consideration for the transfer, the Non-Qualified Stock
Options to members of his immediate family, to trusts for the benefit of such
family members, to partnerships in which such family members are the only
partners, or to charitable organization so long as the transferee agrees in
writing to be bound by the terms and conditions of this Plan and the applicable
Option Agreement.
Section 6. RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARDS. A Restricted Stock Award is an
Award entitling the recipient to acquire, at par value or such other purchase
price determined by the Committee, shares of Stock subject to such restrictions
and conditions as the Committee may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other business
relationship) and/or achievement or pre-established performance goals and
objectives.
(b) RIGHTS AS A STOCKHOLDER. Upon execution of a written instrument
setting forth the Restricted Stock Award and paying any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the Committee
shall otherwise determine, certificates evidencing the Restricted Stock shall
remain in the possession of the company until such Restricted Stock is vested as
provided in Section 6(d) below.
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<PAGE> 9
(c) RESTRICTIONS. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the written instrument evidencing the
Restricted Stock Award. If a participant's employment (or other business
relationship) with the Company and its Subsidiaries terminates under the
conditions specified in the relevant instrument relating to the Award, or upon
such other event or events as may be stated in the instrument evidencing the
Award, the company or its assigns shall have the right or shall agree, as may be
specified in the relevant instrument, to repurchase some or all of the shares of
Stock subject to the Award at such purchase price as is set forth in such
instrument.
(d) VESTING OF RESTRICTED STOCK. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which Restricted Stock
shall become vested, subject to such further fights of the Company or its
assigns as may be specified in the instrument evidencing the Restricted Stock
Aware.
(e) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
Section 7. UNRESTRICTED STOCK AWARDS
(a) GRANT OR SALE OF UNRESTRICTED STOCK. The Committee may, in its
sole discretion, grant (or sell at a purchase price determined by the Committee)
an Unrestricted Stock Award to any participant, pursuant to which such
participant may receive shares of Stock free of any vesting restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted
or sold as described in the preceding sentence in respect of past services or
other valid consideration, or in lieu of any cash compensation due to such
individual.
(b) ELECTIONS TO RECEIVE UNRESTRICTED STOCK IN LIEU OF COMPENSATION.
Upon the request of a participant and with the consent of the Committee, each
such participant may, pursuant to an advance written election delivered to the
Company no later than the date specified by the Committee, receive a portion of
the cash compensation otherwise due to such participant in the form of shares of
Unrestricted Stock either currently or on a deferred basis.
(c) RESTRICTIONS ON TRANSFERS. The right to receive shares of
Unrestricted Stock on a deferred basis may not be sold, assigned, transferred,
pledged or otherwise encumbered, other than by will or the laws of descent and
distribution.
Section 8. TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the
date as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any federal, state, or local
taxes of any kind required by law to be withheld with respect to such
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income. The Company and its Subsidiaries shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the participant.
(b) PAYMENT IN STOCK. Subject to approval by the Committee, a
participant may elect to have such tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the participant with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
Section 9. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
Section 10. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Committee may, at any time, amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price in a manner not inconsistent with the terms of the
Plan), but such price, if any, must satisfy the requirements which would apply
to the substitute or amended Award if it were then initially granted under this
Plan for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's consent. If and to the extent determined by the
Committee to be required by the Act to ensure that Incentive Stock Options
granted under the Plan are qualified under Section 422 of the Code, Plan
amendments shall be subject to approval by the Company stockholders who are
eligible to vote at a meeting of stockholders.
Section 11. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the company unless the Committee shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Committee
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
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Section 12. GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The
Committee may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of such
stop-orders and restrictive legends on certificates for Stock and Awards as it
deems appropriate.
(b) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adopting of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
Section 13. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a majority
of the shares of Stock of the Company present or represented and entitled to
vote at a meeting of stockholders. Subject to such approval by the stockholders
and to the requirement that no Stock may be issued hereunder prior to such
approval, Stock Options and other Awards may be granted hereunder on and after
adoption of this Plan by the Board.
Section 14. GOVERNING LAW
This Plan shall be governed by Delaware law except to the extent such law
is preempted by federal law.
Adopted and Effective: August 20, 1999
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<PAGE> 1
EXHIBIT 10.5
CLASS A SUBORDINATED PROMISSORY NOTE
$8,750 June 27, 1996
Calgary, Alberta
FOR VALUE RECEIVED, MCK COMMUNICATIONS, INC., a Nevada corporation, having
an address at 2255 A Renaissance Drive, Las Vegas, Nevada 89119 (hereinafter,
the "Company"), hereby promises to pay to WS Investment Company 96A (the
"Payee"), or its assigns, at 650 Page Mill Road, Palo Alto, California 94304,
U.S.A., or at such other place as may be designated by the Payee from time to
time by notice to the Company, the principal sum of Eight Thousand Seven Hundred
Fifty Dollars ($8,750.00), together with accrued interest from the date hereof
on the unpaid principal balance at a rate equal to twelve and one-half percent
(12.5%) per annum (subject to adjustment as set forth in Section 7 hereof). Such
principal and interest shall be paid in accordance with the terms of paragraph 1
below, in cash, or by wire transfer to such account as the payee shall direct,
in immediately available funds and in lawful currency of the United States of
America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable to
the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on September 30, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable in
full on the closing of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before June 30, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $2,916.67 each on June
30, 2000 and June 30, 2001 and one (1) installment of S2,916.66 on June 30,
2002;
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean any one of (a) an offering by the Company of its capital stock
or equity securities to the public pursuant to an effective registration
statement under the United States Securities Act of 1933, as then in effect, or
any comparable statement under any similar United States statute then in force,
(b) any sale or transfer of more than 20% of the assets of the Company and its
subsidiaries on a consolidated basis (measured either by book value in
accordance with generally accepted accounting principles consistently applied or
by fair market value determined in the reasonable good faith judgment of the
Company's Board of Directors) in any transaction or series of transactions
(other than sales of inventory in the ordinary course of business) and (c) any
merger or consolidation to which the Company is a party, except for a merger in
which the Corporation is the surviving corporation and after giving effect to
such merger the stockholders of the Company immediately prior to the merger
continue to be the record and beneficial owners of capital stock of the Company
possessing the voting power (under ordinary circumstances) to elect a majority
of the Company's Board of Directors and continue to be the record and beneficial
owners of at least 51% of the Company's issued and outstanding Common Stock.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the State of Nevada are authorized
<PAGE> 2
or required by law to close, then the maturity thereof shall be extended to the
next succeeding business day; and during any such extension, interest on
principal amounts payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Note Purchase Agreement (the "Agreement") dated of even date herewith by and
among the Company, the Payee and certain other individuals and entities and is
subject to the terms and conditions of the Agreement. Capitalized terms not
otherwise defined herein shall have the definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee and
successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof.
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors and
assigns, covenants and agrees, and the Payee and successor holders of this Note
by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, but only to the extent and in the manner hereinafter set forth, to the
prior payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they or
any of them may proceed to enforce such provisions against the Company or
against the holder of this Note without the necessity of joining the Company as
a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except securities that are subordinated to Senior Debt to at
least the same extent as this Note) or other property, shall be made on account
of this Note, and any such payment or distribution, except securities that are
subordinated and junior in right of payment to the payment of all Senior Debt
then outstanding in terms of substantially the same tenor as this Section 3,
which would, but for the provisions hereof, be payable or deliverable in respect
of the Note shall be paid or delivered directly to the holders of Senior Debt
(or their duly authorized representatives), in the proportions in which they
hold the same, until all Senior Debt shall have been paid in full, and every
holder of this Note by becoming a holder hereof shall have designated and
appointed the holder or holders of Senior Debt (and their duly authorized
representatives) as his or its agents and attorneys-in-fact to demand, sue for,
collect and receive such Senior Debt holder's ratable share of all such payments
and distributions and, if the holder fails to make any such filing by 30 days
prior to the last date on which such filing may be made, to file any necessary
proof of claim thereof in the name of the holders of this Note or otherwise, as
such Senior Debt holders (or their authorized representatives) may determine to
be necessary or appropriate for the enforcement of this Section 3.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the event
that:
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<PAGE> 3
(A) Any default occurs in the payment of the principal of or
interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event that
any default by the Company under the terms of the Senior Debt occurs (other than
a default in the payment of the principal of or interest on any Senior Debt),
then, upon receipt by the Company and the Payee of a written notice of such
default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee. Each holder of Senior Debt may send one or more Blockage
Notices, except as otherwise provided above, but payments hereunder may not be
blocked by the holders of Senior Debt for more than 180 days during any 360-day
period. The terms of this Section 3(b)(iii) shall not apply if the maturity of
any Senior Debt has been accelerated by any holder thereof because of a default
if such acceleration has not been rescinded or said Senior Debt has not been
paid, but rather, the provisions of Section 3(b)(ii) shall apply. Other than as
set forth in Sections 3(b)(ii) and 3(b)(iii), past and current interest and
principal on this Note shall by paid by the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or distribution
shall be paid or delivered to any holder of this Note in violation or
contravention of the terms of this subordination, before all Senior Debt shall
have been paid in full, such payment or distribution shall be held in trust for
and paid and delivered ratably to the holders of Senior Debt (or their duly
authorized representatives), until all Senior Debt shall have been paid in full
or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. At any meeting of creditors of the Company or
in the event of any proceeding, voluntary or involuntary, for the distribution,
division or application of all or part of the assets of the Company or its
proceeds thereof, whether such proceeding be for the liquidation, dissolution or
winding up of the Company or the business of a receivership, insolvency or
bankruptcy proceeding, an assignment for the benefit of creditors or a
proceeding by or against the Company for relief under any bankruptcy,
reorganization or insolvency law or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, arrangement, composition or
extension or otherwise, if all Senior Debt has not been paid in full at the
time, the holders of the Senior Debt are hereby authorized at any such meeting
or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant to
or in connection with this Note, either in their own names or the name or names
of any holder of this Note; and
(B) To collect any assets of the Company distributed, divided
or applied by way of dividend or payment, or any securities issued on account of
this Note (other than securities containing subordinating provisions at least as
favorable to the holders of Senior Debt as those contained in this Note)
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<PAGE> 4
and apply the same, or the proceeds of any realization upon the same that the
holders of the Senior Debt elect to effect, to Senior Debt until all Senior Debt
shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 3 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or future
holder of Senior Debt to enforce subordination of this Note pursuant to the
provisions of this Section 3 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such other holder of
Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security of
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of this Section 3, may
not be amended or waived in any manner that is detrimental to any Senior Debt
without the consent of the holders of a majority in principal amount of then
existing Senior Debt.
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior Debt"
shall mean all Indebtedness of the Company up to a maximum of $2,000,000 (which
is not convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof which is not by its terms subordinate and junior to or on a parity with
this Note.
The term "Indebtedness" shall mean the obligations of the Company
in respect of the principal, interest, fees, charges and expenses, whether
direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will execute
and deliver any other documents evidencing the subordination of this Note to
Senior Debt that may be reasonably requested by the Company or the holders of a
majority in principal amount of then existing Senior Debt so long as none of the
provisions contained in such documents diminish the rights of Payee in any
manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future holder
of any Senior Debt to enforce subordination as herein provided shall at any time
in any way be prejudiced or impaired by any good faith act or good faith failure
to act by such holder, or by any noncompliance by the Company, with the terms
and provisions and covenants herein (other than the failure of such holder or
the Company to give notice of default under Sections 3(b)(ii) and 3(b)(iii)
hereof) regardless of any knowledge thereof any such holder may have or
otherwise be charged with. The provisions of this Section 3 are intended to be
for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
4
<PAGE> 5
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest remains
unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder and/or (ii) any written notification given to the
Company by any holder of Senior Debt that an event of default has occurred under
the Senior Debt loan documents, or that such holder has declared the Senior Debt
owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable advance
notice, during normal business hours, and without undue disruption of the
business of the Company, to visit, and inspect any of the properties, corporate
books and financial records of the Company, to make copies of such books and
records, and to discuss the affairs, finances, and accounts of the Company with
the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 3.3 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events shall constitute an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to acceleration of the maturity of such Senior Debt; PROVIDED,
HOWEVER, that in the event that the event of default under the terms of the
Senior Debt is waived or tolled, the Event of Default hereunder shall be waived
or tolled for a similar duration;
(iii) A breach or default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 5 of this Note, which has not been cured within fifteen
(15) days after notice thereof from the Payee;
(iv) (A) The Company or any Subsidiary shall commence any
voluntary case, proceeding or other action under any existing or future law of
any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to the Company
or any Subsidiary, or seeking to adjudicate the Company or any Subsidiary as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other
5
<PAGE> 6
relief with respect to the Company or any Subsidiary or its debts, or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its assets, or the Company or any
Subsidiary shall make a general assignment for the benefit of its creditors; or
(B) there shall have been commenced against the Company or any Subsidiary any
involuntary case, proceeding or other action of a nature referred to in clause
(A) above and such involuntary case, proceeding or other action shall remain
undismissed and unstayed for a period of sixty (60) consecutive days; or (C)
there shall have been commenced against the Company or any Subsidiary any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
the assets of the Company or any Subsidiary which shall not have been vacated,
discharged or stayed or bonded pending appeal within sixty (60) consecutive days
from the entry thereof, or (D) the Company or any Subsidiary shall have taken
any action in furtherance of or acquiescence in any of the acts set forth in
clauses (A), (B) or (C) above; or (E) the Company or any Subsidiary shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due;
(v) All or any substantial part of the assets of the Company or
any Subsidiary shall be (A) destroyed by fire or other casualty and shall not
have been substantially reconstructed within a period of one (1) year, unless
the Company or such Subsidiary shall have received or be entitled to receive
insurance benefits with respect to such assets in an amount equal to at least
ninety percent (90%) of the fair market value of such assets at the time of
destruction or (B) condemned, seized or otherwise appropriated, or custody or
control of such assets shall be assumed by any governmental agency or by any
court of competent jurisdiction at the instance of any governmental agency, and
shall be retained for a period of sixty (60) days, unless the Company or such
Subsidiary shall have received or be entitled to receive compensation for such
assets in an amount equal to at least ninety percent (90%) of the fair market
value of such assets on the date of such condemnation, seizure or other
appropriation;
(vi) Other than an Event of Default of the nature specified in
Sections 6(a)(i) and (ii) above, a default by the Company or any Subsidiary in
the performance or observance of any material covenant, agreement or condition
contained in the Agreement which, if such event is subject to being cured, has
not been cured within fifteen (15) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under any
evidence of indebtedness for borrowed money of the Company or any Subsidiary in
a principal amount in excess of $100,000 (other than the Senior Debt and trade
payables incurred in the ordinary course of business), whether such indebtedness
now exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in the event
that the event of default of such indebtedness is waived or tolled, the Event of
Default hereunder shall be waived or tolled for a similar duration); or
(viii) If a judgment in excess of $100,000 is entered against the
Company or any Subsidiary, and, within sixty (60) days after entry thereof, such
judgment is not discharged or execution thereof stayed pending appeal, or within
(30) days after the expiration of said stay, such judgment is not discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and accrued
interest on this Note shall immediately become due and payable; and (ii) if such
Event of Default is any other Event of Default which shall be continuing, the
Payee may, by written notice to the Company, declare this Note to be forthwith
due and payable, whereupon this Note shall become forthwith due and payable,
both as to principal and accrued interest, without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived,
anything contained in this Note to the contrary notwithstanding.
7. INTEREST RATE ADJUSTMENTS. In the event that any Payment of principal
or interest provided for herein is not paid by the Company when due, then the
Company shall pay to the Payee a late charge in an
6
<PAGE> 7
amount equal to eighteen percent (18%) per annum. Such late charge shall be
applied only to those installments of principal and interest not paid when due
(including the entire unpaid principal balance of this Note, in the event that
the Payee shall have the right to exercise its rights and remedies hereunder)
computed from the date payment was due to the date of actual payment.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment of
all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion (provided that such portion shall be
not less than $100,000.00) of the outstanding principal balance of this Note,
together with accrued interest to the date of prepayment on the principal amount
prepaid. Any partial prepayment of principal shall be applied in reduction of
the outstanding installments of principal hereof, in inverse order of stated
maturity.
(b) In the event of the completion of a public offering that qualifies
as a Qualified Liquidity Event, then subject to any contrary provision of the
Senior Debt, the net proceeds to the Company of such public offering shall, upon
receipt by the Company, first be applied toward payment of the outstanding
principal balance of this Note, which prepayment of principal shall be
accompanied by payment of all unpaid accrued interest thereon. Any such
prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall be
restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Nevada without giving
effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in
7
<PAGE> 8
such jurisdiction and the remaining provisions hereof shall be liberally
construed in favor of the holder hereof in order to effectuate the provisions
hereof and of said instruments; and the invalidity of any provision hereof or
thereof in any jurisdiction shall not affect the validity or enforceability of
any other provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its duly authorized officers as of the day and year first above written.
MCK COMMUNICATIONS, INC.
a Nevada corporation
By: /s/ Cal Manz
-------------------------------------
Cal Manz, President
9
<PAGE> 1
EXHIBIT 10.6
CLASS A SUBORDINATED PROMISSORY NOTE
$16,250 June 27, 1996
Calgary, Alberta
FOR VALUE RECEIVED, MCK COMMUNICATIONS, INC., a Nevada corporation, having
an address at 2255 A Renaissance Drive, Las Vegas, Nevada 89119 (hereinafter,
the "Company"), hereby promises to pay to Trustee, WSGR Retirement Plan FBO
Jeffrey D. Saper (the "Payee"), or its assigns, at 650 Page Mill Road, Palo
Alto, California 94304, U.S.A., or at such other place as may be designated by
the Payee from time to time by notice to the Company, the principal sum of
Sixteen Thousand Two Hundred Fifty Dollars ($16,250.00), together with accrued
interest from the date hereof on the unpaid principal balance at a rate equal to
twelve and one-half percent (12.5%) per annum (subject to adjustment as set
forth in Section 7 hereof). Such principal and interest shall be paid in
accordance with the terms of paragraph 1 below, in cash, or by wire transfer to
such account as the Payee shall direct, in immediately available funds and in
lawful currency of the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable to
the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on September 30, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable in
full on the closing of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before June 30, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $5,416.67 each on June
30, 2000 and June 30, 2001 and one (1) installment of $5,416.66 on June 30,
2002;
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean any one of (a) an offering by the Corporation of its capital
stock or equity securities to the public pursuant to an effective registration
statement under the United States Securities Act of 1933, as then in effect, or
any comparable statement under any similar United States statute then in force,
(b) any sale or transfer of more than 20% of the assets of the Company and its
subsidiaries on a consolidated basis (measured either by book value in
accordance with generally accepted accounting principles consistently applied or
by fair market value determined in the reasonable good faith judgment of the
Company's Board of Directors) in any transaction or series of transactions
(other than sales of inventory in the ordinary course of business) and (c) any
merger or consolidation to which the Company is a party, except for a merger in
which the
<PAGE> 2
Corporation is the surviving corporation and after giving effect to such merger
the stockholders of the Company immediately prior to the merger continue to be
the record and beneficial owners of capital stock of the Company possessing the
voting power (under ordinary circumstances) to elect a majority of the Company's
Board of Directors and continue to be the record and beneficial owners of at
least 51% of the Company's issued and outstanding Common Stock.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the State of Nevada are authorized or required by law to
close, then the maturity thereof shall be extended to the next succeeding
business day; and during any such extension, interest on principal amounts
payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Note Purchase Agreement (the "Agreement") dated of even date herewith by and
among the Company, the Payee and certain other individuals and entities and is
subject to the terms and conditions of the Agreement. Capitalized terms not
otherwise defined herein shall have the definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee and
successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof.
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors and
assigns, covenants and agrees, and the Payee and successor holders of this Note
by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, but only to the extent and in the manner hereinafter set forth, to the
prior payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they or
any of them, may proceed to enforce such provisions against the Company or
against the holder of this Note without the necessity of joining the Company as
a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or
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<PAGE> 3
marshalling of its assets or any composition with creditors of the Company,
whether or not involving insolvency or bankruptcy, then and in any such event
all Senior Debt shall be paid in full before any payment or distribution of any
character, whether in cash, securities (except securities that are subordinated
to Senior Debt to at least the same extent as this Note) or other property,
shall be made on account of this Note; and any such payment or distribution,
except securities that are subordinated and junior in right of payment to the
payment of all Senior Debt then outstanding in terms of substantially the same
tenor as this Section 3, which would, but for the provisions hereof, be payable
or deliverable in respect of the Note shall be paid or delivered directly to the
holders of Senior Debt (or their duly authorized representatives), in the
proportions in which they hold the same, until all Senior Debt shall have been
paid in full, and every holder of this Note by becoming a holder hereof shall
have designated and appointed the holder or holders of Senior Debt (and their
duly authorized representatives) as his or its agents and attorneys-in-fact to
demand, sue for, collect and receive such Senior Debt holder's ratable share of
all such payments and distributions and, if the holder fails to make any such
filing by 30 days prior to the last date on which such filing may be made, to
file any necessary proof of claim thereof, in the name of the holders of this
Note or otherwise, as such Senior Debt holders (or their authorized
representatives) may determine to be necessary or appropriate for the
enforcement of this Section 3.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the event
that:
(A) Any default occurs in the payment of the principal of or
interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event that
any default by the Company under the terms of the Senior Debt occurs (other than
a default in the payment of the principal of or interest on any Senior Debt),
then, upon receipt by the Company and the Payee of a written notice of such
default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee. Each holder of Senior Debt may send one or more Blockage
Notices, except as otherwise provided above, but payments hereunder may not be
blocked by the holders of Senior Debt for more than 180 days during any
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<PAGE> 4
360-day period. The terms of this Section 3(b)(iii) shall not apply if the
maturity of any Senior Debt has been accelerated by any holder thereof because
of a default if such acceleration has not been rescinded or said Senior Debt has
not been paid, but rather, the provisions of Section 3(b)(ii) shall apply. Other
than as set forth in Sections 3(b)(ii) and 3(b)(iii), past and current interest
and principal on this Note shall be paid by the Company to the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or distribution
shall be paid or delivered to any holder of this Note in violation or
contravention of the terms of this subordination, before all Senior Debt shall
have been paid in full, such payment or distribution shall be held in trust for
and paid and delivered ratably to the holders of Senior Debt (or their duly
authorized representatives), until all Senior Debt shall have been paid in full
or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. At any meeting of creditors of the Company or
in the event of any proceeding, voluntary or involuntary, for the distribution,
division or application of all or part of the assets of the Company or its
proceeds thereof, whether such proceeding be for the liquidation, dissolution or
winding up of the Company or the business of a receivership, insolvency or
bankruptcy proceeding, an assignment for the benefit of creditors or a
proceeding by or against the Company for relief under any bankruptcy,
reorganization or insolvency law or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, arrangement, composition or
extension or otherwise, if all Senior Debt has not been paid in full at the
time, the holders of the Senior Debt are hereby authorized at any such meeting
or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant to
or in connection with this Note, either in their own names or the name or names
of any holder of this Note; and
(B) To collect any assets of the Company distributed, divided
or applied by way of dividend or payment, or any securities issued on account of
this Note (other than securities containing subordinating provisions at least as
favorable to the holders of Senior Debt as those contained in this Note) and
apply the same, or the proceeds of any realization upon the same that the
holders of the Senior Debt elect to effect, to Senior Debt until all Senior Debt
shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this
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<PAGE> 5
Note, subject to the rights, if any, under this Section 3 of the holders of
Senior Debt to receive cash, property or securities of the Company received by
the Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or future
holder of Senior Debt to enforce subordination of this Note pursuant to the
provisions of this Section 3 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such other holder of
Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment extension, renewal, or taking or release of security of or
in respect of any Senior Debt, or by noncompliance by the Company with the terms
of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of this Section 3, may
not be amended or waived in any manner that is detrimental to any Senior Debt
without the consent of the holders of a majority in principal amount of then
existing Senior Debt.
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior Debt"
shall mean all Indebtedness of the Company up to a maximum of $2,000,000 (which
is not convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof which is not by its terms subordinate and junior to or on a parity with
this Note.
The term "Indebtedness" shall mean the obligations of the Company
in respect of the principal, interest, fees, charges and expenses, whether
direct or indirect, now existing or hereafter arising to replace such
obligations, absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will execute
and deliver any other documents evidencing the subordination of this Note to
Senior Debt that may be reasonably requested by the Company or the holders of a
majority in principal amount of then existing Senior Debt so long as none of the
provisions contained in such documents diminish the rights of Payee in any
manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future holder
of any Senior Debt to enforce subordination as herein provided shall at any time
in any way be prejudiced or impaired by any good faith act or good faith failure
to act by such holder, or by any noncompliance by the Company, with the terms
and provisions and covenants herein (other than the failure of such holder or
the Company to give notice of default under Sections 3(b)(ii) and 3(b)(iii)
hereof) regardless of any knowledge thereof any such holder may have or
otherwise be charged with. The provisions of this Section 3 are intended to be
for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest remains
unpaid under this Note, the Company shall:
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<PAGE> 6
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder and/or (ii) any written notification given to the
Company by any holder of Senior Debt that an event of default has occurred under
the Senior Debt loan documents, or that such holder has declared the Senior Debt
owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable advance
notice, during normal business hours, and without undue disruption of the
business of the Company, to visit, and inspect any of the properties, corporate
books and financial records of the Company, to make copies of such books and
records, and to discuss the affairs, finances, and accounts of the Company with
the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 3.3 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events shall constitute an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to acceleration of the maturity of such Senior Debt; PROVIDED,
HOWEVER, that in the event that the event of default under the terms of the
Senior Debt is waived or tolled, the Event of Default hereunder shall be waived
or tolled for a similar duration;
(iii) A breach or default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in
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<PAGE> 7
Section 5 of this Note, which has not been cured within fifteen (15) days after
notice thereof from the Payee;
(iv) (A) The Company or any Subsidiary shall commence any
voluntary case, proceeding or other action under any existing or future law of
any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to the Company
or any Subsidiary, or seeking to adjudicate the Company or any Subsidiary as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to the Company or any Subsidiary or its debts, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any Subsidiary shall make a
general assignment for the benefit of its creditors; or (B) there shall have
been commenced against the Company or any Subsidiary any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and such
involuntary case, proceeding or other action shall remain undismissed and
unstayed for a period of sixty (60) consecutive days; or (C) there shall have
been commenced against the Company or any Subsidiary any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of the assets of the
Company or any Subsidiary which shall not have been vacated, discharged or
stayed or bonded pending appeal within sixty (60) consecutive days from the
entry thereof, or (D) the Company or any Subsidiary shall have taken any action
in furtherance of or acquiescence in any of the acts set forth in clauses (A),
(B) or (C) above; or (E) the Company or any Subsidiary shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due;
(v) All or any substantial part of the assets of the Company or
any Subsidiary shall be (A) destroyed by fire or other casualty and shall not
have been substantially reconstructed within a period of one (1) year, unless
the Company or such Subsidiary shall have received or be entitled to receive
insurance benefits with respect to such assets in an amount equal to at least
ninety percent (90%) of the fair market value of such assets at the time of
destruction or (B) condemned, seized or otherwise appropriated, or custody or
control of such assets shall be assumed by any governmental agency or by any
court of competent jurisdiction at the instance of any governmental agency, and
shall be retained for a period of sixty (60) days, unless the Company or such
Subsidiary shall have received or be entitled to receive compensation for such
assets in an amount equal to at least ninety percent (90%) of the fair market
value of such assets on the date of such condemnation, seizure or other
appropriation;
(vi) Other than an Event of Default of the nature specified in
Sections 6(a)(i) and (ii) above, a default by the Company or any Subsidiary in
the performance or observance of any material covenant, agreement or condition
contained in the Agreement which, if such event is subject to being cured, has
not been cured within fifteen (15) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under any
evidence of indebtedness for borrowed money of the Company or any Subsidiary in
a principal amount in excess of $100,000 (other than the Senior Debt and trade
payables incurred in the ordinary
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<PAGE> 8
course of business), whether such indebtedness now exists or shall hereafter be
created, which default gives rise to actual acceleration of the maturity of such
indebtedness (provided that, in the event that the event of default of such
indebtedness is waived or tolled, the Event of Default hereunder shall be waived
or tolled for a similar duration); or
(viii) If a judgment in excess of $100,000 is entered against the
Company or any Subsidiary, and, within sixty (60) days after entry thereof, such
judgment is not discharged or execution thereof stayed pending appeal, or within
(30) days after the expiration of said stay, such judgment is not discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and accrued
interest on this Note shall immediately become due and payable; and (ii) if such
Event of Default is any other Event of Default which shall be continuing, the
Payee may, by written notice to the Company, declare this Note to be forthwith
due and payable, whereupon this Note shall become forthwith due and payable,
both as to principal and accrued interest, without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived,
anything contained in this Note to the contrary notwithstanding.
7. INTEREST RATE ADJUSTMENTS. In the event that any Payment of principal
or interest provided for herein is not paid by the Company when due, then the
Company shall pay to the Payee a late charge in an amount equal to eighteen
percent (18%) per annum. Such late charge shall be applied only to those
installments of principal and interest not paid when due (including the entire
unpaid principal balance of this Note, in the event that the Payee shall have
the right to exercise its rights and remedies hereunder) computed from the date
payment was due to the date of actual payment.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment of
all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion (provided that such portion shall be
not less than $100,000.00) of the outstanding principal balance of this Note,
together with accrued interest to the date of prepayment on the principal amount
prepaid. Any partial prepayment of principal shall be applied in reduction of
the outstanding installments of principal hereof, in inverse order of stated
maturity.
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<PAGE> 9
(b) In the event of the completion of a public offering that qualifies
as a Qualified Liquidity Event, then subject to any contrary provision of the
Senior Debt, the net proceeds to the Company of such public offering shall, upon
receipt by the Company, first be applied toward payment of the outstanding
principal balance of this Note, which prepayment of principal shall be
accompanied by payment of all unpaid accrued interest thereon. Any such
prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall be
restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Nevada without giving
effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
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<PAGE> 10
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its duly authorized officers as of the day and year first above written.
MCK COMMUNICATIONS, INC.
a Nevada corporation
By: /s/ Cal Manz
--------------------------------------
Cal Manz, President
10
<PAGE> 1
EXHIBIT 10.7
CLASS A SUBORDINATED PROMISSORY NOTE
$4,875,500 June 27, 1996
Calgary, Alberta
FOR VALUE RECEIVED, MCK COMMUNICATIONS, INC., a Nevada corporation,
having an address at 2255 A Renaissance Drive, Las Vegas, Nevada 89119
(hereinafter, the "Company"), hereby promises to pay to Summit Subordinated Debt
Fund, L.P. (the "Payee"), or its assigns, at 600 Atlantic Avenue, Suite 2800,
Boston, Massachusetts 02110-2227, U.S.A., or at such other place as may be
designated by the Payee from time to time by notice to the Company, the
principal sum of Four Million Eight Hundred Seventy-Five Thousand Five Hundred
Dollars ($4,875,500.00), together with accrued interest from the date hereof on
the unpaid principal balance at a rate equal to twelve and one-half percent
(12.5%) per annum (subject to adjustment as set forth in Section 7 hereof). Such
principal and interest shall be paid in accordance with the term of paragraph 1
below, in cash, or by wire transfer to such account as the Payee shall direct in
immediately available funds and in lawful currency of the United States of
America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable to
the Payee as follows:
(i) Interest shall accrue from the date hereof and shall be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on September 30, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable in
full on the closing of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before June 30, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $1,625,166.67 each on
June 30, 2000 and June 30, 2001 and one (1) installment of $1,625,166.66 on June
30, 2002;
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean any one of (a) an offering by the Company of its capital stock
or equity securities to the public pursuant to an effective registration
statement under the United States Securities Act of 1933, as then in effect, or
any comparable statement under any similar United States statute then in force,
(b) any sale or transfer of more than 20% of the assets of the Company and its
subsidiaries on a consolidated basis (measured either by book value in
accordance with generally accepted accounting principles consistently applied or
by fair market value determined in the reasonable good faith judgment of the
Company's Board of Directors) in any transaction or series of transactions
(other than sales of inventory in the ordinary course of business) and (c) any
merger or consolidation to which the Corporation is a party, except for a merger
in which the Company is the surviving corporation and after giving effect to
such merger the stockholders of the Company immediately prior to the merger
continue to be the record and beneficial owners of capital stock of the Company
possessing the voting power (under ordinary circumstances) to
<PAGE> 2
elect a majority of the Company's Board of Directors and continue to be the
record and beneficial owners of at least 51 % of the Company's issued and
outstanding Common Stock.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the State of Nevada are authorized or required by law to
close, then the maturity thereof shall be extended to the next succeeding
business day; and during any such extension, interest on principal amounts
payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Note Purchase Agreement (the "Agreement") dated of even date herewith by and
among the Company, the Payee and certain other individuals and entities and is
subject to the terms and conditions of the Agreement. Capitalized terms not
otherwise defined herein shall have the definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee and
successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof.
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors and
assigns, covenants and agrees, and the Payee and successor holders of this Note
by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, but only to the extent and in the manner hereinafter set forth, to the
prior payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they or
any of them, may proceed to enforce such provisions against the Company or
against the holder of this Note without the necessity of joining the Company as
a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except securities that are subordinated to Senior Debt to at
least the same extent as this Note) or other
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<PAGE> 3
property, shall be made on account of this Note; and any such payment or
distribution, except securities that are subordinated and junior in right of
payment to the payment of all Senior Debt then outstanding in terms of
substantially the same tenor as this Section 3, which would, but for the
provisions hereof, be payable or deliverable in respect of the Note shall be
paid or delivered directly to the holders of Senior Debt (or their duly
authorized representatives), in the proportions in which they hold the same,
until all Senior Debt shall have been paid in full, and every holder of this
Note by becoming a holder hereof shall have designated and appointed the holder
or holders of Senior Debt (and their duly authorized representatives) as his or
its agents and attorneys-in-fact to demand, sue for, collect and receive such
Senior Debt holder's ratable share of all such payments and distributions and,
if the holder fails to make any such filing by 30 days prior to the last date on
which such filing may be made, to file any necessary proof of claim thereof, in
the name of the holders of this Note or otherwise, as such Senior Debt holders
(or their authorized representatives) may determine to be necessary or
appropriate for the enforcement of this Section 3.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the event
that:
(A) Any default occurs in the payment of the principal of or
interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event that
any default by the Company under the terms of the Senior Debt occurs (other than
a default in the payment of the principal of or interest on any Senior Debt),
then, upon receipt by the Company and the Payee of a written notice of such
default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee. Each holder of Senior Debt may send one or more Blockage
Notices, except as otherwise provided above, but payments hereunder may not be
blocked by the holders of Senior Debt for more than 180 days during any 360-day
period. The terms of this Section 3(b)(iii) shall not apply if the maturity of
any Senior Debt has been accelerated by any holder thereof because of a default
if such acceleration has not been rescinded or said Senior Debt has not been
paid, but rather, the provisions of Section 3(b)(ii)
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<PAGE> 4
shall apply. Other than as set forth in Sections 3(b)(ii) and 3(b)(iii), past
and current interest and principal on this Note shall by paid by the Company to
the Payee as due.
(iv) PAYMENTS HELD IN TRUST. In case any payment or distribution
shall be paid or delivered to any holder of this Note in violation or
contravention of the terms of this subordination, before all Senior Debt shall
have been paid in full, such payment or distribution shall be held in trust for
and paid and delivered ratably to the holders of Senior Debt (or their duly
authorized representatives), until all Senior Debt shall have been paid in full
or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. At any meeting of creditors of the Company or
in the event of any proceeding, voluntary or involuntary, for the distribution,
division or application of all or part of the assets of the Company or its
proceeds thereof, whether such proceeding be for the liquidation, dissolution or
winding up of the Company or the business of a receivership, insolvency or
bankruptcy proceeding, an assignment for the benefit of creditors or a
proceeding by or against the Company for relief under any bankruptcy,
reorganization or insolvency law or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, arrangement, composition or
extension or otherwise, if all Senior Debt has not been paid in full at the
time, the holders of the Senior Debt are hereby authorized at any such meeting
or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant to
or in connection with this Note, either in their own names or the name or names
of any holder of this Note; and
(B) To collect any assets of the Company distributed, divided
or applied by way of dividend or payment, or any securities issued on account of
this Note (other than securities containing subordinating provisions at least as
favorable to the holders of Senior Debt as those contained in this Note) and
apply the same, or the proceeds of any realization upon the same that the
holders of the Senior Debt elect to effect, to Senior Debt until all Senior Debt
shall have been paid in full.
(vi) SCOPE OF SECTION. The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 3 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
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<PAGE> 5
(vii) SURVIVAL OF RIGHTS. The right of any present or future
holder of Senior Debt to enforce subordination of this Note pursuant to the
provisions of this Section 3 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such other holder of
Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security of
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of this Section 3, may
not be amended or waived in any manner that is detrimental to any Senior Debt
without the consent of the holders of a majority in principal amount of then
existing Senior Debt.
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior Debt"
shall mean all Indebtedness of the Company up to a maximum of $2,000,000 (which
is not convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof which is not by its terms subordinate and junior to or on a parity with
this Note.
The term "Indebtedness" shall mean the obligations of the Company in
respect of the principal, interest, fees, charges and expenses, whether direct
or indirect, now existing or hereafter arising to replace such obligations,
absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will execute
and deliver any other documents evidencing the subordination of this Note to
Senior Debt that may be reasonably requested by the Company or the holders of a
majority in principal amount of then existing Senior Debt so long as none of the
provisions contained in such documents diminish the rights of Payee in any
manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future holder
of any Senior Debt to enforce subordination as herein provided shall at any time
in any way be prejudiced or impaired by any good faith act or good faith failure
to act by such holder, or by any noncompliance by the Company, with the terms
and provisions and covenants herein (other than the failure of such holder or
the Company to give notice of default under Sections 3(b)(ii) and 3(b)(iii)
hereof) regardless of any knowledge thereof any such holder may have or
otherwise be charged with. The provisions of this Section 3 are intended to be
for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest remains
unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder and/or (ii) any written notification given to the
Company by any holder of
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<PAGE> 6
Senior Debt that an event of default has occurred under the Senior Debt loan
documents, or that such holder has declared the Senior Debt owed to such holder
to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable advance
notice, during normal business hours, and without undue disruption of the
business of the Company, to visit, and inspect any of the properties, corporate
books and financial records of the Company, to make copies of such books and
records, and to discuss the affairs, finances, and accounts of the Company with
the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 3.3 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events shall constitute an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to acceleration of the maturity of such Senior Debt; PROVIDED,
HOWEVER, that in the event that the event of default under the terms of the
Senior Debt is waived or tolled, the Event of Default hereunder shall be waived
or tolled for a similar duration;
(iii) A breach or default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 5 of this Note, which has not been cured within fifteen
(15) days after notice thereof from the Payee;
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<PAGE> 7
(iv) (A) The Company or any Subsidiary shall commence any
voluntary case, proceeding or other action under any existing or future law of
any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to the Company
or any Subsidiary, or seeking to adjudicate the Company or any Subsidiary as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to the Company or any Subsidiary or its debts, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any Subsidiary shall make a
general assignment for the benefit of its creditors; or (B) there shall have
been commenced against the Company or any Subsidiary any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and such
involuntary case, proceeding or other action shall remain undismissed and
unstayed for a period of sixty (60) consecutive days; or (C) there shall have
been commenced against the Company or any Subsidiary any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of the assets of the
Company or any Subsidiary which shall not have been vacated, discharged or
stayed or bonded pending appeal within sixty (60) consecutive days from the
entry thereof; or (D) the Company or any Subsidiary shall have taken any action
in furtherance of or acquiescence in any of the acts set forth in clauses (A),
(B) or (C) above; or (E) the Company or any Subsidiary shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due;
(v) All or any substantial part of the assets of the Company or
any Subsidiary shall be (A) destroyed by fire or other casualty and shall not
have been substantially reconstructed within a period of one (1) year, unless
the Company or such Subsidiary shall have received or be entitled to receive
insurance benefits with respect to such assets in an amount equal to at least
ninety percent (90%) of the fair market value of such assets at the time of
destruction or (B) condemned, seized or otherwise appropriated, or custody or
control of such assets shall be assumed by any governmental agency or by any
court of competent jurisdiction at the instance of any governmental agency, and
shall be retained for a period of sixty (60) days, unless the Company or such
Subsidiary shall have received or be entitled to receive compensation for such
assets in an amount equal to at least ninety percent (90%) of the fair market
value of such assets on the date of such condemnation, seizure or other
appropriation;
(vi) Other than an Event of Default of the nature specified in
Sections 6(a)(i) and (ii) above, a default by the Company or any Subsidiary in
the performance or observance of any material covenant, agreement or condition
contained in the Agreement which, if such event is subject to being cured, has
not been cured within fifteen (15) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under any
evidence of indebtedness for borrowed money of the Company or any Subsidiary in
a principal amount in excess of $100,000 (other than the Senior Debt and trade
payables incurred in the ordinary course of business), whether such indebtedness
now exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in
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<PAGE> 8
the event that the event of default of such indebtedness is waived or tolled,
the Event of Default hereunder shall be waived or tolled for a similar
duration); or
(viii) If a judgment in excess of $100,000 is entered against the
Company or any Subsidiary, and, within sixty (60) days after entry thereof, such
judgment is not discharged or execution thereof stayed pending appeal, or within
(30) days after the expiration of said stay, such judgment is not discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and accrued
interest on this Note shall immediately become due and payable; and (ii) if such
Event of Default is any other Event of Default which shall be continuing, the
Payee may, by written notice to the Company, declare this Note to be forthwith
due and payable, whereupon this Note shall become forthwith due and payable,
both as to principal and accrued interest, without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived,
anything contained in this Note to the contrary notwithstanding.
7. INTEREST RATE ADJUSTMENTS. In the event that any Payment of principal or
interest provided for herein is not paid by the Company when due, then the
Company shall pay to the Payee a late charge in an amount equal to eighteen
percent (18%) per annum. Such late charge shall be applied only to those
installments of principal and interest not paid when due (including the entire
unpaid principal balance of this Note, in the event that the Payee shall have
the right to exercise its rights and remedies hereunder) computed from the date
payment was due to the date of actual payment.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment of
all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata, share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion (provided that such portion shall be
not less than $100,000.00) of the outstanding principal balance of this Note,
together with accrued interest to the date of prepayment on the principal amount
prepaid. Any partial prepayment of principal shall be applied in reduction of
the outstanding installments of principal hereof, in inverse order of stated
maturity.
(b) In the event of the completion of a public offering that qualifies
as a Qualified Liquidity Event, then subject to any contrary provision of the
Senior Debt, the net proceeds to
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<PAGE> 9
the Company of such public offering shall, upon receipt by the Company, first be
applied toward payment of the outstanding principal balance of this Note, which
prepayment of principal shall be accompanied by payment of all unpaid accrued
interest thereon. Any such prepayment of principal shall be applied in reduction
of the outstanding installments of principal hereof in inverse order of stated
maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall be
restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Nevada without giving
effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
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<PAGE> 10
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
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<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
MCK COMMUNICATIONS, INC.
a Nevada corporation
By: /s/ Cal Manz
--------------------------------------
Cal Manz, President
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<PAGE> 1
EXHIBIT 10.8
CLASS A SUBORDINATED PROMISSORY NOTE
$99,500 June 27, 1996
Calgary, Alberta
FOR VALUE RECEIVED, MCK COMMUNICATIONS, INC., a Nevada corporation, having
an address at 2255 A Renaissance Drive, Las Vegas, Nevada 89119 (hereinafter,
the "Company"), hereby promises to pay to Summit Investors III (the "Payee"), or
its assigns, at 600 Atlantic Avenue, Suite 2800, Boston, Massachusetts
02110-2227, U.S.A., or at such other place as may be designated by the Payee
from time to time by notice to the Company, the principal sum of Ninety-Nine
Thousand Five Hundred Dollars ($99,500.00), together with accrued interest from
the date hereof on the unpaid principal balance at a rate equal to twelve and
one-half percent (12.5%) per annum (subject to adjustment as set forth in
Section 7 hereof). Such principal and interest shall be paid in accordance with
the terms of paragraph 1 below, in cash, or by wire transfer to such account as
the Payee shall direct, in immediately available funds and in lawful currency of
the United States of America.
1. PAYMENTS.
(a) The interest and principal amount of this Note shall be payable to
the Payee as follows:
(i) Interest shall accrue from the date hereof and shall, be
payable quarterly in arrears on the last day of each March, June, September and
December commencing on September 30, 1996;
(ii) All principal and any accrued and unpaid interest, and any
and all other obligations due and owing under this Note, shall be payable in
full on the closing of a "Qualified Liquidity Event," as such term is defined
herein; PROVIDED, HOWEVER, in the event that a Qualified Liquidity Event shall
not have been consummated on or before June 30, 2000, then all outstanding
principal shall be paid in two (2) equal installments of $33,166.67 each on June
30, 2000 and June 30, 2001 and one (1) installment of $33,166.66 on June 30,
2002;
(iii) For purposes of this Note, the term "Qualified Liquidity
Event" shall mean any one of (a) an offering by the Company of its capital stock
or equity securities to the public pursuant to an effective registration
statement under the United States Securities Act of 1933, as then in effect, or
any comparable statement under any similar United States statute then in force,
(b) any sale or transfer of more than 20% of the assets of the Company and its
subsidiaries on a consolidated basis (measured either by book value in
accordance with generally accepted accounting principles consistently applied or
by fair market value determined in the reasonable good faith judgment of the
Company's Board of Directors) in any transaction or series of transactions
(other than sales of inventory in the ordinary course of business) and (c) any
merger or consolidation to which the Company is a party, except for a merger in
which the
<PAGE> 2
Corporation is the surviving corporation and after giving effect to such merger
the stockholders of the Company immediately prior to the merger continue to be
the record and beneficial owners of capital stock of the Company possessing the
voting power (under ordinary circumstances) to elect a majority of the Company's
Board of Directors and continue to be the record and beneficial owners of at
least 51% of the Company's issued and outstanding Common Stock.
(b) In the event that any payment of principal and/or interest
hereunder becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in the State of Nevada are authorized or required by law to
close, then the maturity thereof shall be extended to the next succeeding
business day; and during any such extension, interest, on principal amounts
payable shall accrue and be payable at the applicable rate.
2. REFERENCE TO PURCHASE AGREEMENT. This Note is one of the Class A
Subordinated Promissory Notes referred to as the "Notes" in that certain Stock
and Note Purchase Agreement (the "Agreement") dated of even date herewith by and
among the Company, the Payee and certain other individuals and entities and is
subject to the terms and conditions of the Agreement. Capitalized terms not
otherwise defined herein shall have the definition set forth in the Agreement.
3. SUBORDINATION.
(a) SCOPE OF SUBORDINATION. By acceptance of this Note, the Payee and
successor holders of this Note, for the benefit of the holders of the Senior
Debt, acknowledge and agree that the payment of all or any portion of the
outstanding principal amount of this Note, and interest thereon, shall be
subordinated and junior in right of payment to the payment of the Senior Debt
(as defined below), and any refinancing thereof.
(b) TERMS OF SUBORDINATION. The Company, for itself, its successors and
assigns, covenants and agrees, and the Payee and successor holders of this Note
by its acceptance hereof likewise covenant and agree, that payment of the
principal of and interest on this Note shall be subordinated in right of
payment, but only to the extent and in the manner hereinafter set forth, to the
prior payment in full of all Senior Debt (as hereinafter defined), at any time
outstanding. The provisions of this Section 3 shall constitute a continuing
representation to all Persons who, in reliance upon such provisions, become the
holders of or continue to hold Senior Debt, and such provisions are made for the
benefit of the holders of Senior Debt, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they or
any of them, may proceed to enforce such provisions against the Company or
against the holder of this Note without the necessity of joining the Company as
a party.
(i) PAYMENT OF SENIOR DEBT. In the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings in connection therewith, relating to the Company or to
its property, or, in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company or marshalling of its assets or
any composition with creditors of the Company, whether or not involving
insolvency or bankruptcy, then and in any such event all Senior Debt shall be
paid in full before any payment or distribution of any character, whether in
cash, securities (except
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<PAGE> 3
securities that are subordinated to Senior Debt to at least the same extent as
this Note) or other property, shall be made on account of this Note; and any
such payment or distribution, except securities that are subordinated and junior
in right of payment to the payment of all Senior Debt then outstanding in terms
of substantially the same tenor as this Section 3, which would, but for the
provisions hereof, be payable or deliverable in respect of the Note shall be
paid or delivered directly to the holders of Senior Debt (or their duly
authorized representatives), in the proportions in which they hold the same,
until all Senior Debt shall have been paid in full, and every holder of this
Note by becoming a holder hereof shall have designated and appointed the holder
or holders of Senior Debt (and their duly authorized representatives) as his or
its agents and attorneys-in-fact to demand, sue for, collect and receive such
Senior Debt holder's ratable share of all such payments and distributions and,
if the holder fails to make any such filing by 30 days prior to the last date on
which such filing may be made, to file any necessary proof of claim thereof, in
the name of the holders of this Note or otherwise, as such Senior Debt holders
(or their authorized representatives) may determine to be necessary or
appropriate for the enforcement of this Section 3.
(ii) NO PAYMENT ON NOTE UNDER CERTAIN CONDITIONS. In the event
that:
(A) Any default occurs in the payment of the principal of or
interest on any Senior Debt and during the continuance of such default until
such payment has been made or such default has been cured or waived in writing
by such holder of Senior Debt; or
(B) The maturity of any Senior Debt is accelerated by any
holder thereof because of a default with respect thereto and until such
acceleration has been rescinded or said Senior Debt has been paid;
then and during the continuance of any of such events no payment of principal of
or interest on this Note shall be made by the Company (provided that the Company
has received written notice of such events by the holder of such Senior Debt) or
demanded or accepted by Payee (provided that the Company has received written
notice of such events by the holder of such Senior Debt).
(iii) DELAY OF PAYMENT IN CERTAIN CONDITIONS. In the event that
any default by the Company under the terms of the Senior Debt occurs (other than
a default in the payment of the principal of or interest on any Senior Debt),
then, upon receipt by the Company and the Payee of a written notice of such
default and payment blockage from the holder of any Senior Debt ("Blockage
Notice") and for a period commencing on the date of the Blockage Notice and
extending until the earlier of (A) the date that the default giving rise to the
Blockage Notice is cured, (B) 180 days after the date of the Blockage Notice, or
(C) such Senior Debt is paid in full ("Blockage Period"), no payment of
principal or of interest on this Note shall be made by the Company or demanded
or accepted by Payee. Each holder of Senior Debt may send one or more Blockage
Notices, except as otherwise provided above, but payments hereunder may not be
blocked by the holders of Senior Debt for more than 180 days during any 360-day
period. The terms of this Section 3(b)(iii) shall not apply if the maturity of
any Senior Debt has been accelerated by any holder thereof because of a default
if such acceleration has not been rescinded or said Senior Debt has not been
paid, but rather, the provisions of Section 3(b)(ii) shall apply. Other than as
set forth in Sections 3(b)(ii) and 3(b)(iii), past and current interest and
principal on this Note shall by paid by the Company to the Payee as due.
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<PAGE> 4
(iv) PAYMENTS HELD IN TRUST. In case any payment or distribution
shall be paid or delivered to any holder of this Note in violation or
contravention of the terms of this subordination, before all Senior Debt shall
have been paid in full, such payment or distribution shall be held in trust for
and paid and delivered ratably to the holders of Senior Debt (or their duly
authorized representatives), until all Senior Debt shall have been paid in full
or until no default exists on the Senior Debt.
(v) BANKRUPTCY, ETC. At any meeting of creditors of the Company or
in the event of any proceeding, voluntary or involuntary, for the distribution,
division or application, of all or part of the assets of the Company or its
proceeds thereof, whether such proceeding be for the liquidation, dissolution or
winding up of the Company or the business of a receivership, insolvency or
bankruptcy proceeding, an assignment for the benefit of creditors or a
proceeding by or against the Company for relief under any bankruptcy,
reorganization or insolvency law or any law relating to the relief of debtors,
readjustment of indebtedness, reorganization, arrangement, composition or
extension or otherwise, if all Senior Debt has not been paid in full at the
time, the holders of the Senior Debt are hereby authorized at any such meeting
or in any such proceeding:
(A) To enforce claims comprising, arising under, pursuant to
or in connection with this Note, either in their own names or the name or names
of any holder of this Note; and
(B) To collect any assets of the Company distributed, divided
or applied by way of dividend or payment, or any securities issued on account of
this Note (other than securities containing subordinating provisions at least as
favorable to the holders of Senior Debt as those contained in this Note) and
apply the same, or the proceeds of any realization upon the same that the
holders of the Senior Debt elect to effect, to Senior Debt until all Senior Debt
shall have been paid in full.
(vi) SCOPE OF SECTION The provisions of this Section 3 are
intended solely for the purpose of defining the relative rights of the Payee, on
the one hand, and the holders of Senior Debt, on the other hand. Nothing
contained in this Section 3, or elsewhere in this Note, is intended to or shall
impair, as between the Company, its creditors other than the holders of Senior
Debt, and the Payee, the obligation of the Company, which is unconditional and
absolute, to pay to the Payee the principal of and interest on this Note as and
when the same shall become due and payable in accordance with the terms thereof,
or to affect the relative rights of the Payee and creditors of the Company other
than the holders of the Senior Debt, nor shall anything herein or therein
prevent Payee from accepting any payment with respect to this Note or exercising
all remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Section 3 of the holders of Senior
Debt to receive cash, property or securities of the Company received by the
Payee.
(vii) SURVIVAL OF RIGHTS. The right of any present or future
holder of Senior Debt to enforce subordination of this Note pursuant to the
provisions of this Section 3 shall not at any time be prejudiced or impaired by
any act or failure to act on the part of the Company or any such other holder of
Senior Debt, including without limitation, any forbearance, waiver, consent,
compromise, amendment, extension, renewal or taking or release of security of
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<PAGE> 5
or in respect of any Senior Debt, or by noncompliance by the Company with the
terms of such subordination.
(viii) AMENDMENT OR WAIVER. The provisions of this Section 3, may
not be amended or waived in any manner that is detrimental to any Senior Debt
without the consent of the holders of a majority in principal amount of then
existing Senior Debt.
(ix) SENIOR DEBT AND INDEBTEDNESS DEFINED. The term "Senior Debt"
shall mean all Indebtedness of the Company up to a maximum of $2,000,000 (which
is not convertible into equity securities of the Company and is not issued in
conjunction with equity securities of the Company or options or warrants to
purchase equity securities of the Company) for money borrowed from banks or
other institutional or commercial finance lenders, whether outstanding on the
date hereof or thereafter created or incurred, and all extensions and renewals
thereof which is not by its terms subordinate and junior to or on a parity with
this Note.
The term "Indebtedness" shall mean the obligations of the Company in
respect of the principal, interest, fees, charges and expenses, whether direct
or indirect, now existing or hereafter arising to replace such obligations,
absolute or contingent for money borrowed or property received.
(x) PROOF OF SUBORDINATION. The Payee agrees that it will execute
and deliver any other documents evidencing the subordination of this Note to
Senior Debt that may be reasonably requested by the Company or the holders of a
majority in principal amount of then existing Senior Debt so long as none of the
provisions contained in such documents diminish the rights of Payee in any
manner.
(xi) RIGHTS NOT IMPAIRED. No right of any present or future holder
of any Senior Debt to enforce subordination as herein provided shall at any time
in any way be prejudiced or impaired by any good faith act or good faith failure
to act by such holder, or by any noncompliance by the Company, with the terms
and provisions and covenants herein (other than the failure of such holder or
the Company to give notice of default under Sections 3(b)(ii) and 3(b)(iii)
hereof) regardless of any knowledge thereof any such holder may have or
otherwise be charged with. The provisions of this Section 3 are intended to be
for the benefit of, and shall be enforceable directly by, the holders of the
Senior Debt, without any act or notice of acceptance hereof or reliance thereon.
4. AFFIRMATIVE COVENANTS. For as long as any principal or interest remains
unpaid under this Note, the Company shall:
(a) Give prompt written notice to the Payee of (i) the occurrence of
any Event of Default hereunder and/or (ii) any written notification given to the
Company by any holder of Senior Debt that an event of default has occurred under
the Senior Debt loan documents, or that such holder has declared the Senior Debt
owed to such holder to be immediately due and payable; and
(b) Permit any representative(s) of the Payee, upon reasonable advance
notice, during normal business hours, and without undue disruption of the
business of the Company, to visit, and inspect any of the properties, corporate
books and financial records of the Company, to
5
<PAGE> 6
make copies of such books and records, and to discuss the affairs, finances, and
accounts of the Company with the principal officers of the Company.
5. NEGATIVE COVENANTS. For so long as any principal or interest remains
unpaid under this Note, the Company shall not, without the prior consent of the
Payee, take the actions contained in the covenants set forth in Section 3.3 of
the Agreement and shall not:
(a) Grant any mortgage or security interest in its assets other than
with respect to the Senior Debt;
(b) Incur any additional debt (other than the Senior Debt, purchase
money financing, capitalized leases, trade payables incurred in the ordinary
course of business or debt which is subordinated to the debt evidenced by this
Note) except in a manner and amount reasonably satisfactory to Payee; and
(c) Transfer any substantial portion of the Company's assets to a
subsidiary corporation of the Company, unless, in each such instance, such
subsidiary shall guaranty this Note in a manner reasonably satisfactory to the
Payee.
6. EVENTS OF DEFAULT.
(a) Each or any of the following events shall constitute an "Event of
Default" under this Note:
(i) Failure by the Company to pay all or any portion of any
installment of principal, interest or other monetary sum payable under this Note
and such failure to pay continues for five days after the same shall be due and
payable;
(ii) An event of default has occurred under the terms of the
Senior Debt after giving effect to any grace periods expressly provided therein
which gives rise to acceleration of the maturity of such Senior Debt; PROVIDED,
HOWEVER, that in the event that the event of default under the terms of the
Senior Debt is waived or tolled, the Event of Default hereunder shall be waived
or tolled for a similar duration;
(iii) A breach or default by the Company in the performance or
observance of any of the non-monetary covenants and agreements of the Company
contained in Section 5 of this Note, which has not been cured within fifteen
(15) days after notice thereof from the Payee;
(iv) (A) The Company or any Subsidiary shall commence any
voluntary case, proceeding or other action under any existing or future law of
any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to the Company
or any Subsidiary, or seeking to adjudicate the Company or any Subsidiary as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to the Company or any Subsidiary or its debts, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Company or any Subsidiary shall make a
general assignment for the benefit of its creditors; or (B) there shall have
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<PAGE> 7
been commenced against the Company or any Subsidiary any involuntary case,
proceeding or other action of a nature referred to in clause (A) above and such
involuntary case, proceeding or other action shall remain undismissed and
unstayed for a period of sixty (60) consecutive days; or (C) there shall have
been commenced against the Company or any Subsidiary any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of the assets of the
Company or any Subsidiary which shall not have been vacated, discharged or
stayed or bonded pending appeal within sixty (60) consecutive days from the
entry thereof; or (D) the Company or any Subsidiary shall have taken any action
in furtherance of or acquiescence in any of the acts set forth in clauses (A),
(B) or (C) above; or (E) the Company or any Subsidiary shall be unable to, or
shall admit in writing its inability to, pay its debts as they become due;
(v) All or any substantial part of the assets of the Company or
any Subsidiary shall be (A) destroyed by fire or other casualty and shall not
have been substantially reconstructed within a period of one (1) year, unless
the Company or such Subsidiary shall have received or be entitled to receive
insurance benefits with respect to such assets in an amount equal to at least
ninety percent (90%) of the fair market value of such assets at the time of
destruction or (B) condemned, seized or otherwise appropriated, or custody or
control of such assets shall be assumed by any governmental agency or by any
court of competent jurisdiction at the instance of any governmental agency, and
shall be retained for a period of sixty (60) days, unless the Company or such
Subsidiary shall have received or be entitled to receive compensation for such
assets in an amount equal to at least ninety percent (90%) of the fair market
value of such assets on the date of such condemnation, seizure or other
appropriation;
(vi) Other than an Event of Default of the nature specified in
Sections 6(a)(i) and (ii) above, a default by the Company or any Subsidiary in
the performance or observance of any material covenant, agreement or condition
contained in the Agreement which, if such event is subject to being cured, has
not been cured within fifteen (15) days after notice thereof from the Payee;
(vii) A default under any bond, debenture or note or under any
evidence of indebtedness for borrowed money of the Company or any Subsidiary in
a principal amount in excess of $100,000 (other than the Senior Debt and trade
payables incurred in the ordinary course of business), whether such indebtedness
now exists or shall hereafter be created, which default gives rise to actual
acceleration of the maturity of such indebtedness (provided that, in the event
that the event of default of such indebtedness is waived or tolled, the Event of
Default hereunder shall be waived or tolled for a similar duration); or
(viii) If a judgment in excess of $100,000 is entered against the
Company or any Subsidiary, and, within sixty (60) days after entry thereof, such
judgment is not discharged or execution thereof stayed pending appeal, or within
(30) days after the expiration of said stay, such judgment is not discharged.
(b) Upon the occurrence and during the continuance of an Event of
Default, (i) if such Event of Default is a default described in Paragraph
6(a)(iv) which shall be continuing, the unpaid principal amount of and accrued
interest on this Note shall immediately become due and payable; and (ii) if such
Event of Default is any other Event of Default which shall be
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<PAGE> 8
continuing, the Payee may, by written notice to the Company, declare this Note
to be forthwith due and payable, whereupon this Note shall become forthwith due
and payable, both as to principal and accrued interest, without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived, anything contained in this Note to the contrary
notwithstanding.
7. INTEREST RATE ADJUSTMENTS. In the event that any Payment of principal or
interest provided for herein is not paid by the Company when due, then the
Company shall pay to the Payee a late charge in an amount equal to eighteen
percent (18%) per annum. Such late charge shall be applied only to those
installments of principal and interest not paid when due (including the entire
unpaid principal balance of this Note, in the event that the Payee shall have
the right to exercise its rights and remedies hereunder) computed from the date
payment was due to the date of actual payment.
8. PARI PASSU NOTES. The Payee acknowledges and agrees that the payment of
all or any portion of the outstanding principal amount of this Note and all
interest thereon shall be and hereby is pari passu in right of payment and in
all other respects to the Class A Subordinated Promissory Notes of the Company
issued pursuant to the Agreement. In the event that the Payee receives payments
in excess of its pro rata share of the Company's payments to the holders of all
of the Class A Subordinated Promissory Notes, then the Payee shall hold in trust
all such excess payments for the benefit of the payees under the other Class A
Subordinated Promissory Notes and shall pay such amounts held in trust to such
other holders upon demand by such holders.
9. PREPAYMENT.
(a) The Company shall have the right to prepay, at any time or times
after the date hereof, all or any portion (provided that such portion shall be
not less than $100,000.00) of the outstanding principal balance of this Note,
together with accrued interest to the date of prepayment on the principal amount
prepaid. Any partial prepayment of principal shall be applied in reduction of
the outstanding installments of principal hereof, in inverse order of stated
maturity.
(b) In the event of the completion of a public offering that qualifies
as a Qualified Liquidity Event, then subject to any contrary provision of the
Senior Debt, the net proceeds to the Company of such public offering shall, upon
receipt by the Company, first be applied toward payment of the outstanding
principal balance of this Note, which prepayment of principal shall be
accompanied by payment of all unpaid accrued interest thereon. Any such
prepayment of principal shall be applied in reduction of the outstanding
installments of principal hereof, in inverse order of stated maturity.
10. WAIVER OR ALTERATION. None of the provisions hereof may be waived,
altered or amended, except by a written instrument signed by the party to be
charged therewith. In the case of any waiver, the Company and the Payee shall be
restored to their former respective positions and rights hereunder, and any
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Event of Default or impair
any right consequent thereon except to the extent expressly provided in such
waiver.
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<PAGE> 9
11. REMEDIES CUMULATIVE. No failure to exercise or delay in exercising any
right, remedy, power or privilege hereunder shall operate as a waiver thereof
nor shall any single or partial exercise of any right, remedy, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies,
powers and privileges herein provided are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.
12. NOTICES. All notices, requests, demands or other communications under
this Note shall be given in the same manner as provided in the Agreement.
13. GOVERNING LAW. This Note shall be governed by, and construed and then
interpreted in accordance with the laws of the State of Nevada without giving
effect to conflict of laws principles of such state.
14. SEVERABILITY. If any provision hereof or of any of the instruments
securing this Note is invalid or unenforceable in any jurisdiction, the other
provisions hereof and thereof shall remain in full force and effect in such
jurisdiction and the remaining provisions hereof shall be liberally construed in
favor of the holder hereof in order to effectuate the provisions hereof and of
said instruments; and the invalidity of any provision hereof or thereof in any
jurisdiction shall not affect the validity or enforceability of any other
provision or of such provisions in any other jurisdiction.
15. COSTS OF COLLECTION. If the Payee is required to commence suit to
recover any account due under this Note following an Event of Default, the Payee
shall be entitled to collect from the Company such reasonable attorneys' fees as
may be incurred by the Payee in collecting or attempting to collect any amount
due hereunder.
16. MAXIMUM INTEREST RATE. Notwithstanding anything to the contrary
contained in this Note, in no event shall the total of all interests or other
charges payable under this Note that are or could be held to be in the nature of
interest exceed the maximum rate permitted to be charged by applicable law.
17. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
the benefit of the Company and the Payee and their respective successors and
assigns; PROVIDED, HOWEVER, that the Company may not transfer any of its rights
or obligations hereunder without the prior written consent of the Payee.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its
duly authorized officers as of the day and year first above written.
MCK COMMUNICATIONS, INC.
a Nevada corporation
By: /s/ Cal Manz
--------------------------------------
Cal Manz, President
10
<PAGE> 1
EXHIBIT 10.9
FORM OF
STOCK RESTRICTION AGREEMENT
STOCK RESTRICTION AGREEMENT by and between MCK COMMUNICATIONS, INC.
(the "Company") and [_________________] (the "Executive"), dated as of
[_______________].
WHEREAS, the Executive is one of the key employees of the Company and
is the owner of [__________] shares of the Company's Common Stock (the
"Shares"); and
WHEREAS, the parties hereto believe that it is in the best interests of
the Company and the Executive to provide for certain rights and obligations of
the Company and the Executive with respect to the Shares under certain
circumstances.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
Section 1. DEFINITIONS. For the purposes of this Agreement, the
following terms shall have the following respective meanings:
(a) "ACT" shall mean the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
(b) "CAUSE" shall mean the determination by a majority of the
Board of Directors of the Company that are not employees of the Company
that any one or more of the following events has occurred: (A)
dishonesty, breach of fiduciary duty or breach of the terms of this
Agreement or any other agreements executed by the Executive (including,
without limitation, the Executive's Agreement Regarding Inventions,
Confidentiality, Non-Competition and Non-Solicitation with the
Company); (B) commission by the Executive of any act of embezzlement,
fraud, larceny or theft on or from the Company; (C) substantial and
continuing neglect or inattention by the Executive of duties of his
employment which shall continue for 30 business days following written
notification by the Board of Directors; (D) willful misconduct or gross
negligence of the Executive in connection with the performance of such
duties; (E) commission by the Executive of any acts of moral turpitude;
or (F) the conviction of the Executive of a felony. A determination by
the Board of Directors, after notice to the Executive and providing the
Executive an opportunity to be heard, that the Executive has committed
an act of the sort mentioned in (A) through (F) above shall be
conclusive, whether or not there are proceedings by public authorities
with respect thereto and without regard to the outcome thereof.
(c) "COMMON STOCK" shall mean the Company's Common Stock, par
value $.15 per share.
<PAGE> 2
(d) "DISABILITY" shall have the meaning ascribed to it in the
Executive's Employment Agreement with the Company.
(e) "EXECUTIVE" shall mean [__________________].
(f) "QUALIFIED PUBLIC OFFERING" shall mean the consummation of
the first fully underwritten, firm commitment public offering pursuant
to an effective registration statement under the Securities Act, other
than on Forms S-4, S-8, S-14 or S-15 or their then equivalents,
covering the offer and sale by the Company of its Common Stock, with
net proceeds to the Company equal to or in excess of $15,000,000.
(g) "NON-VESTED SHARES" shall mean all the Shares that are not
Vested Shares.
(h) "PERMITTED TRANSFEREES" shall mean the Executive's spouse,
parents, brothers, sisters, children (natural or adopted), stepchildren
or grandchildren or a trust for their benefit.
(i) "SALE EVENT" shall mean the occurrence of any of the
following events: (i) the Company is the subject of a merger or
consolidation in which the holders of voting securities or the Company
immediately prior to the closing of such merger or consolidation own
less than fifty percent (50%) of the voting securities of the combined
entity following such merger or consolidation; (ii) there is a sale or
transfer of all of the voting securities of the Company to a person or
entity that was previously not a shareholder of the Company; or (iii)
there is a sale of substantially all of the Company's assets.
(j) "SHARES" shall mean the [___________] shares of Common
Stock owned by the Executive on the date hereof.
(k) "TERMINATION EVENT" shall mean the termination of
Executive's employment with the Company, whether by reason of death,
Disability, retirement, discharge or any other reason, voluntary or
involuntary.
(l) "VESTED SHARES" shall mean [_______] of the Shares owned
by the Executive on [_________________], plus an additional [_____] of
the Shares on the last day of each month, commencing on
[_________________] and continuing through [_________________], so long
as the Executive remains in the employ of the Company on each such
date; provided, however, that if on any one occasion there shall occur
a Sale Event, then one-half of the Non-Vested Shares held by the
executive immediately prior to the closing of such Sale Event shall
vest and become fully exercisable.
Section 2. PURCHASE AND SALE OF SHARES.
2.1 PURCHASE AND SALE. On the date hereof, the Company hereby
sells to the Executive and the Executive hereby purchases [_____________] Shares
at a purchase price of
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<PAGE> 3
[____] per Share, payable in cash or a promissory note reasonably acceptable to
the Board of Directors.
Section 3. REPURCHASE RIGHT.
3.1 REPURCHASE RIGHT. In the event of a Termination Event,
the Company shall have the right and obligation (the "Repurchase Right") to
repurchase all of the Non-Vested Shares and, if the Executive is terminated by
the Company for Cause, all of the Vested Shares, at a per share repurchase price
equal to the aggregate of (i) $[____] plus (ii) the documented, per share amount
of any taxes paid by the Executive with respect to such Non-Vested Shares and/or
Vested Shares on account of Section 83 of the Internal Revenue Code of 1986, as
amended minus (iii) the amount of any tax reduction realized by the Executive
during the tax year in which the repurchase occurs as a result of the
application of the capital loss attributable to the repurchase to offset other
capital gains. The Company shall exercise its Repurchase Right pursuant to the
provision of Section 3.2 below.
3.2 EXERCISE OF REPURCHASE RIGHT AND CLOSING. The Company
shall exercise the Repurchase Right by delivering or mailing to the Executive,
in accordance with Section 8.7, written notice within 45 days after the
Termination Event. The closing of any such repurchase of Non-Vested Shares
and/or Vested Shares shall be held at the principal office of the Company, or at
such other location as the parties to such repurchase may mutually determine. At
any such closing, the Company shall pay to the Executive and/or any holder of
the Non-Vested Shares and/or vested Shares the aggregate repurchase price for
the Non-Vested Shares and/or Vested shares to be purchased by certified or bank
check. At such time, the Executive and/or any holder of the non-Vested Shares
and/or Vested Shares shall deliver to the Company the certificate or
certificates representing the Non-Vested Shares and/or Vested Shares so
repurchased, duly endorsed for transfer, free and clear of any lien or
encumbrances.
Section 4. RESTRICTIONS ON TRANSFER OF SHARES.
4.1 NO TRANSFERS UNLESS AUTHORIZED AND IN COMPLIANCE WITH THIS
AGREEMENT.
(a) None of the Shares now owed or hereafter acquired shall be
sold, assigned, transferred, pledged, hypothecated, given away or in
any other manner disposed of or encumbered, whether voluntarily or by
operation of law (each a "Transfer"), unless such Transfer is in
compliance with all foreign, federal and state securities laws
(including, without limitation, the Act), and such Transfer is in
accordance with the terms and conditions of this Section 4. In
connection with any Transfer of Shares, the Company may require an
opinion of counsel to the transferor, satisfactory to the Company, that
such transfer is in compliance with all foreign, federal and state
securities laws (including without limitation, the Act). The Executive
agrees to give the Company prompt notice of any transfer of Shares to a
Permitted Transferee. Any attempted disposition of Shares not in
accordance with the terms and conditions of this Agreement shall be
null and void, and the Company shall not reflect on its records any
change in record ownership of any
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<PAGE> 4
Shares pursuant to any such disposition, shall otherwise refuse to
recognize any such disposition of any shares.
(b) Prior to making any Transfer of Shares (other than to a
Permitted Transferee), the Executive shall deliver written notice (the
"Transfer Notice") to the Company. The Transfer Notice shall disclose
in reasonable detail the identity of the prospective transferees, the
number of shares to be Transferred (the "Offered Shares") and the terms
and conditions of the proposed Transfer. By giving the Transfer Notice,
the Executive shall be deemed to have granted the Company an option to
purchase the Offered Shares. The Company many purchase all, but not
less than all, of the Offered Shares upon the same terms and conditions
as those set forth in the Transfer Notice by delivering written notice
of such election to the Executive within 20 days after the Transfer has
been delivered to the Company (the "Election Period"). If the Company
has not elected to purchase or otherwise acquire all of the Offered
Shares prior to the expiration of the Election Period, the Executive
may Transfer such Shares at a price and on terms no more favorable to
transferees thereof than specified in the Transfer notice during the
30-day period immediately following the expiration of the Election
Period (the "Transfer Period"). Any Offered Shares not Transferred
within the Transfer period shall be subject the provisions of this
Section 4.1 upon any subsequent Transfer. If the Company has elected to
purchase any offered Shares hereunder, the Transfer of such Offered
Shares shall be consummated as soon as practical after the delivery of
the election notice to the Executive, but in any event within 15 days
after the expiration of the Election Period.
4.2 TRANSFERS TO PERMITTED TRANSFEREES. Subject to the next
sentence of this Section 4.2, the Executive may sell, assign, transfer or give
away any or all of the Shares without receipt of consideration or for such
consideration as such holder shall determine to Permitted Transferees. No
transfer permitted hereby shall be effective unless the Permitted Transferee to
whom the Shares are proposed to be transferred has delivered to the Company a
written acknowledgement that the Shares to be received by it are subject to the
provisions of this Agreement (including without limitation, the provisions of
this Section 4) and that the Permitted Transferee is bound hereby and thereby.
4.3 TRANSFERS UPON DEATH. Upon the death of the Executive, the
Vested Shares held by the Executive may be transferred and distributed by will
or other instrument taking effect at his death or by the laws of descent and
distribution to the Executive's estate, executors, administrators and personal
representatives, and then to such holder's heirs, legatees or distributees
whether or not such heirs, legatees or distributees are Permitted Transferees.
No transfer permitted hereby shall be effective unless the transferee to whom
the Shares are proposed to be transferred pursuant to this provision has
delivered to the Company a written acknowledgement that the Shares to be
received by it are subject to the provisions of this Agreement (including
without limitation, the provisions of this Section 4) and that such transferee
is bound hereby and thereby.
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<PAGE> 5
Section 5. LEGEND. Any certificate representing the Shares shall carry
the following legends:
"The transferability of this Certificate and the shares of
stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture, repurchase and
restrictions against transfers contained in the Executive's
Stock Restriction Agreement dated [__________] between the
Company and [___________] (copies of which are available at
the offices of the Company for examination)."
and
"The shares represented by this Stock Certificate have not
been registered under the Securities Act of 1933 or the
securities laws of any state. The shares may not be sold or
transferred in the absence of such registration or an
exemption from registration."
Section 6. TERMINATION. The provisions of Sections 3, 4 and 5 hereof
shall terminate upon a Qualified Public Offering.
Section 7. MISCELLANEOUS PROVISIONS.
7.1 INVESTMENT REPRESENTATION. The Executive represents that
his purchase hereunder is for investment and not for resale or with a view to
the distribution thereof. The Executive acknowledges that the Executive has been
informed by the Company that in the absence of an effective registration
statement under the Act and under any applicable state securities or "blue sky"
laws (or exemptions from the registration requirements thereof), the Shares may
not be sold or otherwise transferred or disposed of. The Company is not
obligated to register under the Act or under applicable state securities or
"blue sky" laws, any sale transfer or other disposition of the Shares, and,
accordingly, the Shares must be held, and the Executive must bear the economic
risk of such investment, for an indefinite period of time unless such sale,
transfer or disposition is registered under the Act and under any applicable
state securities or "blue sky" laws or is exempt from the registration
requirements thereof.
7.2 EQUITABLE RELIEF. The parties hereto agree and declare
that legal remedies may be inadequate to enforce the provisions of this
Agreement and that equitable relief, including specific performance and
injunctive relief, may be used to enforce the provisions of this Agreement.
7.3 CHANGE AND MODIFICATIONS. This Agreement may not be orally
changed, modified or terminate, nor shall any oral waiver of any of its terms be
effective. This Agreement may be changed, modified or terminate only by an
agreement in writing signed by the Company and the Executive.
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<PAGE> 6
7.4 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.
7.5 HEADINGS. The headings are intended only for convenience
in finding the subject matter and do not constitute part of the text of the
Agreement and shall not be considered in the interpretation of this Agreement.
7.6 SAVING CLAUSE. If any provision(s) of this Agreement shall
be determined to be illegal or unenforceable, such determination shall in no
manner affect the legality or enforceability of any other provision hereof.
7.7 NOTICES. All notices, requests, consents and other
communications shall be in writing and be deemed given when delivered
personally, by telex or facsimile transmission or when received if mailed by
first class registered or certified mail, postage prepaid. Notices to the
Company or the Executive shall be addressed as set forth underneath their
signatures below, or to such other address or addresses as may have been
furnished by such party in writing to the other. Notices to any holder of the
Shares other than the Executive shall be addressed to the address furnished by
such holder to the Company.
7.8 BENEFIT AND BINDING EFFECT. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto, their
respective successors, assigns, and legal representatives. The Company has the
right to assign this Agreement, and such assignee shall become entitled to all
the rights of the Company hereunder to the extent of such assignment.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date first above written.
MCK COMMUNICATIONS, INC.
By:
--------------------------------------
Name:
Title:
EXECUTIVE:
------------------------------------------
[Name]
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<PAGE> 1
EXHIBIT 10.10
FORM OF
PROMISSORY NOTE
[__________ __, ____]
Newton, Massachusetts
$[______________]
FOR VALUE RECEIVED, the undersigned ("Debtor") hereby promises to pay to MCK
Communications, Inc, a Delaware corporation ("Payee"), at such place or places
as may be specified by Payee or any holder hereof, in legal tender of the United
States of America, the principal amount of $[_________] (the "Principal"), with
interest at the rate of six percent (6%) per annum, compounded annually, on the
unpaid balance. The Debtor shall pay to Payee, within ten (10) days after
receipt thereof, the net after-tax proceeds from all sales of the Debtor's
shares of the Common Stock, par value $.15 per share, of MCK Communications,
Inc. purchased with the proceeds of the Note, in reduction of Principal until
such time as the Principal has been repaid in full, and in connection with each
such payment shall pay accrued but unpaid interest on the amount so prepaid. For
purposes hereof, net after-tax proceeds refers to the amount received by the
Debtor upon any sale of such shares, less brokerage commissions or underwriting
discounts, other expenses of every kind, including documentary, excise and other
taxes, if any, directly relating to the sale and an amount equal to the federal,
state and local taxes on any gain from such sale (as determined by multiplying
the amount of such gain by the combined maximum federal, state and local tax
rate applicable to the sale of such shares by the Debtor, taking into account
the holding period for such shares and any federal income tax deduction for
state and local income taxes ). In any event, any principal then unpaid shall be
due and payable, with accrued interest thereon, on the earlier of (1) the fifth
anniversary of the date hereof and (b) the date sixty (60) days after Debtor's
termination for any reason as an employee of Payee (the "Repayment Date").
This Note is subject to the terms of and the payment hereof is secured by
a certain Pledge Agreement dated as of the date hereof by and between Debtor and
Payee (the "Pledge Agreement").
In case an Event of Default, as defined in the Pledge Agreement, shall
occur, the aggregate unpaid balance of Principal and accrued interest may be
declared to be due and payable in the manner and with the effect provided in the
Pledge Agreement. The obligation of the undersigned Debtor to pay the Recourse
Amount (as hereinafter defined) shall be absolute and unconditional, and the
Payee shall have full recourse against the Debtor's assets (including, but not
limited to, the collateral pledged pursuant to the Pledge Agreement) to recover
the Recourse Amount. The "Recourse Amount" as of any time shall mean twenty-five
percent (25%) of the original Principal reduced by twenty-five percent (25%) of
each payment of Principal made by or on behalf of the Debtor from any source.
Unless otherwise set forth herein
<PAGE> 2
or directed by the Debtor, all sums paid by the Debtor or otherwise received by
Payee on account of sums owing hereunder shall first be applied to the Recourse
Amount and only after the Recourse Amount is paid in full, then to other sums
owing hereunder. With respect to amounts due and payable hereunder in excess of
the Recourse Amount, the Payee shall have no recourse against the Debtor or any
of his assets other than the collateral pledged pursuant to the Pledge
Agreement, and Payee shall look only to its rights as provided in the Pledge
Agreement for the repayment of amounts in excess of the Recourse Amount.
Debtor may discharge the obligations undertaken hereby, at any time, by
repaying the aggregate unpaid balance of Principal and accrued interest, without
penalty. Debtor may without penalty, make a partial prepayment of Principal
and/or interest in any amount at any time and may thereby reduce any required
future payment hereunder by the amount of such prepayment.
Debtor expressly waives presentment for payment, protest and demand,
notice of protest, demand and dishonor and expressly agrees that this Note may
be extended from time to time without in any way affecting the liability of
Debtor. No delay or omission on the part of Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note.
This Note may from time to time be extended by Payee, with or without
notice to Debtor, and any related right may be waived, exchanged, surrendered or
otherwise dealt with, all without affecting the liability of Debtor, in each
case in the sole discretion of Payee.
This Note may not be changed, modified or terminated orally, but only by
an agreement in writing and signed by the Debtor and Payee. This Note shall be
binding upon the successors and assigns of Debtor and inure to the benefit of
Payee and its heirs, successors, endorsees and assigns.
DEBTOR:
---------------------------------
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<PAGE> 1
EXHIBIT 10.11
FORM OF
PLEDGE AGREEMENT
In consideration of MCK Communications, Inc., a Delaware corporation
(the "Company"), having made a loan to [_________________________________]
("Borrower"), under the Promissory Note dated [___________________], and any
renewals or extensions thereof made in the sole discretion of the Company
("Note"), Borrower agrees as follows:
Section 1. PLEDGE. Borrower hereby pledges, assigns and transfers to
the Company, and grants to the Company a security interest in, the following
property ("Collateral"), to be held by the Company:
(a) The shares of Common Stock of the Company, par value $0.15 per
share (each, a "Share"), obtained pursuant to a certain Restricted Stock
Agreement dated as of the date hereof between Borrower and the Company and held
by Borrower or any Permitted Transferee (as that term is defined in the
Restricted Stock Agreement dated as of the date hereof by and between Borrower
and the Company (the "Restricted Stock Agreement")), and any securities owned in
respect thereof or in exchange therefor.
(b) All other securities, instruments and other property issued or
accepted in substitution for or in addition to any of the foregoing.
(c) All proceeds of any and all of the Collateral.
Section 2. OBLIGATIONS. This Agreement and the security interest
granted hereby secure the payment of all obligations of Borrower to the Company
under the Note ("Obligations"), and the Obligations of Borrower under this
Agreement, and any and all renewals or extensions thereof. So long as any of the
Obligations are outstanding, unless and until Borrower shall be in default
hereunder or there shall be any default of any of the Obligations, Borrower
shall retain all rights to dividends and distributions and voting rights, if
any, with respect to the Collateral. In the event the Obligations shall be in
default or in the event that Borrower shall be in default under the terms
hereof, the Company may, in its discretion, vote and exercise all of the powers
of an owner with respect to any of the relevant Collateral. Without limiting the
generality of the other remedies provided herein and in addition thereto, in the
event any of the Obligations shall be in default or upon any default by Borrower
hereunder, the Company after the occurrence of an Event of Default may take all
steps necessary to cause the Collateral to be transferred into the name of the
Company, including but not limited to taking steps necessary to comply with
restrictions on sale or transfer of the shares constituting such Collateral, and
in connection therewith Borrower appoints the Company such Borrower's
attorney-in-fact to execute and deliver such offers, tender offers,
certificates, documents or instruments of every nature or description required
for the purpose of the transfer of such shares into the name of the Company, or
any other person.
If Borrower receives any cash distribution or dividend in respect of
any Collateral, Borrower may retain the such cash distribution or dividend as
his own property unless prior to
<PAGE> 2
such receipt an Event of Default has occurred, in which event Borrower shall
accept same in trust for the Company, and shall upon request deliver same
immediately to the Company in the form received, with Borrower's endorsement
and/or assignment when necessary, to be held by the Company as Collateral.
If Borrower receives any stock certificate or option or deferred
compensation right, whether as an addition to, in substitution of, or in
exchange for, any Collateral, or otherwise, Borrower shall accept same in trust
for the Company, and shall upon request deliver same immediately to the Company
in the form received, with Borrower's endorsement and/or assignment when
necessary, to be held by the Company as Collateral.
Borrower is herewith delivering to the Company all certificates or
instruments representing or evidencing Collateral in suitable form for transfer
or delivery, or accompanied by duly executed instruments of transfer or
assignment to be held subject to the preceding paragraph.
Section 3. RELEASE OF COLLATERAL. Upon the written request of Borrower,
the Company shall promptly release Collateral to Borrower or to any designee of
Borrower at any time and from time to time; provided, however, that the Company
shall retain an amount of Collateral with an Agreed Value (as defined below) at
least equal to the amount of the Obligations then outstanding.
(a) The "Agreed Value" of any Collateral consisting of Shares shall be
the original cost of such Shares as set forth in the Restricted Stock Agreement
($[_______] per Share), equitably adjusted for stock splits, stock dividends and
like transactions. The Agreed Value of any Collateral not consisting of Shares
shall be determined reasonably and in good faith by the mutual agreement of
Borrower and the Company.
(b) Borrower acknowledges that transfer of the Shares is subject to
certain restrictions under the Restricted Stock Agreement. The obligation of the
Company to release certificates representing Shares to Borrower or his designee
hereunder shall in any event be subject to the requirements of the Restricted
Stock Agreement. Subject to such requirements and the terms hereof, the Company
shall release Vested Shares or Restricted Shares (as those terms are defined in
the Restricted Stock Agreement) as designated by Borrower.
Section 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to the Company as follows:
(a) Borrower is, and (as to any substitute or additional Collateral)
shall be, the sole owner of the Collateral pledged by Borrower, free and clear
of any lien, security interest, option or other charge or encumbrance, except
for (i) the security interest created by this Agreement, (ii) certain
restrictions under the Restricted Stock Agreement and (iii) restrictions imposed
by applicable laws, and, subject to the same exceptions, Borrower has and shall
have the right to transfer such Collateral and to grant a security interest
therein to the Company as provided in this Agreement.
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<PAGE> 3
(b) No effective financing statement or similar notice covering any
Collateral pledged by Borrower is or shall be on file in any recording office,
and no other pledge or assignment thereof has been made, or shall have been
made, other than in favor of the Company, except as the Company may approve.
Section 5. FURTHER ACTION BY BORROWER. Borrower shall, at the expense
of Borrower, promptly execute and deliver all further notices, instruments and
documents, including, without limitation, financing statements, and take all
such further action as may be reasonably necessary or reasonably advisable or as
the Company at any time may reasonably request, in order to perfect, preserve
and protect the security interest granted or purported to be granted hereby or
to enable the Company to exercise and enforce such rights, powers and remedies
with respect to Collateral.
Section 6. PRESERVATION OF COLLATERAL.
(a) The Company shall give to the Collateral the same degree of care
and protection which it gives to its own property, provided, however, that the
Company shall have no liability to Borrower for any losses, costs, expenses or
damages due to any acts or omissions of third parties, or due to any acts of God
or other causes beyond its control. The Company shall have no duty to preserve
any rights with respect to any Collateral, including, without limitation, rights
against prior parties, or to take, or to notify Borrower of the need to take,
any action respecting any rights, privileges or options relating to any
Collateral, To replace any certificates, however, Borrower shall not be required
to supply any bond or other indemnity.
(b) Borrower shall furnish to the Company, promptly upon receipt
thereof, copies of all material notices, requests and other documents received
by Borrower relating to Collateral unless the same were sent by the Company.
(c) Borrower shall not (i) sell, assign, transfer or otherwise dispose
of any Collateral, or create or suffer to exist any lien, security interest,
assignment by operation of law or other charge or encumbrance on, or with
respect to, any Collateral, except for the security interest created by this
Agreement and the rights, remedies and restrictions imposed by the Restricted
Stock Agreement; or (ii) attempt any action prohibited by paragraph (c)(i) of
this Section 6. Notwithstanding the foregoing, Borrower may transfer Shares to
Permitted Transferees pursuant to the Restricted Stock Agreement; provided,
however, that the Shares so transferred shall remain subject to the security
interest created by this Agreement and any such Permitted Transferee(s) shall,
as a condition to any transfer, agree to be subject to the provisions of this
Agreement.
Section 7. DEFAULTS. A default (an "Event of Default") shall be deemed
to have occurred hereunder if (a) Borrower fails in any material respect to
perform any material obligation hereunder, if any material representation or
warranty hereunder was untrue in any material respect when made, or if any
default or Event of Default by Borrower occurs under the Note or any agreement
evidencing, or constituting or granting security for, the Obligations, provided
the Company is current in its obligation to pay certain bonuses on each day
interest is
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<PAGE> 4
due on the Note, and (b) the Company gives to Borrower written notice thereof
and such default shall not have been cured within fourteen (14) days or such
additional time as may be required to effect such cure if diligently pursued.
Section 8. REMEDIES. Upon and after the occurrence of any Event of
Default which is then continuing or which has not been cured within the time
period given for such cure:
(a) The Company may exercise its rights with respect to the Collateral,
without regard to the existence of any other security or source of payment for
Obligations, including without limitation the rights set forth in Section 2, and
may demand, sue for collection or make any other compromise or settlement with
respect to other rights and remedies provided for herein or otherwise available
to it, and the Company shall have all of the rights and remedies of a secured
party in Massachusetts under the Uniform Commercial Code.
(b) Except as specifically reserved herein, Borrower waives all
suretyship defenses at law and in equity, including waste and impairment of
Collateral, and further waives the requirement of any demand and presentment.
Twenty-one (21) days' prior notice to Borrower at the address provided below or
at such other address as Borrower shall provide to the Company in writing for
such purpose, of the time and place of any public sale of Collateral, or of the
time after which any private sale or any other intended disposition is to be
made, shall constitute reasonable notification.
(c) The Company is authorized at any such sale (including without
limitation any sale to itself or any affiliate of the Company, the same being
expressly authorized and contemplated herein), if the Company deems it advisable
to do so, in order to comply with any applicable securities laws, to restrict
the prospective bidders or purchasers to persons who will represent and agree
that they are purchasing the Collateral for their own account for investment,
and not with a view to the distribution or resale thereof. Sales made subject to
such restriction shall not, solely by reason thereof, be deemed not to have been
made in a commercially reasonable manner.
(d) The Company is specifically authorized, with respect to any
Collateral that consists of Shares, to acquire such Collateral itself or to
transfer such Collateral to any affiliate of the Company at a price equal to the
Agreed Value of such Shares, as defined in Section 3(a). Borrower expressly
waives any requirement that the Company conduct a public or private sale with
respect to such Shares and agrees that such a disposition is commercially
reasonable.
(e) In case of any sale of all or part of the Collateral on credit for
future delivery, the Collateral so sold shall be retained by the Company until
the purchase price is paid. The Company shall incur no liability in case of the
failure of the purchaser to pay for the Collateral as so sold if the Collateral
is recovered, or of the failure of the Company to make any sale of Collateral
after giving notice thereof, and in case of any such failure, such Collateral
may again be sold.
(f) All cash proceeds received by the Company in respect of any sale,
collection or other enforcement or disposition of Collateral shall be applied
(after deduction of any amounts
-4-
<PAGE> 5
payable to the Company for reasonable expenses of the sale, collection or
disposition of Collateral) against Obligations-in such order as the Company
shall elect. Upon payment in full of all Obligations, Borrower shall be entitled
to the return of all Collateral pledged by him and all proceeds thereof, which
have not been used or applied toward the payment of Obligations as herein
authorized.
Section 9. WAIVERS AND REMEDIES. Except as otherwise provided herein or
by law, Borrower waives presentment, demand, notice and protest, notice of
acceptance of this' Agreement, and except as provided in Section 8(b) notice of
all action by the Company in reliance hereon. No failure by the Company to
exercise, no delay by the Company in exercising, and no single or partial
exercise of, any right, remedy or power hereunder or under any other agreement
relating to the Obligations or to Collateral shall operate as a waiver thereof,
or of any other right, remedy or power at any time. No amendment, modification
or waiver of any provision of this Agreement shall be effective unless contained
in a writing signed by the Company. Any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. The rights, remedies and powers of the Company and Borrower, not only
hereunder, but also under any promissory note or notes of Borrower held by the
Company, any other agreements of Borrower with the Company and applicable law,
are cumulative and may be exercised successively, concurrently or alternatively.
Section 10. TERM; BINDING EFFECT. This Agreement shall remain in full
force and effect until payment and satisfaction in full of all Obligations,
shall be binding upon Borrower and the heirs, legatees, legal representatives
and assigns of Borrower, including Permitted Transferees, and shall inure to the
benefit of the Company and its successors and assigns. Notwithstanding the
foregoing, the Company may terminate this Agreement and release the Collateral,
or may accept substitute Collateral, at any time in its sole discretion without
in any way affecting the nonrecourse nature of a portion of the Obligations as
provided in the Note.
Section 11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts,
except to the extent that the perfection of the security interest granted hereby
in respect of any item of Collateral may be governed by the law of another
jurisdiction. Unless otherwise defined herein, all words and terms used in this
Agreement shall have the meanings provided in the Massachusetts Uniform
Commercial Code. If any provision of this Agreement, or the application thereof
to any person or circumstance, is held invalid, such provision shall be deemed
to be modified to comply with applicable law or if not able to be so modified,
shall be deemed to be severed from the Agreement, the remaining provisions of
which to be valid and enforceable.
Section 12. SIGNATURES. This Agreement may be executed in counterparts.
Section 13. HEADINGS. The captions in this Agreement have been included
for reference only and shall not define or limit the provisions hereof.
-5-
<PAGE> 6
EXECUTED as of the date first set forth above.
BORROWER:
-------------------------------
[NAME]
PLEDGEE:
MCK COMMUNICATIONS, INC.
By:___________________________
Name:
Title:
-6-
<PAGE> 7
SCHEDULE OF COLLATERAL
TO
PLEDGE AGREEMENT
QUANTITY DESCRIPTION OF SECURITY
-------- -----------------------
[ ] Shares Common Stock of MCK Communications, Inc.,
par value $0.15 per share.
-7-
<PAGE> 1
EXHIBIT 10.12
MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
[______________________]
[_________________________]
c/o MCK Communications, Inc.
313 Washington street
Newton, MA 02158
Dear [______________]:
In connection with your employment arrangements, MCK Communications,
Inc. agrees to pay you a bonus on each date you pay interest pursuant to the
terms of the attached Promissory Note, in each case an amount equal to the
amount of the related interest payment.
Executed under seal as of the date set forth above.
By: ____________________
Name:
Title:
Accepted and Agreed to:
- ---------------------------------
<PAGE> 1
[PRICEWATERHOUSECOOPERS LETTERHEAD]
EXHIBIT 16.1
Securities and Exchange Commission
Washington, D.C.
U.S.A. 20549
August 20, 1999
Ladies and Gentlemen
We (or a predecessor firm Price Waterhouse) were previously engaged as principal
accountants to audit the financial statements of MCK Communications, Inc. (or
its predecessor) as of and for the years ended April 30, 1996 and 1997. Our
appointment as principal accountants was terminated when they moved the Company
headquarters from Calgary to Boston. We have read MCK Communications, Inc.'s
disclosure regarding our engagement as its principal accountants and the
termination of our relationship, as included in its Form S-1 dated on or before
August 24, 1999. We agree with all such statements.
Yours very truly,
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
RJH/pm
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers
LLP and other members of the worldwide PricewaterhouseCoopers organization.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data", "Experts" and "Change in Independent Accountants"
and to the use of our report dated July 30, 1999, in the Registration Statement
on Form S-1 and related Prospectus of MCK Communications, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
----------------------------
Ernst & Young LLP
Boston, Massachusetts
August 23, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference of our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
June 20, 1997, in the Registration Statement on Form S-1 and related Prospectus
of MCK Communications, Inc. for the registration of shares of its common stock.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
Calgary, Alberta
August 24, 1999
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<ARTICLE> 5
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,284,984
<SECURITIES> 0
<RECEIVABLES> 3,350,389
<ALLOWANCES> (179,560)
<INVENTORY> 1,493,641
<CURRENT-ASSETS> 8,342,039
<PP&E> 1,966,286
<DEPRECIATION> (911,725)
<TOTAL-ASSETS> 9,428,443
<CURRENT-LIABILITIES> 2,763,933
<BONDS> 0
28,204,790
0
<COMMON> 3,464
<OTHER-SE> (24,043,744)
<TOTAL-LIABILITY-AND-EQUITY> 9,428,443
<SALES> 0
<TOTAL-REVENUES> 14,269,603
<CGS> 0
<TOTAL-COSTS> 5,389,557
<OTHER-EXPENSES> 8,853,765
<LOSS-PROVISION> 112,418
<INTEREST-EXPENSE> 397,969
<INCOME-PRETAX> (181,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (181,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (181,082)
<EPS-BASIC> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
