<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1999
REGISTRATION STATEMENT NO. 333-85821
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
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. [ ]
------------------------
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 OCTOBER 13, 1999
MCK COMMUNICATIONS LOGO
3,400,000 SHARES
COMMON STOCK
MCK Communications, Inc. is offering 3,400,000 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 $14.00 and $16.00 per share.
------------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
<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 510,000 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.
------------------------------
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST
The date of this prospectus is , 1999
<PAGE> 3
[MCK COMMUNICATIONS LOGO]
A LEADING SUPPLIER OF REMOTE ACCESS PRODUCTS THAT EXTEND THE FULL RANGE OF
FEATURES AND APPLICATIONS OF THE CORPORATE TELEPHONE SYSTEM TO SMALL
BRANCH OFFICES AND TELECOMMUTERS.
CUSTOMER PREMISE EQUIPMENT
SINGLE-USER EXTENDERS connect remote employees, such as
telecommuters and customer service representatives, to
corporate telephone systems over traditional telephone lines
or data networks, including broadband.
[Photo of an EXTender 4000]
MULTI-USER EXTENDERS allow small branch offices to
seamlessly connect to corporate telephone systems
over the customer's existing data network, including broadband.
[Photo of a pair of Branch Office EXTENDERS]
CORPORATE GATEWAY DEVICES
MCK GATEWAYS, located at the corporate telephone location, provide an
interface between the corporate telephone system and remote employees using
single- and multi-user MCK EXTenders. Together, MCK's EXTenders and
Gateways create a unified telephone system between locations.
[Photo of a PBXgateway]
<PAGE> 4
Edgar description for Interior Fold-out Page:
(MCK LOGO)
CAPTION: EXTENDING CORPORATE TELEPHONE SYSTEMS TO
REMOTE EMPLOYEES OVER MANY NETWORKS
The page is divided into three sections, labeled "Corporate Office" on the
left, "Branch Office" in the top center and "Telecommuter or Home Office" on the
right and at the bottom center. The diagram shows a large corporate office with
a PBX connected to a PBXgateway and a non-MCK product. The PBXgateway connects
to public and private networks. The non-MCK product independently connects to
public and private networks. At the branch office location, the diagram shows a
network termination device that connects to public and private networks. A
Branch Office EXTender 6000 connects to a network termination device and
multiple telephone sets connect to the Branch Office EXTender 6000. Multiple
telephone sets connect to the Branch Office EXTender 6000s and one telephone set
connects to the EXTender 4000. At the telecommuter or home office locations, 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
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Note on Forward Looking Statements.......................... 15
Use of Proceeds............................................. 15
The Company................................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 29
Management.................................................. 49
Certain Transactions........................................ 57
Principal Stockholders...................................... 59
Description of Capital Stock................................ 60
Shares Eligible for Future Sale............................. 63
Underwriting................................................ 65
Legal Matters............................................... 66
Experts..................................................... 66
Change in Independent Accountants........................... 67
Where You Can Find More Information......................... 67
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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 1.53 for-one stock split of the common stock effected as a dividend on
October 8, 1999 and the filing of our amended and restated certificate of
incorporation. 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.
MCK COMMUNICATIONS, INC.
MCK Communications is a leading provider of products that provide remote
employees access to corporate voice systems and applications. These products
enable corporations to extend the features and applications of large corporate
telephone systems known as private branch exchanges, or PBXs, from the corporate
office to remote branch offices and telecommuters over public and private
networks. PBX systems are the most commonly used corporate telephone systems and
deliver features such as three- or four-digit internal dialing and call
forwarding and applications such as voicemail. 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 voice and PBX
applications to remote locations over corporations' existing data networks.
Branch office employees benefit from having digital telephone sets that function
as extensions of the corporate telephone systems, providing these employees with
the same features and applications utilized by employees at the corporate
headquarters. In addition, our products reduce the total cost of ownership by
allowing corporations to use their existing 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. This model of distributed work forces with multiple branch
offices and numerous telecommuters enables corporations 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 and the deployment of interoperable equipment from multiple vendors
has enabled cost-effective, high-speed remote access and communication over
local and wide area data networks, including virtual private networks. In
contrast, corporate voice systems, 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
limitations and cost constraints. As a result, corporations have had to deploy
separate telephone systems 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 voice and data services be offered
over one centrally-managed corporate communications infrastructure. Technology
which converts voice transmissions into packets of data, 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, make this convergence of
voice and data possible. Thus, solutions for the remote voice marketplace must
offer a centrally-managed interface to corporate telephone systems and have the
capability of packetizing and transmitting voice over both traditional
circuit-based data networks and emerging packet networks.
1
<PAGE> 8
Our remote access solutions enable corporations to realize the following
key benefits:
- Full-Featured Remote Voice Access. Our solutions effectively provide the
rich features and applications of PBX systems to branch office employees
and telecommuters over existing data networks.
- Digital Line Extension Technology. Our solutions utilize our proprietary
hardware and software interfaces to: (1) extract voice and the signaling
information necessary to interface with proprietary PBX systems from the
user or line side of the PBX; and (2) access the rich features and
applications of corporate telephone systems for transmission across data
networks.
- Packet Voice Architecture. Utilizing our proprietary Remote Voice
Protocol, or RVP, software platform, we packetize voice transmission and
voice applications extracted from PBXs 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. By transmitting voice over data networks, our
products eliminate the need for corporations to install separate,
parallel wiring architectures for voice and data.
- Compatibility with Leading PBX Manufacturers. Our solutions are
compatible with the proprietary PBX systems 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;
- 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.
2
<PAGE> 9
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THE OFFERING
Common stock offered by MCK............. 3,400,000 shares
Common stock to be outstanding after the
offering................................ 17,864,434 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:
- 1,451,160 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $1.40 per share; and
- 2,887,798 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."
- --------------------------------------------------------------------------------
3
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The as adjusted consolidated balance sheet data summarized below reflects
the conversion of our convertible preferred stock into 8,674,493 shares of
common stock upon the completion of this offering and the application of the net
proceeds from the sale of 3,400,000 shares of common stock issued hereby at an
assumed offering price of $15.00 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
1.53 for one stock split of our common stock effected on October 8, 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 1,691
---------- ---------- ---------- ---------- ---------- ---------- ----------
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 3,888 780 1,347
General and administrative......... 626 319 607 1,485 1,617 391 494
Stock based compensation........... -- -- -- -- 406 20 1,114
Transaction-related charges........ -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses....... 892 1,239 3,060 5,434 9,260 1,942 3,919
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 122 1,677 548 (358) (380) (14) (1,087)
Other income (expense)............... 12 7 (343) (595) (207) (129) (95)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes and dividends on
redeemable preferred stock of
subsidiary......................... 134 1,684 205 (953) (587) (143) (1,182)
Provision for income taxes........... 13 652 302 -- -- -- --
Dividends on redeemable preferred
stock of subsidiary................ -- -- 133 160 197 50 50
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 121 $ 1,032 $ (230) $ (1,113) $ (784) $ (193) $ (1,232)
Dividends on redeemable preferred
stock.............................. -- -- 1,011 1,220 1,966 393 551
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to
common shares...................... $ 121 $ 1,032 $ (1,241) $ (2,333) $ (2,750) $ (586) $ (1,783)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net income (loss)
per common share................... $ .04 $ .33 $ (0.39) $ (0.67) $ (0.71) $ (0.16) $ (0.41)
Shares used in computing basic and
diluted net income (loss) per
common share....................... 3,108,373 3,108,373 3,188,152 3,476,281 3,881,526 3,657,057 4,304,187
Pro forma basic and diluted loss per
share.............................. $ (0.34) $ (0.21)
Shares used in computing pro forma
basic and diluted loss per share... 8,132,866 8,674,492
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents........................................ $ 3,596 $ 22,423
Working capital............................................. 5,621 25,448
Total assets................................................ 9,813 29,640
Long-term debt.............................................. 2,654 154
Redeemable preferred stock.................................. 24,003 --
Redeemable convertible preferred stock...................... 4,799 --
Total common stockholders' equity (deficit)................. (24,750) 26,381
</TABLE>
4
<PAGE> 11
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 failure
to generate as much revenue as expected from these customers or the failure of
these customers, particularly Lucent, to purchase our products would seriously
harm our business. 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, present and future
customers may 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 seriously
harm our business, financial condition and results of operations.
OUR INABILITY TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH KEY PBX VENDORS WOULD
HARM OUR ABILITY TO SUSTAIN AND GROW OUR BUSINESS
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 systems sold by these vendors account for approximately 65% of the
U.S. market for corporate PBX equipment sales, and approximately 99% of our
revenues for fiscal year 1999 were attributable to products which interoperate
with corporate telephone systems offered by these vendors. We may not have
access in the future to the proprietary protocols for the major corporate
telephone systems marketed by those vendors, which access may be essential to
ensure the continued interoperability of our products. Moreover, we may not be
able to develop products that interoperate with the corporate telephone systems
offered by other vendors. Additionally, the standards for telephony equipment
and data networks are evolving and our products may not 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
5
<PAGE> 12
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 customers could purchase competitive
products from other suppliers if we fail to produce technologically competitive
products in a cost-effective manner or on a timely basis. This may cause us to
be unable to sustain or grow our business.
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. Our inability
to compete effectively in this market would materially adversely affect our
revenues and future profitability. 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 may not be able to
compete successfully against current or future competitors and these competitive
pressures may 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. This consolidation creates uncertainty as to
the nature of our future competition. For instance, a relatively small
competitor which is acquired by a large telecommunications company would likely
have access to greater resources than us and would accordingly be a greater
competitive threat. 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 strategic relationships with
third parties in our industry, such as Lucent, any consolidation involving these
parties could reduce the demand for our products and otherwise harm our business
prospects.
6
<PAGE> 13
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. For example, over the nine most recent fiscal quarters, our
net results of operations have ranged from a net loss before dividends on
subsidiary redeemable preferred stock of $95,000 to net loss of $1,182,000. 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, the
market price of our common stock will most likely fall. A number of factors
could cause our quarterly results to fluctuate, 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 necessary manufacturing processes 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 permanently harm our reputation in the industry.
7
<PAGE> 14
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-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.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, OUR REVENUES WILL DECREASE
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
reduce the amount of revenue we receive from the sale of our products.
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 reduce the amount
of revenue we receive from the sale of our products 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
8
<PAGE> 15
depending on the timing and amount of orders from our indirect distribution
channels. Our indirect distribution channels may not market our products
effectively or may cease to devote the resources necessary to provide us with
effective sales, marketing and technical support.
In order to support and develop leads for our indirect distribution
channels, we plan to significantly expand our field sales staff. This internal
expansion may not be successfully completed. In addition, the cost of this
expansion may exceed the revenues generated and our expanded sales and support
staff may not 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. It is
uncertain whether and to what extent a trading market will develop for our
common stock 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 reduce the amount of resources and management time focused on
growing our business and improving operating results.
9
<PAGE> 16
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 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 general economic downturns impact our customers,
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. In addition, the foreign markets for
our products may 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. Our future currency hedging strategies may not be
successful.
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 seriously harm our future operating results.
10
<PAGE> 17
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 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 and we may not 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, certain product returns, diversion of development
resources, injury to our reputation or increased service and warranty costs, any
of which could seriously harm our business, financial condition and results of
operations. For example, minor software defects in our EXTender 3000E product
caused us to cease shipments of that product for approximately six weeks to
enable us to correct the defects. 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 damages arising from
the implementation and use of our products, the terms of our insurance limit the
amount and types of damages that are covered and 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 WHICH MAY ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
PRODUCTS
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.
11
<PAGE> 18
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 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. Within the last year, we have
introduced several new products, and we have additional new products currently
in pre-release testing. The loss of the services of any key personnel,
particularly senior management and engineers, could seriously harm our business,
financial condition and results of operations, including our success in selling
our recently introduced products and introducing new products.
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
12
<PAGE> 19
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
- 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, we do not expect the cost of
remediation 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 13,307,794 shares, or
approximately 74.5% of the outstanding shares of common stock (73.4% 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 $46.3 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."
13
<PAGE> 20
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.
14
<PAGE> 21
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 $46.3 million, at an assumed initial offering price of
$15.00 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 $49.9 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 October 1999, the Nevada corporation
became our wholly-owned subsidiary.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock since our
June 1996 recapitalization. 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.
15
<PAGE> 22
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 and accrued dividends on the
preferred stock into 8,674,493 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 $15.00
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........................................... $ 2,500 $ 2,500 --
Series A redeemable preferred stock, $0.001 par value per
share: 14,985,733 shares authorized, issued and
outstanding, actual and pro forma; no shares authorized,
issued or outstanding pro forma as adjusted............... 18,654 18,654 --
Series B redeemable convertible preferred stock, $0.001 par
value per share; 3,968,354 shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted.......... 2,117 -- --
Series C redeemable preferred stock, $0.001 par value per
share; 28,505 shares authorized, issued and outstanding,
actual and pro forma; no shares authorized, issued or
outstanding, pro forma as adjusted........................ 2,808 2,808 --
Series D redeemable convertible preferred stock, $0.001 par
value per share; 1,672,354 shares authorized, issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma as adjusted........................ 2,682 -- --
Series E redeemable preferred stock of subsidiary, $0.001
par value per share; unlimited shares authorized, 20,000
issued and outstanding, actual and pro forma; no shares
authorized, issued or outstanding, pro forma as
adjusted.................................................. 2,540 2,540 --
Common stockholders' deficit:
Common stock, $.001 par value, 25,000,000 shares authorized;
5,675,033 shares issued and outstanding, actual;
25,000,000 shares authorized, 14,349,526 shares issued and
outstanding, pro forma; and 40,000,000 shares authorized,
17,749,526 shares issued and outstanding, pro forma as
adjusted.................................................. 6 14 $ 18
Paid-in capital............................................. 9,494 14,285 60,612
Accumulated deficit......................................... (26,086) (26,086) (26,086)
Deferred compensation....................................... (7,186) (7,186) (7,186)
Accumulated other comprehensive income...................... (206) (206) (206)
Notes receivable from officers.............................. (771) (771) (771)
------- ------- -------
Total common stockholders' deficit..................... (24,749) (19,950) 26,381
------- ------- -------
Total capitalization.............................. 6,552 6,552 26,381
======= ======= =======
</TABLE>
The table above excludes as of July 31, 1999 1,336,088 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $0.46 per share under our 1996 Stock Option Plan and 3,060,000
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."
16
<PAGE> 23
DILUTION
As of July 31, 1999, we had a pro forma net tangible book deficit of $20.0
million, or $1.39 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 3,400,000 shares of common stock
offered hereby at an assumed initial public offering price of $15.00 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 $26.4 million, or $1.49 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.88 per share to existing stockholders and an immediate dilution of $13.51 per
share to new investors. If the initial public offering price is higher or lower
than $15.00 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............. $15.00
Pro forma net tangible book deficit per share as of July 31,
1999...................................................... $1.39
Increase per share attributable to new investors............ 2.88
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.49
------
Dilution per share to new investors......................... $13.51
======
</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.............. 14,349,526 80.8% $ 5,593,000 9.9% $ 0.39
New investors...................... 3,400,000 19.2 51,000,000 90.1 15.00
---------- ----- ----------- -----
Total.................... 17,749,526 100.0% $56,593,000 100.0% 3.19
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of common shares
outstanding as of July 31, 1999 and exclude:
- 1,336,088 shares of common stock subject to outstanding options at July
31, 1999 at a weighted average exercise price of $0.46 per share; and
- 3,060,000 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.
17
<PAGE> 24
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 1,691
---------- ---------- ---------- ---------- ---------- ---------- ----------
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 3,888 780 1,347
General and
administrative............ 626 319 607 1,485 1,617 391 494
Stock based compensation.... -- -- -- -- 406 20 1,114
Transaction-related
charges................... -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 892 1,239 3,060 5,434 9,260 1,942 3,919
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.................. 122 1,677 548 (358) (380) (14) (1,087)
Other income (expense)........ 12 7 (343) (595) (207) (129) (95)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision
for income taxes and
dividends on redeemable
preferred stock of
subsidiary.................. 134 1,684 205 (953) (587) (143) (1,182)
Provision for income taxes.... 13 652 302 -- -- -- --
Dividends on redeemable
preferred stock of
subsidiary.................. -- -- 133 160 197 50 50
========== ========== ========== ========== ========== ========== ==========
Net income (loss)............. $ 121 $ 1,032 $ (230) $ (1,113) $ (784) $ (193) $ (1,232)
========== ========== ========== ========== ========== ========== ==========
Dividends on redeemable
preferred stock............. -- -- 1,011 1,220 1,966 393 551
Net income (loss) applicable
to common shares............ $ 121 $ 1,032 $ (1,241) $ (2,333) $ (2,750) $ (586) $ (1,783)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net income
(loss) per share............ $ 0.04 $ 0.33 $ (0.39) $ (0.67) $ (0.71) $ (0.16) $ (0.41)
Shares used in computing basic
and diluted net income
(loss) per share............ 3,108,373 3,108,373 3,188,152 3,476,282 3,881,526 3,657,058 4,304,187
Pro forma basic and diluted
loss per share.............. $ (0.34) $ (0.21)
Shares used in computing pro
forma basic and diluted loss
per share................... 8,132,866 8,674,492
</TABLE>
18
<PAGE> 25
<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>
19
<PAGE> 26
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 products that enable
corporations to distribute the full range of features and applications of
corporate telephone systems to branch offices and telecommuters over data
networks. We market and distribute our products through an international network
of indirect resellers and equipment 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 products for corporate telephone
systems by using 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 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
20
<PAGE> 27
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
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 corporate telephone systems 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.
Stock based compensation expenses resulted from the granting of restricted
stock and stock options to employees and directors with exercise prices per
share determined to be below the deemed fair values per share for financial
reporting purposes of our common stock at dates of grant. The deferred
compensation is being amortized to expense in accordance with FASB
interpretation No. 28 over the vesting period of the individual options,
generally four years. In the fiscal year ended April 30, 1999, we recorded total
deferred stock compensation of $1,211,652 and amortized $406,000. In addition,
we recorded total deferred stock compensation of $7,494,575 in the three months
ended July 31, 1999 and amortized $1,113,856 in the same period. At July 31,
1999, deferred compensation to be amortized in future periods amounted to
$7,186,371.
21
<PAGE> 28
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
Stock based compensation................... -- -- 2.8 .6 24.6
Transaction-related charges................ 8.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 51.7 69.0 64.9 62.3 86.6
----- ----- ----- ----- -----
Income (loss) from operations................ 9.2 (4.5) (2.7) (0.4) (24.0)
Other expense, net........................... (5.7) (7.6) (1.5) (4.1) (2.1)
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes and dividends on redeemable preferred
stock of subsidiary........................ 3.5 (12.1) (4.1) (4.6) (26.1)
Provision for income taxes................... (5.1) -- -- -- --
----- ----- ----- ----- -----
Net loss before dividends on subsidiary
redeemable preferred stock................. (1.6)% (12.1)% (4.1)% (4.6)% (26.1)%
===== ===== ===== ===== =====
</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
22
<PAGE> 29
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 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%.
23
<PAGE> 30
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 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 the 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.
24
<PAGE> 31
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 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 1,691
------ ------ ------ ------ ------ ------ ------ ------ -------
Gross profit.................. 888 1,125 1,400 1,663 1,928 2,111 2,233 2,608 2,832
Operating expenses:
Research and development.... 296 405 501 553 751 770 880 948 964
Sales and marketing......... 361 625 551 655 779 918 1,004 1,186 1,347
General and
administrative............ 200 404 425 457 392 415 347 463 494
Stock based compensation.... -- -- -- -- 20 83 146 157 1,114
------ ------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses................ 857 1,434 1,477 1,665 1,942 2,186 2,377 2,754 3,919
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations.................. 31 (309) (77) (2) (14) (75) (144) (146) (1,087)
------ ------ ------ ------ ------ ------ ------ ------ -------
Other income (expense), net... (126) (164) (179) (127) (129) (91) (8) 21 (95)
------ ------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) before
dividends on subsidiary
redeemable preferred
stock....................... $ (95) $ (473) $ (256) $ (129) $ (143) $ (166) $ (152) $ (125) $(1,182)
====== ====== ====== ====== ====== ====== ====== ====== =======
</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 23.4 20.6 17.2 12.6 12.1 9.7 11.3 10.9
Stock based compensation... -- -- -- -- 0.6 2.4 4.0 3.8 24.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 59.9 83.0 71.6 62.8 62.3 63.5 65.9 67.1 86.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 2.2 (17.9) (3.8) (0.1) (0.4) (2.2) (4.0) (3.6) (24.0)
----- ----- ----- ----- ----- ----- ----- ----- -----
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) before
dividends on subsidiary
redeemable preferred
stock...................... (6.6)% (27.4)% (12.5)% (4.9)% (4.6)% (4.8)% (4.2)% (3.0)% (26.1)%
===== ===== ===== ===== ===== ===== ===== ===== =====
</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
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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 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 have incurred cumulative losses for the three-year period ended April
30, 1999. At April 30, 1999, we had net deferred tax assets of $423,100. Due to
the Company's relatively short operating history and its recent history of
operating losses, we do not have an objective and verifiable basis for
concluding that it is more likely than not that we will generate taxable income
in the foreseeable future. Accordingly, we have provided a full valuation
allowance against our deferred tax assets. When management is able to
demonstrate a sustained ability to generate taxable income, the valuation
allowance will be reduced or eliminated. The Company's net income or loss will
be positively impacted during the period of any such modification or removal.
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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."
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.
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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
- 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 access products for
corporate telephone systems that enable corporations to extend the features and
applications of those systems, which are known as private branch exchanges or
PBXs, from the corporate office to remote branch offices and telecommuters over
geographically dispersed public and private data networks. PBX systems are the
most commonly used corporate telephone systems and deliver features such as
three- or four-digit internal dialing and call forwarding and applications such
as voicemail, automatic call distribution and interactive voice response. 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 voice and PBX applications to remote locations over corporations'
existing data networks. In addition, our products reduce the total cost of
ownership by utilizing 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 telephone
systems, or 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 telephone 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 have 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 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 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
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extending the reach of data networks beyond corporate locations over public and
private networks to create wide area networks, or WANs.
Today, branch offices and telecommuters access corporate data networks over
a variety of circuit-based networks that were designed 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
communications 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 telephone systems are generally based on circuit-based
networks and corporate telephone equipment known as private branch exchanges, or
PBXs. Given the mission critical nature of voice communications and related
applications, corporate telephone 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, including:
- voicemail systems;
- unified messaging systems that create a single interface for accessing
voicemail, e-mail and fax messages;
- automatic call distribution systems;
- auto-attendant systems;
- call accounting software;
- least-cost routing applications; and
- interactive voice response 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 MMTA, estimates that the
installed base of PBX-based corporate telephone systems in the United States in
1998 exceeded 45 million ports. In addition, the MMTA has reported that the
market for these corporate telephone systems is growing. Since 1991 over
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44 million lines have been added to both new and existing PBX-based corporate
telephone systems. In 1998 alone, 7.4 million new lines were added to these
corporate telephone 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 corporate telephone systems as they do on the
equipment itself. According to the MMTA, over $25 billion has been spent on
PBX-based corporate telephone 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 PBX-based corporate
telephone systems cannot be cost-effectively extended to small branch offices
and telecommuters. A number of factors have created this deficiency. Technical
limitations of these systems cause the quality of voice transmission to degrade
beyond a limited distance. In addition, the high cost associated with deploying
a PBX-based telephone system 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. Key systems 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-based corporate telephone 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 offices. While Centrex
offers many of the same features as PBXs, its effectiveness is
constrained by phone companies' 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. 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. These offerings cannot support
digital telephone sets, and require an expensive dedicated leased line or
private network connection.
- LAN and Windows NT PBXs. Recently introduced solutions from data
networking vendors, such as LAN and Windows 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 utilizes 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 technology that can convert voice transmissions into packets of data
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,
information that is proprietary to each type of PBX system and is required to
interface with these systems in order to deliver the features and applications
supported by these
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systems. As a result of its reliability, the wide variety of applications that
it supports and the size of its installed base, 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-based corporate telephone 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 effectively
deliver all of the voice 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 the signaling
information that is proprietary to each PBX to remote locations over existing
data networks. This signaling information is necessary to interface with each
type of PBX system to deliver the features and applications supported by these
systems. In addition, our products reduce the total cost of ownership by
allowing corporations to use their existing investments in voice and data
equipment, and streamline network administration through the utilization of
industry standard network management techniques.
The following are the key attributes of our solution:
Full-Featured Remote Voice Access. Our EXTender solutions provide the
features and applications of corporate telephone systems 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 PBX 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 its digital line or user side. We have developed proprietary
software and hardware interfaces that extract the voice and PBX signaling
information from the user side of the PBX which is also known as the digital
line side. 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 side of the PBX, 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 or user side of most leading PBX vendors, our
products enable corporations to deploy effective remote voice solutions without
significant reconfigurations or upgrades to their existing PBX-based corporate
telephone 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 subscriber line, or DSL, fiber,
frame relay, IP, integrated services digital network, or ISDN, leased line, T-1,
fractional T-1 and traditional telephone networks. Our products enable next
generation service providers such as the emerging digital subscriber line and
cable network operators to provide MCK EXTender functionality as a value-added
service offering to corporations for branch offices and telecommuters over
public and private data networks.
Lower Cost Solution. Our products provide a cost-effective solution,
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.
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- 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
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 utilize their existing
capital investment in PBX-based corporate telephone 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 PBX-based corporate telephone systems. 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 solutions that extend
corporate telephone systems to branch offices and telecommuters of Fortune 5000
businesses. The following are the principal elements of our business strategy:
Maintain technology leadership. Our technology enables us to provide
products that distribute the features and applications of corporate telephone
systems 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 the PBX signaling information required to
interface with each of the PBX systems we support 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 to develop new products
and applications that target broadband markets. 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 its full
features and applications to remote locations with minimal impact on the
existing corporate telephone system or its resident software applications. We
believe that this non-intrusive implementation, and our products' positioning as
an extension of the corporate PBX, 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.
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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 develop service offerings based
on our technology that can deliver our application over broadband networks. We
jointly developed a broadband 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 their existing
PBX-based telephone systems and have significant numbers of branch offices and
telecommuters. Accordingly, these corporations have the most to gain from an
integrated 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 telephone
systems 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 corporate telephone systems are
accessed through the proprietary user or digital line side of the PBX. These
line-side interfaces enable the delivery of the features and applications of
PBX-based corporate telephone 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 line-side interfaces and have developed
line-side software interfaces to a number of today's PBX-based corporate
telephone 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 the PBX signaling information required
to interface with PBX systems 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.
Our proprietary software platform, RVP, 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
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<PAGE> 41
efficiently while also ensuring that delay sensitive voice 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.
- Dual Tone Multi-Frequency Processing Technology. Dual tone
multi-frequency 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 these 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 and integrated services digital network, or ISDN,
connections and have incorporated third-party network devices to support T-1,
leased line and frame relay networks. In addition, to deliver data alongside our
packet voice transmission, we have expertise in terminating dial-up networking
connections and bridging standard data traffic.
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 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 telephone
systems without requiring a hardware change. We have also architected our
products with a variety of standard telephony and data network 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 located on the digital line of the PBX.
This software subsystem has been designed to emulate a majority of the PBX-based
corporate telephone systems 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-based corporate telephone systems.
Our RVP software platform is responsible for packetizing voice and PBX signaling
35
<PAGE> 42
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
interfaces between the proprietary software of these leading PBX vendors and our
RVP software platform and standard hardware architecture. We generally enter
into contracts with these PBX vendors which provide us access to their
proprietary software and grant us rights to develop, manufacture and sell
products which interface with each vendor's equipment. As a result of these
relationships, we have developed substantial expertise in understanding and
interfacing with these proprietary corporate telephone systems. These
manufacturers have tested and validated in their own labs that our RVP platform
is interoperable with a variety of their 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. Single- or multi-user remote location client
devices that service branch offices, remote call centers and
telecommuters; and
- Corporate PBX Gateways. Products located at the corporate location that
extend voice traffic and PBX applications to our customer premise
equipment devices.
Our EXTender series of products enables corporations to provide the
functionality of corporate telephone systems and all of their supported
applications to users who traditionally have not had access to the corporate
telephone system and its voice applications because of the limitations of
current systems. Our products enable the PBX to act as a server that distributes
the features and applications of PBX-based corporate telephone systems to remote
locations over networks such as ATM, DSL, fiber, frame relay, IP, ISDN, leased
line, 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, automated call distribution 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.
Customer Premise Equipment
Our single-user product line enables telecommuters and remote call center
agents located in remote locations to connect to the corporate telephone system
and data network over public and private networks.
- EXTender 1000+. The EXTender 1000+ is a single-user device that supports
both voice and data over a single traditional telephone line. The remote
user's personal computer 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 data network 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
PBXtender gateway
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<PAGE> 43
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 device that supports
both voice and data over an integrated services digital network, or ISDN,
connection. An integrated services digital network connection is composed
of two 64 Kbps channels that each can deliver a separate network
connection. With its built-in network 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 data multiplexed over one channel. The second 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.
- EXTender 3000E. The EXTender 3000E offers dedicated voice over one
channel and a 64 Kbps Ethernet data connection on the second channel.
The EXTender 3000E uses an Ethernet port and bridging technology to
enable simultaneous voice and data network access capabilities. In
addition, standard hardware compression technology is utilized to
significantly enhance data throughput. When not used for Ethernet
data, the second channel is available as an analog port, supporting a
fax, additional phone or modem.
CAPTION: SINGLE-USER PRODUCTS
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.
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<PAGE> 44
- EXTender 3200 for IDSL. The EXTender 3200 for IDSL is a single-user
device that delivers voice and data over an integrated digital subscriber
line, or IDSL, network connection. IDSL is a digital subscriber
line-enabled integrated services digital network connection that combines
both 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 its equipment located in the
central offices of service providers that transmits voice and data
traffic to and from end users. The EXTender 3200 for IDSL connects to a
PBXgateway IP product located at the corporate site. This product is
currently in customer trials 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 and delivers IP-based voice over data
networks. The IP EXTender 4000 connects to a PBXgateway IP product
located at the corporate site. This product is currently in customer
trials and is expected to be commercially available by the fourth quarter
of calendar year 1999.
Our branch office product connects remote offices to the corporate
telephone system 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 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 network interfaces that allow
for multiple options and redundancy capability and transmits voice over a
wide variety of data networks including ATM, DSL, fiber, frame relay, IP,
ISDN, leased line, 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 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.
GRAPHIC
CAPTION: MULTI USER PRODUCTS
The diagram is divided into two sections, labeled "Corporate Location" on the
left and "Remote Location" on the right. The diagram shows a corporate PBX-based
telephone system connected to a Branch Office EXTender 6000 connected to a
non-MCK product. The non-MCK product connects independently to public and
private networks. At the remote location, the diagram shows a network
termination device that connects to public and private networks. The network
termination device connects to a Branch Office EXTender 6000 and a local area
network. The Branch Office EXTender 6000 is connected to multiple telephone
sets.
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<PAGE> 45
Corporate PBX Gateway Products
Our PBX gateway products, located at the corporate PBX site, interface with
the line side of the PBX and create extensions of voice and PBX applications to
our customer premise equipment.
- 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 product lines. The PBXtender can be
configured to support up to 12 line cards that may be mixed and matched
to support up to 12 analog users or 24 integrated services digital
network, or ISDN, users simultaneously. The product also has a
Windows-based graphical user interface to enable remote management and
diagnostics of our customer premise equipment.
- PBXgateway. The PBXgateway supports a range of our products, including
both multi-user and single-user customer premise equipment. Depending
upon the version of the product, the PBXgateway will transmit voice over
a wide variety of data networks including ATM, DSL, fiber, frame relay,
IP, ISDN, leased line, 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, 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, fiber, frame
relay, ISDN, leased line, T-1 or fractional T-1 network connections.
- PBXgateway IP. The PBXgateway IP extends the functionality of the
corporate PBX to a variety of our multi-user and single-user IP
products, 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 products over multiple types of
broadband networks. As part of our strategy, we are positioning this
product as a platform to deliver new applications and services to our
customer premise equipment, 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 customer trials and is expected to be commercially
available by the fourth quarter of calendar year 1999.
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Graphic
CAPTION: BROADBAND NETWORK PRODUCTS CURRENTLY IN CUSTOMER TRIALS
The diagram is divided into four sections, labeled "Corporate Office" on the
left, "Remote Locations" on the top right, "Branch Office" on the right center
and "Telecommuter" on the bottom right. The diagram shows a PBXgateway IP
connected to a PBX-based corporate telephone system and a network termination
device. The network termination device independently connects to public and
private packet networks. At the remote location, the diagram shows a network
termination device that connects to public and private packet networks. An IP
EXTender 4000 connects to the network termination device, a personal computer
and a telephone set. At the Branch Office, the diagram shows a network
termination device that connects to public and private pocket networks as well
as personal computers. A Branch Office EXTender 6000 connects to the network
termination device and multiple telephone sets. At the Telecommuter location,
the diagram shows an EXTender 3200 for IDSL. The EXTender 3200 for IDSL is
connected to a personal computer and a telephone set.
Other Products
- Digital-to-Analog Recording Interface. Our Digital-to-Analog Recording
Interface converts digital voice from proprietary PBXs 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 pre-release 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 distribution channels 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 generally
establish relationships with our most significant distribution channels through
written distribution 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. A number of our distribution channels resell our
products without written agreements, with terms determined on a purchase order
basis. We provide significant sales, marketing, training and technical support
to our channels.
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<PAGE> 48
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 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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<PAGE> 49
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. Lucent-branded products are MCK products that Lucent sells
under its own name. 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 Maritz
Comdisco Bottomline Technologies Massachusetts State Promus Hotels
Deloitte & Touche Citrix Systems Police Travel Services
Fidelity Digital (Compaq) New York University International
General Auto Insurance Landmark Systems U.S. Postal Service United Airlines
MFS Northrop Grumman World Travel Partners
Merrill Lynch
Nationsbank (Bank of TELECOM/MEDIA OTHER
America) ------------- -----
Option One CNN Argon
Prudential Securities Harte-Hanks Circuit City
Safeco Sitel Federal Express
Sun Trust TCI Otis Elevator
TD Waterhouse Group Turner Broadcasting Pacificorp
Pfizer
</TABLE>
Case Studies
Representative examples of the manner in which our products have been used
are set forth below.
Circuit City is a leading national retailer of brand-name consumer
electronics, personal computers, major appliances and entertainment software,
with over 590 store locations nationwide. As a part of its telecommuting
program, Circuit City has used our EXTender 1000+ and EXTender 3000 product
lines to connect its telecommuters to its corporate voice network. Our products
enable Circuit City to provide its employees with effective access to their
corporate PBX and its applications.
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<PAGE> 50
General Automobile Insurance Services, Inc. (GAIS) provides a full range of
automotive insurance services. GAIS has established a single toll-free number
that rings in their corporate headquarters to handle all customer service and
information requests. GAIS is using the MCK EXTender 1000+ and EXTender 3000
products to route incoming calls to the appropriate call center agents at
multiple locations, thereby enabling GAIS customers to reach any agent in any
office depending upon the specific nature of customers' call. In addition, GAIS
is also using our Branch Office EXTender 6000 to provide remote offices with
transparent access to its corporate voice network.
Maritz Inc. has been in business since 1894 and, at over $2 billion in
revenue, is one of the largest sources of integrated performance improvement,
travel and marketing research services globally. As a part of its telecommuting
program, Maritz uses our EXTender 3000 products to connect a number of
telecommuters to its corporate voice network. Our products enable Maritz to
expand its recruiting reach and improve employee productivity and retention,
while reducing office space demands. In addition to the EXTender 3000, Maritz
also uses our Branch Office EXTender 6000 to integrate multiple facilities to
its existing corporate PBX system over its data network.
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 digital line or user side of proprietary PBX systems;
- digital audio technology, such as echo cancellation and voice compression
algorithms;
- IP telephony;
- data 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
relationships 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-based corporate telephone systems 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.
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<PAGE> 51
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
voice prioritization within multiple network environments and across a range of
network conditions. Our facilities contain extensive telephony and data
equipment and network circuits to conduct these tests.
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.
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<PAGE> 52
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;
- 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
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<PAGE> 53
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 or
patent applications pending.
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.
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<PAGE> 54
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> 55
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
Alfred F. Brisard......................... 35 Vice President of Product 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> 56
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.
Alfred F. Brisard has served as our Vice President of Product Marketing
since October 1999. From November 1997 to September 1999 he served as Director
of Marketing and Business Development -- New Business Initiatives for 3Com
Corporation, a provider of information access products and network system
solutions. From April 1996 to November 1997, Mr. Brisard served as Product Line
Manager for the OEM Business Unit of Compaq/Microcom, Inc., which develops and
markets computer hardware, software and services. From March 1994 to March 1996
he served as Senior Product Manager, and from September 1992 to March 1994 as a
Staff Director, for Bell Atlantic Corp., formerly NYNEX. Mr. Brisard holds a
Bachelor's degree from Northeastern University School of Engineering and an
M.B.A. from Boston College.
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 General Partner of Summit Accelerator Partners since August
1999. From December 1998 to August 1999, Mr. Balmuth served as a Principal of
Summit Partners 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
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<PAGE> 57
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
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> 58
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 $243,268 244,629 $660
President and Chief Executive Officer
Paul K. Zurlo.......................... 109,584 34,258 36,009 290
Chief Financial Officer and Vice
President of Operations
Michael D. Williams.................... 110,000 24,280 32,602 264
Vice President of Business
Development
Jeffrey P. Dickerson................... 120,001 75,568 32,218 264
Vice President of Sales
Joan E. Lockhart....................... 122,193 15,308 28,636 304
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, 980,493 shares; Mr. Zurlo, 114,750 shares; Mr. Williams, 68,850
shares; Mr. Dickerson, 59,670 shares; and Ms. Lockhart, 84,150 shares. The
value of these shares of restricted stock is as follows: Mr. Benson,
$7,257,571; Mr. Zurlo, $849,375; Mr. Williams, $509,625; Mr. Dickerson,
$441,675; and Ms. Lockhart, $622,875. The values of the restricted stock
holdings were calculated on the basis of the fair market value of $7.50 per
share at April 30, 1999, as determined by the Board of Directors, minus the
consideration paid for such shares.
(2) Includes amounts paid in respect of interest due to us from the Named
Executive Officers on certain promissory notes. See "Certain Transactions."
(3) Represents premiums paid for term life insurance.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended April 30, 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 0%($) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven J. Benson..... 244,629 32.7% $0.098 7/16/03 $214,295.00 $2,317,632.69 $2,930,847.50
Paul K. Zurlo........ 28,359 3.8 0.098 7/16/03 24,842.25 268,675.20 339,763.08
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
Michael D.
Williams........... 17,302 2.3 0.098 7/16/03 15,156.55 163,920.39 207,291.54
7,650 1.0 0.098 9/15/03 6,701.40 72,476.65 91,653.01
3,825 0.5 0.196 11/13/03 2,975.85 35,863.33 45,451.51
3,825 0.5 0.196 2/23/04 2,975.85 35,863.33 45,451.51
</TABLE>
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<PAGE> 59
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 0%($) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P.
Dickerson.......... 7,650 1.0 $0.098 6/23/03 $ 6,701.40 $ 72,476.65 $ 91,653.01
16,918 2.3 0.098 7/16/03 14,280.17 160,282.35 202,690.92
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
Joan E. Lockhart..... 20,986 2.8 0.098 7/16/03 18,383.74 198,822.87 251,428.75
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
</TABLE>
- ---------------
(1) Based on an aggregate of 748,470 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 0%, 5% and 10% appreciation rates 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 does 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 $7.50
per share, as determined by the Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Benson......................... -- 244,629 -- $1,834,717.50
Paul K. Zurlo............................ -- 36,009 -- 270,067.50
Michael D. Williams...................... -- 32,602 -- 244,515.00
Jeffrey P. Dickerson..................... -- 32,218 -- 241,635.00
Joan E. Lockhart......................... -- 28,636 -- 214,770.00
</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 3,060,000 shares of common
stock. As of July 31, 1999 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
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<PAGE> 60
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 subject to vesting schedules, terminate
up to 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 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
1,959,081 shares of common stock. Of the shares reserved for issuance under the
1996 Stock Option Plan, 49,688 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
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<PAGE> 61
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 for
non-qualified options and five years from the date of grant for incentive stock
options 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 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 2,050,728 shares of restricted common stock to our
employees and directors for an aggregate cash purchase price of $849,551.75,
including an aggregate of 1,629,213 shares sold to Messrs. Benson, Zurlo,
Williams and Dickerson and Ms. Lockhart for an aggregate purchase price of
$653,227. 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 subject to
mandatory repurchase by us at the purchaser's cost. Shares of restricted common
stock are subject to certain rights of first refusal held by us. 217,888 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.
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<PAGE> 62
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> 63
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. The tables below do not give effect to the 1.53 to 1 stock split:
<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 20,000 $100.00 $ 2,000,000
of subsidiary
June 1996 and July
1998................... Series A Redeemable Preferred 14,985,733 1.00 14,985,733
June 1996................ Series B Redeemable 3,968,384 .42 1,666,667
Convertible Preferred
July 1998................ Series C Redeemable Preferred 28,505 87.70 2,500,000
July 1998................ Series D Redeemable 1,672,354 1.49 2,500,000
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 Partners Group........... 14,910,804 3,948,543 -- -- --
Lazard Freres Group............. -- -- 23,944 1,404,778 --
Calvin K. Manz.................. -- -- -- -- 20,000
</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 $96,127, $11,250, $6,750, $5,850 and $8,250, respectively,
for 980,493, 114,750 , 68,850, 59,670 and 84,150 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.
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<PAGE> 64
On January 31, 1998, we issued 57,375 shares of restricted stock to one of
our Directors, John B. Landry, for an aggregate purchase price of $5,625. On
July 16, 1998, we granted 14,298 nonqualified stock options to Mr. Landry with
an exercise price of $0.098 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 16, 1998, we granted stock options to Steven J. Benson, Paul K.
Zurlo, Patrick J. Curley, Joan E. Lockhart, Michael D. Williams, Jeffrey P.
Dickerson, and John B. Landry for 244,629, 28,359, 28,359, 20,986, 17,302,
16,918 and 14,298 shares, respectively, with an exercise price of $0.098 per
share.
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 $87,500 for 53,550 shares of common stock, and Steven J.
Benson issued a promissory note to us in the principal amount of $175,000 for
107,100 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 July 6, 1999, we granted 15,300 nonqualified stock options to one of our
Directors, Paul Severino, with an exercise price of $1.63, and on August 24,
1999, we issued 30,600 shares of common stock for an aggregate purchase price of
$250,000. These stock options and shares of common stock were fully vested on
the date of grant.
On September 21, 1999, we issued 22,950 shares of common stock to one of
our executive officers, Alfred F. Brisard, for an aggregate purchase price of
$75,000, and we granted 130,050 incentive stock options to Mr. Brisard with an
exercise price of $8.17 per share. The stock options vest as to 1/4 of the
shares on the first anniversary of the grant date and 1/16th of the shares
quarterly thereafter.
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> 65
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 17,864,434 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)................................ 6,072,990 42.0% 34.0%
Lazard Freres Group(2).................................. 2,158,021 14.9 12.1
Steven J. Benson(3)..................................... 1,164,040 8.0 6.5
Paul K. Zurlo(4)........................................ 179,075 1.2 1.0
Michael D. Williams(5).................................. 130,995 * *
Jeffrey P. Dickerson(6)................................. 122,970 * *
Joan E. Lockhart(7)..................................... 146,171 1.0 *
Gregory M. Avis(8)...................................... 6,072,990 42.0 34.0
Michael H. Balmuth(9)................................... 6,072,990 42.0 34.0
John B. Landry(10)...................................... 61,843 * *
Calvin K. Manz(11)...................................... 3,108,373 21.5 17.4
Paul Severino(12)....................................... 45,900 * *
All executive officers and directors as a group (12
persons)(13).......................................... 11,232,468 77.2 62.6
</TABLE>
- ---------------
* Less than 1%
(1) Represents 5,537,921 shares held by Summit Ventures IV, L.P., 251,363
shares held by Summit Subordinated Debt Fund, L.P., and 251,988 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. Includes 31,718 shares which will be issued to the Summit
Partners Group as a dividend upon conversion of the Series B preferred
stock.
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<PAGE> 66
(2) Represents 1,715,354 shares held by Lazard Technology Partners L.P.,
301,473 shares held by Lazard Technology Partners LLC, and 127,367 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. Includes 13,827 shares which will
be issued to the Lazard Freres Group as a dividend upon conversion of the
Series D preferred stock.
(3) Includes 45,847 shares underlying options granted to Mr. Benson which are
exercisable within 60 days of September 30, 1999 and 153,000 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 3,685 shares underlying options granted to Mr. Zurlo which are
exercisable within 60 days of September 30, 1999.
(5) Includes 4,269 shares underlying options granted to Mr. Williams which are
exercisable within 60 days of September 30, 1999.
(6) Includes 3,449 shares underlying options granted to Mr. Dickerson which are
exercisable within 60 days of September 30, 1999.
(7) Includes 3,224 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. Includes 31,718
shares which will be issued to the Summit Partners Group as a dividend upon
conversion of the Series B preferred stock.
(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. Includes 31,718
shares which will be issued to the Summit Partners Group as a dividend upon
conversion of the Series B preferred stock.
(10) Includes 894 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 15,300 shares underlying options granted to Mr. Severino which are
exercisable within 60 days of September 30, 1999.
(13) Includes 85,530 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
40,000,000 shares of common stock of which 17,864,434 will be issued and
outstanding; and 3,060,000 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) 5,785,723 shares of
common stock held by 24 stockholders of record; (2) 5,640,738 shares of
convertible preferred stock (convertible into 8,678,711 shares of common stock
upon closing of the offering, including 48,377 shares issued as accrued
dividends on the convertible preferred stock); (3) 15,014,238 shares of
redeemable preferred stock (to be redeemed upon closing of the offering for an
aggregate of approximately $18 million, including accrued dividends of
approximately $4.3 million); and (4) options to purchase an aggregate of
1,451,160 shares of common stock.
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<PAGE> 67
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 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 11,787,084 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.
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<PAGE> 68
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.
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.
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<PAGE> 69
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, 17,864,434 shares of common stock will be outstanding,
assuming the issuance of an aggregate of 3,400,000 shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of September 30, 1999, and assumes no exercise of
outstanding options. The 3,400,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act. The remaining 14,464,434
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 certain of our stockholders who will own
in the aggregate 14,165,183 shares of common stock after the offering 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.
63
<PAGE> 70
At September 30, 1999 we had reserved an aggregate of 1,959,081 shares of
common stock for issuance pursuant to the 1996 Stock Option Plan, and options to
purchase approximately 1,451,160 shares were outstanding under the 1996 Stock
Option Plan, and we had reserved an aggregate of 3,060,000 shares of common
stock for issuance pursuant to the 1999 Stock Option and Grant Plan, and 172,202
options were outstanding under the 1999 Stock Option and Grant Plan. As soon as
practicable following the offering, we intend to file registration statements
under the Securities Act to register shares of common stock reserved for
issuance under the 1996 Stock Option Plan and the 1999 Stock Option and Grant
Plan. Such registration statements will automatically become effective
immediately upon filing. Any shares issued upon the exercise of stock options
will be eligible for immediate public sale, subject to the lock-up agreements
noted above.
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 8,678,711 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.
64
<PAGE> 71
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............................................. 3,400,000
=========
</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 510,000 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. To the extent the option is
exercised, 50% of the shares will be sold by us and 50% will be sold by certain
of our stockholders. 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 14,165,183 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
65
<PAGE> 72
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.
Discretionary Accounts. The underwriters have advised us that they do not
expect sales to discretionary accounts to exceed five percent of the total
number of shares offered.
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.
66
<PAGE> 73
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.
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.
67
<PAGE> 74
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> 75
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, except as to
Note 14, as to which the date
is October 8, 1999
F-2
<PAGE> 76
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 except as to the first paragraph of Note 14,
as to which the date is October 8, 1999.
F-3
<PAGE> 77
MCK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
COMMON
APRIL 30, STOCKHOLDERS'
--------------------------- JULY 31, DEFICIT AT
1998 1999 1999 JULY 31, 1999
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <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 at April 30, 1998,
179,560 at April 30, 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: Issued and
outstanding -- 4,978,570 shares at
April 30, 1998, 5,300,183 shares at
April 30, 1999, 5,675,033 shares at
July 31, 1999, and 14,349,526 shares
pro forma at July 31, 1999............ 4,979 5,300 5,675 $ 14,350
Additional paid-in capital.............. 152,352 1,388,002 9,494,702 14,285,228
Accumulated deficit..................... (19,901,160) (24,303,510) (26,086,271) (26,086,271)
Deferred compensation................... -- (805,652) (7,186,371) (7,186,371)
Accumulated other comprehensive income
(loss)................................ (155,290) (165,743) (206,324) (206,324)
Notes receivable from officers.......... (150,802) (158,677) (771,177) (771,177)
------------ ------------ ------------ ------------
Total common stockholders' deficit...... (20,049,921) (24,040,280) (24,749,766) $(19,950,565)
------------ ------------ ------------ ============
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> 78
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
Amortization of stock based
compensation...................... 406,000 20,000 1,113,856
Transaction-related charges......... 493,284 -- --
----------- ----------- ----------- ---------- -----------
Total operating expenses.......... 3,060,319 5,433,518 9,259,765 1,941,699 3,918,611
----------- ----------- ----------- ---------- -----------
Income (loss) from operations......... 547,311 (357,733) (379,719) (13,842) (1,086,164)
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 and dividends on
redeemable preferred stock of
subsidiary.......................... 204,792 (953,183) (587,082) (142,806) (1,181,412)
Provision for income taxes............ 302,109 -- -- -- --
Dividends on redeemable preferred
stock of subsidiary................. 133,333 160,000 196,947 49,614 50,215
----------- ----------- ----------- ---------- -----------
Net loss.............................. (230,650) (1,113,183) (784,029) (192,420) (1,231,627)
Dividends on redeemable preferred
stock............................... 1,010,557 1,220,000 1,965,921 393,234 551,134
----------- ----------- ----------- ---------- -----------
Loss applicable to common stock....... $(1,241,207) $(2,333,183) $(2,749,950) $ (585,654) $(1,782,761)
=========== =========== =========== ========== ===========
Basic and diluted net loss per common
share............................... $ (0.39) $ (0.67) $ (0.71) $ (0.16) $ (0.41)
=========== =========== =========== ========== ===========
Shares used in computing basic and
diluted net loss per common share... 3,188,152 3,476,282 3,881,526 3,657,058 4,304,187
=========== =========== =========== ========== ===========
Pro forma basic and diluted loss per
share............................... $ (0.34) $ (0.21)
Shares used in computing pro forma
basic and diluted loss per share.... 8,132,866 8,674,492
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 79
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON
SHARES STOCK
COMPREHENSIVE OF AT ADDITIONAL
INCOME COMMON PAR PAID-IN ACCUMULATED DEFERRED
(LOSS) STOCK VALUE CAPITAL DEFICIT COMPENSATION
------------- --------- ------ ---------- ------------ ------------
<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......... 3,108,373 3,108 -- (2,032) --
Dividends to Manz Development,
Inc................................ -- -- -- (16,119,603) --
Dividends on preferred stock......... -- -- -- (1,010,557) --
Stock options exercised.............. 214,929 215 1,470 -- --
Other................................ -- -- -- 2,298 --
Net loss............................. $ (230,650) -- -- -- (230,650) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss).... $ (230,650) -- -- -- -- --
===========
Balance at April 30, 1997............ 3,323,302 3,323 1,470 (17,567,977) --
Stock options exercised.............. 117,090 118 1,618 -- --
Sale of restricted stock............. 1,538,178 1,538 149,264 -- --
Foreign currency translation
adjustment......................... $ (155,290) -- -- -- -- --
Dividends on preferred stock......... -- -- -- -- (1,220,000) --
Net loss............................. (1,113,183) -- -- -- (1,113,183) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss).... $(1,268,473) -- -- -- -- --
===========
Balance at April 30, 1998............ 4,978,570 4,979 152,352 (19,901,160) --
Stock options exercised.............. 241,288 241 16,203 -- --
Sale of restricted stock............. 114,750 115 11,135 -- --
Cancellation of restricted stock..... (34,425) (35) (3,340) -- --
Foreign currency translation
adjustment......................... $ (10,453) -- -- -- -- --
Deferred compensation................ 1,211,652 (1,211,652)
Amortization of deferred
compensation....................... 406,000
Dividends on preferred stock......... -- -- -- (1,965,921) --
Issuance of preferred stock in
exchange for redemption premium.... -- -- -- (1,652,400) --
Net loss............................. (784,029) -- -- -- (784,029) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss).... $ (794,482) -- -- -- --
===========
Balance at April 30, 1999............ 5,300,183 5,300 1,388,002 (24,303,510) (805,652)
Foreign currency translation
adjustment (unaudited)............. $ (40,581) -- -- -- -- --
Deferred compensation................ 7,494,575 (7,494,575)
Amortization of deferred
compensation....................... 1,113,856
Sale of restricted stock
(unaudited)........................ 374,850 375 612,125 -- --
Dividends on preferred stock
(unaudited)........................ -- -- -- (551,134) --
Net loss (unaudited)................. (1,231,627) -- -- -- (1,231,627) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss)
(unaudited)........................ $(1,272,208) -- -- -- --
===========
Balance at July 31, 1999
(unaudited)........................ 5,675,033 $5,675 $9,494,702 $(26,086,271) $(7,186,371)
========= ====== ========== ============ ===========
<CAPTION>
ACCUMULATED NOTES TOTAL
OTHER RECEIVABLES COMMON
COMPREHENSIVE FROM STOCKHOLDERS'
INCOME OFFICERS DEFICIT
------------- ----------- -------------
<S> <C> <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......... -- -- (1,010,557)
Stock options exercised.............. -- -- 2,761
Other................................ -- -- 2,298
Net loss............................. -- -- (230,650)
--------- --------- ------------
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) -- (155,290)
Dividends on preferred stock......... -- -- (1,220,000)
Net loss............................. -- -- (1,113,183)
--------- --------- ------------
Total comprehensive income (loss).... -- -- --
Balance at April 30, 1998............ (155,290) (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) -- (10,453)
Deferred compensation................
Amortization of deferred
compensation....................... 406,000
Dividends on preferred stock......... -- -- (1,965,921)
Issuance of preferred stock in
exchange for redemption premium.... -- -- (1,652,400)
Net loss............................. -- (784,029)
--------- --------- ------------
Total comprehensive income (loss).... -- --
Balance at April 30, 1999............ (165,743) (158,677) (24,040,280)
Foreign currency translation
adjustment (unaudited)............. (40,581) -- (40,581)
Deferred compensation................
Amortization of deferred
compensation....................... 1,113,856
Sale of restricted stock
(unaudited)........................ -- (612,500) --
Dividends on preferred stock
(unaudited)........................ -- -- (551,134)
Net loss (unaudited)................. -- -- (1,231,627)
--------- --------- ------------
Total comprehensive income (loss)
(unaudited)........................ -- -- --
Balance at July 31, 1999
(unaudited)........................ $(206,324) $(771,177) $(24,749,766)
========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 80
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......................................... $ (230,650) $(1,113,183) $ (784,029) $ (192,420) $(1,231,627)
Depreciation and amortization.................... 160,075 230,342 393,977 72,943 132,031
Stock based compensation......................... -- -- 406,000 20,000 1,113,856
Deferred income taxes............................ 22,593 (80,000) -- -- --
Dividends accrued on redeemable preferred stock
of subsidiary.................................. 133,333 160,000 196,947 49,614 50,265
Transaction-related charges...................... 44,554 -- -- -- --
Change in operating assets and liabilities:
Accounts receivable............................ 712,364 (846,047) (1,457,353) (257,254) (243,169)
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 non-subsidiary preferred stock...... $ 1,010,557 $ 1,220,000 $ 1,965,921 $ 393,234 $ 551,134
Sale of restricted stock......................... -- 150,802 7,875 7,875 612,500
Dividends to Manz Development, Inc............... 2,133,333 160,000 196,947 49,614 50,215
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> 81
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999 (AUDITED)
AND FOR THE THREE MONTH PERIODS ENDED JULY 31, 1999 AND 1998 (UNAUDITED)
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
and accrued liabilities are carried at cost, which approximates fair value due
to the short term to either maturity or anticipated settlement. The carrying
value of the Company's subordinated debt approximates fair value based upon
management's best estimates of what interest rates would be available for
similar instruments. The carrying value of the Company's redeemable preferred
stock approximates fair value based upon management's best estimates of what
dividend rates would be available for similar instruments. The fair values of
the Company's redeemable convertible preferred stock is not readily determinable
due to the difficulty of valuing the conversion feature for emerging companies.
(f) Revenue Recognition
Revenues from product sales to end users are recognized upon shipment. The
Company provides reserves for returns and warranty costs at the time revenue is
recognized. Returns and warranty costs have
F-8
<PAGE> 82
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not been material. 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. The Company recognizes service revenues as the service is provided
and maintenance revenues ratably over the contract period. Service revenues and
maintenance revenues have not been material.
(g) Earnings per Share and Pro Forma 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 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.
Pro forma earnings per share is computed using the weighted average number
of common shares outstanding and assumes the conversion of the redeemable
convertible preferred stock at the later of May 1, 1998 or at the date of
issuance.
(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
F-9
<PAGE> 83
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(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.
(o) Pro-Forma Common Stockholders' Deficit (unaudited)
Pro-Forma Common Stockholder's Deficit amounts reflect the conversion of
all outstanding shares of redeemable convertible preferred stock and accrued
dividends on the preferred stock into 8,674,493 shares of common stock, as if
the conversion had taken place on April 30, 1999.
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>
F-10
<PAGE> 84
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. FIXED ASSETS
Fixed assets consisted of:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1998 1999
---------- ----------
<S> <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 and July 31, 1999,
provided for borrowings of approximately $1,920,000. No amounts were outstanding
under this agreement during the year ended April 30, 1999 or the three months
ended July 31, 1999. Interest is charged at the bank's base rate (7.75% at April
30, 1999 and July 31, 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, as defined, 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) (391,688)
-------- --------- ---------
Total.......................................... $204,792 $(953,183) $(587,082)
======== ========= =========
</TABLE>
F-11
<PAGE> 85
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) $(205,479)
Tax loss with no current benefit......................... -- 330,104 187,943
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>
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............................. -- 190,100
--------- ---------
Total deferred tax assets......................... 233,000 451,100
--------- ---------
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) (423,100)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
The Company has incurred cumulative losses for the three year period ended
April 30, 1999. Consequently, the Company does not have an objective and
verifiable basis for concluding that it is more likely than not the Company will
generate taxable income in the foreseeable future. Accordingly, the Company has
provided a valuation allowance covering its net deferred tax asset.
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
$518,600 which expire in 2019.
The Company paid income taxes of $264,000, $18,900 and $912 in 1997, 1998
and 1999, respectively.
F-12
<PAGE> 86
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 eliminated the redemption premium that would
have been due under certain circumstances to the Series A preferred stockholders
in exchange for issuing 1,652,400 shares of Series A preferred stock to the
existing Series A preferred stockholders. This issuance of Series A preferred
stock was accounted for as a preferred stock dividend and the liquidation value
of the preferred stock ($1 per share) issued is reflected as a charge to
retained earnings and a reduction of income available to common 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.
Preferred stock consisted of:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1998 1999 JULY 31, 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <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, $3,373,199 and $3,743,396
(unaudited)) at April 30, 1998, 1999 and July 31,
1999, respectively................................. $15,244,755 $18,284,241 $18,654,438
Series C redeemable preferred stock, 28,505 shares
issued (liquidation value of $2,850,000 plus
accrued dividends of $256,356 and $337,708
(unaudited)) at April 30, 1999 and July 31 1999,
respectively....................................... -- 2,726,518 2,807,870
Series E redeemable preferred stock of subsidiary, no
par value, 20,000 shares issued and outstanding
(liquidation value of $2,000,000 plus accrued
dividends of $293,333, $490,280 and $540,495
(unaudited)) at April 30, 1998, 1999 and July 31,
1999, respectively................................. 2,293,333 2,490,280 2,540,495
----------- ----------- -----------
Total......................................... $17,538,088 $23,501,039 $24,002,803
=========== =========== ===========
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,
$408,567 and $450,413 (unaudited)) at April 30,
1998, 1999 and July 31, 1999, respectively......... $ 1,911,111 $ 2,075,234 $ 2,117,080
Series D redeemable convertible preferred stock,
1,672,354 shares issued (liquidation value of
$2,500,000 plus accrued dividends of $158,356 and
$211,960 (unaudited)) at April 30, 1999 and July
31, 1999, respectively............................. -- 2,628,517 2,682,121
----------- ----------- -----------
Total......................................... $ 1,911,111 $ 4,703,751 $ 4,799,201
=========== =========== ===========
</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 3,108,373 shares of common
stock of the Company.
F-13
<PAGE> 87
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 at the option of the holder 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 $0.27 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 $0.98 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 fair market value, 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 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 1,959,081 shares of common stock of the
Company as either incentive stock options or non-qualified stock options (see
Note 13). The Plan is administered by the Compensation Committee of the Board of
Directors. Both incentive stock options and non-qualified stock options are
generally granted at the fair market value, although as disclosed herein,
certain options were granted below fair market value. 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 and ten years from date of grant for incentive stock options and
non-qualified stock options, respectively. At April 30, 1999, 92,834 shares were
available for future grant. At April 30, 1997, 1998 and 1999, there were
242,576, 327,971 and 146,628 options exercisable under the plan, at a weighted
average exercise price of $.0007, $.052 and $.046 per share, respectively.
F-14
<PAGE> 88
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes option activity over the life of this plan:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Granted................................................... 837,934 $.04
Exercised................................................. (214,928) .0007
Canceled.................................................. (61,231) .10
--------- ------
Outstanding at April 30, 1997............................... 561,775 .06
Granted................................................... 143,973 .10
Exercised................................................. (117,091) .03
Canceled.................................................. (118,085) .10
--------- ------
Outstanding at April 30, 1998............................... 470,571 .07
Granted................................................... 762,768 .12
Exercised................................................. (241,286) .07
Canceled.................................................. (20,411) .10
--------- ------
Outstanding at April 30, 1999............................... 971,642 .11
--------- ------
Granted (unaudited)....................................... 393,210 1.35
Exercised (unaudited)..................................... -- --
Canceled (unaudited)...................................... (28,764) .10
--------- ------
Outstanding at July 31, 1999 (unaudited).................... 1,336,088 $.46
========= ======
</TABLE>
The following table presents certain information about options outstanding
as of April 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICE OPTIONS LIFE (YRS.) EXERCISABLE
- -------------- --------- ----------- -----------
<S> <C> <C> <C>
$0.0007 83,299 2.16 83,299
$ 0.098 691,738 3.99 105.721
$ 0.196 243,576 4.71 21,165
$ 1.634 317,475 5.11 17,595
--------- -------
1,336,088 227,780
--------- -------
</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, 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. The Company recorded deferred
compensation charges of $1,211,652 and $7,494,575 related to stock options
granted below market exercise prices during the fiscal year ended April 30, 1999
and July 31, 1999, respectively. 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, net loss for
1999, 1998 and 1997 would have been approximately $833,000, $1,114,000, and
$232,000, respectively and net loss per share would have not differed materially
from reported net loss per share.
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-
F-15
<PAGE> 89
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.02, $0.02 and $.45. 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 $0.0007 to $0.196 per share.
The Company issued 114,750 shares of restricted common stock having a fair
value of $0.98 per share in June 1998 and 1,538,178 shares of restricted common
stock having a fair value of $0.098 per share in January 1998 to certain
executives and a member of the Board of Directors in exchange for promissory
notes of $0.098 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 face value
of the promissory notes approximate their fair market value. Upon termination
for any reason other than for cause or in the event of the merger, consolidation
or sale of substantially all of the Company's assets or voting securities, the
Company must repurchase all the non-vested restricted stock of the executives at
the original issue price. If an executive is terminated for cause, the Company
must repurchase such executive's vested and non-vested restricted stock. The
Company has a right of first refusal prior to any transfer of restricted stock.
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 9,694,912 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-16
<PAGE> 90
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE
The calculations of earnings per share are as follows:
<TABLE>
<CAPTION>
PRO FORMA
THREE
PRO FORMA MONTHS
THREE MONTHS ENDED YEAR ENDED ENDED
YEARS ENDED APRIL 30, JULY 31, APRIL 30, JULY 31,
--------------------------------------- ------------------------- ---------- -----------
1997 1998 1999 1998 1999 1999 1999
----------- ----------- ----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss................... $ (230,650) $(1,113,183) $ (784,029) $ (192,420) $(1,231,627) $(784,029) $(1,231,771)
Dividends on preferred
stock.................... 1,010,557 1,220,000 1,965,921 393,234 551,134 1,643,492(1) 455,779(1)
----------- ----------- ----------- ----------- ----------- ---------- -----------
Numerator for basic and
diluted earnings per
share-income available to
common stockholders...... $(1,241,207) $(2,333,183) $(2,749,950) $ (585,654) $(1,782,761) (2,427,521) (1,687,550)
=========== =========== =========== =========== =========== ========== ===========
Denominator:
Denominator for basic and
diluted earnings per
share -- weighted-average
shares................... 3,188,152 3,476,282 3,881,526 3,657,058 4,304,187 8,132,866(2) 8,674,492(2)
=========== =========== =========== =========== =========== ========== ===========
Basic and diluted earnings
(loss) per share........... $ (0.39) $ (0.67) $ (0.71) $ (0.16) $ (0.41) $ (0.30) $ (0.19)
=========== =========== =========== =========== =========== ========== ===========
</TABLE>
(1) Excludes dividends on redeemable convertible preferred stock.
(2) Includes common shares issued upon conversion of redeemable convertible
preferred stock.
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 ENDED
YEAR ENDED APRIL 30, JULY 31,
------------------------ ------------------
1997 1998 1999 1998 1999
----- ----- ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options............. 562 471 972 609 1,336
===== ===== ====== ====== ======
Shares of nonvested restricted stock............ -- 1,429 1,119 1,265 1,265
===== ===== ====== ====== ======
Shares potentially issuable upon conversion of
Series B and D preferred stock................ 7,205 8,565 14,413 11,621 12,008
===== ===== ====== ====== ======
</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-17
<PAGE> 91
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 20,000 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 3,108,373 shares of common stock, owned 33.9% of the Company.
14. SUBSEQUENT EVENTS
On June 1, 1999, the Company increased its option pool for the 1996 Stock
Option Plan (the Plan), by 306,000 shares. Subsequent to the increase, the
Company granted approximately 377,910 options to key employees.
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.
On July 6, 1999, the Company granted 15,300 nonqualified stock options to
one of its Directors, Paul Severino, with an exercise price of $1.63 per share,
and on August 24, 1999, the Company issued 30,600 shares of common stock for an
aggregate purchase price of $250,000. These stock options and shares of common
stock were fully vested on the date of grant.
On July 12, 1999, the Company issued 374,850 shares of restricted common
stock to certain executives in exchange for promissory notes equal to $612,500
in the aggregate. The fair market value of the restricted common stock issued
was $11.25 per share.
On August 19, 1999, MCK Communications, Inc. ("MCK Delaware") was formed as
a Delaware Corporation. As a result of a migratory merger effected on October 5,
1999, MCK Communications, Inc. ("MCK Nevada"), a Nevada corporation, became a
wholly-owned subsidiary of MCK Delaware.
On September 21, 1999, the Company issued 22,950 shares of common stock to
one of its executive officers, Alfred F. Brisard, for an aggregate purchase
price of $75,000, and the Company granted 130,050 incentive stock
F-18
<PAGE> 92
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options to Mr. Brisard with an exercise price of $8.17 per share. The stock
options vest as to 1/4 of the shares on the first anniversary of the grant date
and 1/16th of the shares quarterly thereafter.
On October 8, 1999, the Company completed a 1.53 to 1 stock split. Share
numbers for all periods presented have been adjusted to give effect to this
stock split.
F-19
<PAGE> 93
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.
<PAGE> 94
[MCK COMMUNICATIONS LOGO]
<PAGE> 95
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........................................ $ 17,392
NASD Filing Fee............................................. 6,756
Nasdaq National Market Listing Fee.......................... 90,000
Accounting Fees and Expenses................................ 250,000
Legal Fees and Expenses..................................... 400,000
Printing Expenses........................................... 100,000
Blue Sky Qualification Fees and Expenses.................... 15,000
Transfer Agent's Fee........................................ 10,000
Miscellaneous............................................... 210,852
----------
Total....................................................... $1,100,000
</TABLE>
- ---------------
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.
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.
II-1
<PAGE> 96
1. An aggregate of 1,652,400 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 $1,652,400.
2. An aggregate of 28,505 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 $2,500,000.
3. An aggregate of 1,672,354 shares of Series D preferred stock (which are
convertible into 2,558,702 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
$2,500,000.
4. From January 1998 to September 1999, an aggregate of 2,081,328 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 $.098 to $8.17 per share. The
aggregate consideration received for such shares was $1,099,551.75.
5. From June 1996 to September 1999, MCK Communications granted stock
options to purchase an aggregate of 2,137,913 shares of common stock to
directors, employees and consultants with exercise prices ranging from
$.001 to $2.50 per share pursuant to MCK Communications 1996 Stock
Option Plan. As of September 30, 1999, 630,446 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 Partners 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
(a) Exhibits
<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).
**3.1 Certificate of Incorporation of the Registrant.
**3.2 Form of First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to the
effectiveness of the offering).
</TABLE>
II-2
<PAGE> 97
<TABLE>
<C> <S>
**3.3 Form of Second Amended and Restated Certificate of
Incorporation of the Registrant (to be filed following the
consummation of this offering).
**3.4 By-laws of the Registrant.
**3.5 Form of First 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.
**10.17 Amended and Restated Loan and Security Agreement between MCK
Communications, Inc. and BankBoston, N.A. dated July 1,
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>
- ---------------
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
(b) Consolidated Financial Statement Schedules
II-3
<PAGE> 98
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> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Newton, Commonwealth of Massachusetts, on October 12, 1999.
MCK COMMUNICATIONS, INC.
By: /s/ STEVEN J. BENSON
------------------------------------
Steven J. Benson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the 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 October 12, 1999
- --------------------------------------------------- Officer and Director
Steven J. Benson (Principal Executive Officer)
* Chief Financial Officer October 12, 1999
- --------------------------------------------------- (Principal Financial Officer
Paul K. Zurlo and Principal Accounting
Officer)
* Director October 12, 1999
- ---------------------------------------------------
Calvin K. Manz
* Director October 12, 1999
- ---------------------------------------------------
John B. Landry
* Director October 12, 1999
- ---------------------------------------------------
Gregory M. Avis
* Director October 12, 1999
- ---------------------------------------------------
Michael H. Balmuth
* Director October 12, 1999
- ---------------------------------------------------
Paul Severino
* By: /s/ STEVEN J. BENSON
-------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 100
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 First Amended and Restated Certificate of
Incorporation of the Registrant (to be filed prior to
effectiveness of the offering).
**3.3 Form of Second Amended and Restated Certificate of
Incorporation of the Registrant (to be filed following the
consummation of this offering).
**3.4 By-laws of the Registrant.
**3.5 Form of First 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> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
**10.17 Amended and Restated Loan and Security Agreement between MCK
Communications, Inc. and BankBoston, N.A. dated July 1,
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>
- ---------------
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
<PAGE> 1
Exhibit 5.1
A Partnership Including Boston
Professional Corporations Chicago
28 State Street Los Angeles
Boston, MA 02109-1775 Miami
617-535-4000 Moscow
Facsimile 617-535-3800 Newport Beach
http://www.mwe.com New York
St. Petersburg
Silicon Valley
Vilnius
Washington, D.C.
MCDERMOTT, WILL & EMERY
October 12, 1999
MCK Communications, Inc.
313 Washington Street
Newton, MA 02458
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to MCK
Communications, Inc. (the "Company") in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended, of a Registration Statement on Form S-1 (the "Registration
Statement") relating to 3,910,000 shares of Common Stock, par value $.001 per
share (the "Registration Statement"), including the 510,000 shares to cover the
over-allotment option (of which 255,000 shares may be sold by the Company (the
"Company Shares") and 255,000 shares may be sold by certain selling stockholder
(the "Selling Stockholder Shares")) to the several underwriters (the
"Underwriters") of which BancBoston Robertson Stephens Inc., Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated and Hambrecht & Quist LLC, are
the representatives (the "Representatives") pursuant to an Underwriting
Agreement (the "Underwriting Agreement") to be entered into between the Company
and the Representatives of the Underwriters.
As counsel for the Company, we have examined the form of the proposed
Underwriting Agreement being filed as an exhibit to the Registration Statement,
the Company's Amended and Restated Certificate of Incorporation, as amended, and
the Company's Amended and Restated By-laws, each as presently in effect, and
such records, certificates and other documents of the Company as we have deemed
necessary or appropriate for the purpose of this opinion.
Based on the foregoing, we are of the opinion that (A) when (i) the
Underwriting Agreement is completed (including the insertion therein of pricing
terms) and executed by the Company and on behalf of the Underwriters, and (ii)
the Company Shares are sold to the
<PAGE> 2
MCK Communications, Inc.
October 12, 1999
Page 2
Underwriters and paid for pursuant to the terms of the Underwriting Agreement,
the Company Shares will be duly authorized, legally issued, fully paid and
non-assessable by the Company under the General Corporation Law of the State of
Delaware (the "DGCL"), and (B) the Selling Stockholder Shares are duly
authorized, legally issued, fully paid and non assessable by the Company under
the DGCL.
We hereby consent to being named as counsel to the Company in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters," and to the inclusion of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ MCDERMOTT, WILL & EMERY
<PAGE> 1
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN REDACTED PROVISIONS OF
THIS AGREEMENT. THE REDACTED PROVISIONS ARE IDENTIFIED BY THREE ASTERISKS AND
ENCLOSED BY BRACKETS. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 10.15
Agreement No. WR71980064
Sheet 1 of 32
MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
This Agreement is made by and between Lucent Technologies Inc. ("Company")
having an office at 211 Mt. Airy Road, Basking Ridge, NJ 07920 and MCK
Communications, Inc. ("Supplier") having an office at 313 Washington Street,
Newton, MA 02158. Company agrees to purchase and Supplier agrees to sell in
accordance with the terms and conditions stated in this Agreement and any
attachments to this Agreement.
WHEREAS, Company wishes to purchase products of Supplier's (design and)
manufacture for resale to Company's customers, and
WHEREAS, Supplier desires to sell such materials to Company for resale to
Company's customers,
THEREFORE, the parties agree as follows
1. AGREEMENT EFFECTIVE PERIOD
The term of this Agreement shall commence on April 30, 1999 and shall, except as
otherwise provided in this Agreement, continue in effect thereafter until April
30, 2002.
<PAGE> 2
Agreement No. WR71980064
Sheet 2 of 31
2. MATERIAL
"MATERIAL" as used in this Agreement shall mean Supplier's DCP-based
Extender product line as listed in APPENDIX A, attached and made a part of
this Agreement. Such MATERIAL is hereby offered for sale by Supplier and
may be purchased by Company in accordance with the terms, conditions and
specifications stated in this Agreement. This Agreement is a non-commitment
agreement and MATERIAL shall be furnished by Supplier on an as-ordered
basis. "Specification(s)" as used in this Agreement shall mean all of the
specifications made part of this Agreement.
3. OPTION TO EXTEND
Company shall have the right to extend the period specified in the
section "AGREEMENT EFFECTIVE" for up to twelve (12) months by giving
Supplier at least thirty (30) business days prior written notice.
Within ten (10) business days of the date of Company's notice to
extend the period, Supplier shall notify Company in writing whether
Supplier proposes to revise the price(s) under this Agreement. If the
parties fail to agree on the revised price(s) within twenty (20) business
days after the date of Supplier's notice, Company's notice of extension
shall be considered withdrawn and prices for outstanding orders or orders
placed during the term of this Agreement shall not be revised.
4. PRICE
Prices and discounts shall be as shown in APPENDIX A. Prices as listed
in APPENDIX A shall remain in effect during the term of this Agreement.
5. [***]
6. [***]
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 3
Agreement No. WR71980064
Sheet 3 of 31
[***]
7. TERMS OF PAYMENT
Net thirty (30) business days from the date of delivery of the
MATERIAL to Company or receipt of the applicable invoice therefor by
Company whichever occurs later.
8. FORECASTS
Company shall provide Supplier with a twelve (12) month non-binding
forecast submitted to Supplier by the fifth (5th) business day of each
calendar month. Such forecast shall be used by Supplier for planning
purposes only and shall not be deemed a commitment by Company to purchase
the MATERIAL shown in the forecast.
9. FOB
The MATERIAL shall be shipped FOB Supplier's location (or such other
Supplier's location as may be designated by Supplier). Supplier shall
notify Company's transportation representative on (303) 538-8278 or (303)
538-2907 when MATERIAL is ready for shipment. Company shall select the
carrier and arrange at Company's expense for the transportation of the
MATERIAL.
10. FREIGHT CLASSIFICATION
MATERIAL purchased under this Agreement shall be shipped to Company
subject to freight charges appropriate for goods classified as DCP-based
Extenders and D/A Converters. Supplier shall indicate on the bill of lading
that Company's contract rates apply.
11. NON-EXCLUSIVE MARKET RIGHTS
This Agreement neither grants to Supplier an exclusive right or
privilege to sell to Company any or all products of the type described in
the MATERIAL section which Company may require, nor requires the purchase
of any MATERIAL or other products from Supplier by Company. Therefore,
Company may contract with other manufacturers and suppliers for the
procurement of comparable products. In addition, Company shall, at its sole
discretion, decide the extent to which Company will market advertise,
promote, support or otherwise assist in further offerings of the MATERIAL.
Purchases by Company under this Agreement shall neither restrict the
right of Company to cease purchasing nor require Company to continue any
level of such purchases.
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 4
Agreement No. WR71980064
Sheet 4 of 31
12. SPECIFICATIONS OR DRAWINGS
Supplier's standard commercial Technical Specifications are included
by reference and further described in APPENDIX B attached hereto and made a
part of this Agreement.
In accordance with the notification requirements outlined in Section
"PRODUCT CHANGE NOTICES", Supplier shall provide Company with at least
[***] business days prior written notice of any change proposed to be made
by Supplier in the MATERIAL furnished pursuant to said Technical
Specification under this Agreement.
If Company, in its sole discretion, does not agree to the change
proposed by Supplier, then in addition to all other rights and remedies at
law or equity or otherwise, and without any cost to or liability or
obligation of Company, Company shall have the right to terminate this
Agreement and to terminate any or all purchase orders for MATERIAL affected
by such change.
Supplier shall continue to supply MATERIAL to Company pursuant to the
Technical Specification for the term of the Agreement. If Supplier is
unable to continue to thus supply or discontinues manufacture of MATERIAL,
Company shall be entitled to [***] advance notice.
13. ASSIGNMENT
Supplier shall not assign any right or interest under this Agreement
(excepting solely for moneys due or to become due) without the prior
written consent of Company. Supplier shall be responsible to Company for
all Work performed by Supplier's subcontractor(s) at any tier.
14. BANKRUPTCY AND TERMINATION FOR FINANCIAL INSECURITY
Either party may terminate this Agreement by notice in writing:
(i) if the other party makes an assignment for the benefit of
creditors (other than solely an assignment of monies due); or:
(ii) if the other party evidences an inability to pay debts as they
become due, unless adequate assurance of such ability to pay is
provided within thirty (30) days of such notice.
If a proceeding is commenced under any provision of the United States
Bankruptcy Code, voluntary or involuntary, by or against either party, and
this Agreement has not been terminated, the non-debtor party may file a
request with the bankruptcy court to have the court set a date within sixty
(60) days after the commencement of the case, by which the debtor party
will assume or reject this Agreement, and the debtor party shall cooperate
and
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 5
Agreement No. WR71980064
Sheet 5 of 31
take whatever steps necessary to assume or reject the Agreement by such
date.
15. CFC PACKAGING
Supplier warrants that all packaging materials furnished under this
Agreement and all packaging associated with MATERIAL furnished under this
Agreement were not manufactured using and do not contain
chlorofluorocarbons. "Packaging" means all bags, wrapping, boxes, cartons
and any other packing materials used for packaging. Supplier shall
indemnify and hold Company harmless for any liability, fine or penalty
incurred by Company to any third party or governmental agency arising out
of Company's good faith reliance upon said warranty.
16. CHOICE OF LAW
This Agreement and all transactions under it shall be governed by the
laws of the State of New Jersey excluding its choice of laws rules and
excluding the Convention for the International Sale of Goods. Supplier
agrees to submit to the jurisdiction of any court wherein an action is
commenced against Company based on a claim for which Supplier has agreed to
indemnify Company under this Agreement.
17. COMPLIANCE WITH LAWS
Supplier and all persons furnished by Supplier shall comply at their
own expense with all applicable laws, ordinances, regulations and codes,
including the identification and procurement of required permits,
certificates, licenses, insurance, approvals and inspections in performance
under this Agreement.
18. CONTINUING AVAILABILITY
Supplier shall offer for sale to Company, during the term of this Agreement
and for at least one (1) year after the expiration of this Agreement,
MATERIAL conforming to the Technical Specifications and other
Specifications set forth in this Agreement. Supplier further shall offer
for sale to Company, during the term of this Agreement and until five (5)
years after the expiration of this Agreement, maintenance, replacement, and
repair parts ("Parts") which are functionally equivalent and identical in
form and fit for the MATERIAL covered by this Agreement. The price for the
MATERIAL and Parts shall be the price set forth in Supplier's then current
agreement with Company for said MATERIAL or Parts or, if no such agreement
exists, at a price agreed upon by Company and Supplier. If the parties fail
to agree on a price, the price shall be a reasonably competitive price for
said MATERIAL or Parts at the time for delivery. The MATERIAL and Parts
shall be warranted as set forth in the "WARRANTY" section of this
Agreement. The term "Parts" is included in the term "MATERIAL."
<PAGE> 6
Agreement No. WR71980064
Sheet 6 of 31
In the event Supplier fails to supply such MATERIAL or Parts and
Supplier is unable to obtain another source of supply for Company, then
such failure or inability shall be considered noncompliance with this
section and Supplier shall, without obligation of or charge to Company,
provide Company with the technical information or any other rights required
so that Company can provide technical support and maintenance to its
customers.
The technical information includes, by example; and not by way of
limitation: (a) manufacturing drawings and specifications of raw materials
and components comprising such MATERIAL or Parts, (b) manufacturing
drawings and specifications covering special tooling and the operation
thereof (c) a detailed list of all commercially available MATERIAL or Parts
and components purchased by Supplier on the open market disclosing the
MATERIAL or Part number, name and location of the Supplier and price lists
for the purchase thereof, and (d) one complete copy of the executable code
used in the preparation of any software licensed or otherwise acquired by
Company from Supplier under this Agreement.
19. DEFAULT
If either party shall be in breach or default of any of the terms,
conditions or covenants of this Agreement or of any purchase order, and if
such breach or default shall continue for a period of ten (10) business
days after the giving of written notice to other party thereof, then, in
addition to all other rights and remedies which the non-defaulting party
may have at law or equity or otherwise, the non-defaulting party shall have
the right to cancel this Agreement and/or any purchase orders placed
without any charge to or obligation or liability of non-defaulting party.
20. ELECTRONIC DATA INTERCHANGE
Supplier agrees, if requested by Company, to implement Electronic Data
Interchange (EDI) ordering and payment arrangements as an electronic means
of trading business document with Company. The electronic business
documents include purchase orders, acknowledgments, purchase order changes,
ship notices, invoices, remittance advice, electronic funds transfer (EFT)
or such purchasing communications as may be requested by Company for
transaction under this Agreement. Supplier shall at its sole expense,
obtain, make fully operational and maintain all equipment, software and
other materials set forth in Company's EDI Planning Guide. Supplier shall
also execute an Electronic Purchasing Agreement with Company at the time of
execution of this Agreement.
21. EPIDEMIC CONDITION
If during the term of this Agreement and for one (1) year after the
last shipment date of MATERIAL under this Agreement Company notifies
Supplier that MATERIAL shows evidence of an "Epidemic Condition,"
<PAGE> 7
Agreement No. WR71980064
Sheet 7 of 31
Supplier shall prepare and propose a Corrective Action Plan ("CAP") with
respect to such MATERIAL within five (5) working days of such notification,
addressing implementation and procedure milestones for remedying such
Epidemic Condition(s). An extension of this time-frame is permissible upon
mutual written agreement of the parties.
Upon notification of the Epidemic Condition to Supplier, Company shall
have the right to postpone all or part of the shipments of unshipped
MATERIAL, by giving written notice of such postponement to Supplier,
pending correction of the Epidemic Condition. Such postponement shall
temporarily relieve Supplier of its shipment liability and Company of its
shipment acceptance liability. Should Supplier not agree to the existence
of an Epidemic Condition or should Company not agree to the CAP, then
Company shall have the right to suspend all or part of its unshipped orders
without liability to Company until such time as a mutually acceptable
solution is reached.
An Epidemic Condition will be considered to exist when one or more of
the following conditions occur:
(1) Failure reports or statistical samplings show that MATERIAL
shipped contain a potential safety hazard (such as personal injury or
death, fire, explosion, toxic emissions, etc.), or exhibit a highly
objectionable symptom (such as emissions of smoke, loud noises, deformation
of housing) or other disconcerting symptoms of this type.
(2) Reliability plots of relevant data indicate that the MATERIAL has
actual Mean Time Between Failures (MTBF) of less than 80% of the MTBF
stipulated in the Technical Specification. The MTBF parameter of MATERIAL
is defined as the total operating or power-on time of any population under
observation ("T"), in hours, divided by the total number of critical
failures ("n") that have occurred during the observed period. A critical
failure is defined as a failure to operate per the requirements of the
Technical Specification. The total operating time of a population is the
summation of operating time of individual units in that population. MTBF is
expressed as MTBF = T/n. An Epidemic Condition shall exist when data
derived from populations being tracked confirms the condition with 80%
confidence. (3) MATERIAL Dead on Arrival (DOA) failures exceed the Epidemic
DOA failure rate which is defined as 1.2 x DOA specified in the section of
this Agreement entitled PRODUCT CONFORMANCE REVIEW.
Only major functional and visual/mechanical/appearance defects are
considered for determining Epidemic Condition. MATERIAL could be either
sampled or, a Company's option, 100% audited at Company warehouses,
<PAGE> 8
Agreement No. WR71980064
Sheet 8 of 31
factories or Company's customers' locations. If MATERIAL is sampled, the
data must have 80% or better statistical confidence.
For the purpose of this Agreement, functional DOA shall be defined as
any MATERIAL that during the test, installation or upon its first use fails
to operate as expected or specified. Visual/mechanical/appearance DOA is
defined as any MATERIAL containing one or more major defects that would
make the MATERIAL unfit for use or installation.
An Epidemic Condition shall not include failures due to customer
misapplication, utilization of parts not approved by Supplier, or chain
failures induced by internally or externally integrated subassemblies.
In the event that Supplier develops a remedy for the defect(s) that
caused the Epidemic Condition and Company agrees in writing that the remedy
is acceptable Supplier shall:
(a) Incorporate the remedy in the affected MATERIAL in accordance with
Company's instructions.
(b) Ship all subsequent MATERIAL incorporating the required modification
correcting the defect(s) at no additional charge to Company; and
(c) Repair and/or replace MATERIAL that caused the Epidemic Condition. In
the event that Company incurs costs due to such repair and/or replacement,
including but not limited to labor and shipping costs, Supplier shall
reimburse Company for such costs. Supplier shall bear risk of in transit
loss and damage for such repaired and/or replaced MATERIAL.
Supplier and Company shall mutually agree in writing as to the
remedy's implementation schedule. Supplier shall use its best efforts to
implement the remedy in accordance with the agreed-upon schedule.
If Supplier is unable to develop a mutually agreeable remedy, or does
not adequately take into account the business interests of Company, as
reasonably agreed by the parties, Company may (1) develop and implement
such remedy and, in such case, implementation costs and risk of in-transit
loss and damage shall be allocated between the parties as set forth in this
section, and/or (2) cancel postponed orders without liability and return
all MATERIAL affected by such Epidemic Condition for full refund, payable
by Supplier within thirty (30) business days after receipt of returned
MATERIAL (with risk of loss or in-transit damage borne by Supplier) and/or
(3) terminate this Agreement without further liability.
<PAGE> 9
Agreement No. WR71980064
Sheet 9 of 31
22. EXPORT CONTROL
Supplier will not use, distribute, transfer or transmit any products,
software or technical information (even if incorporated into other
products) provided under this Agreement except in compliance with U.S.
export laws and regulations (the "Export Laws"). Supplier will not,
directly or indirectly, export or re-export the following items to any
country which is in the then current list of prohibited countries specified
in the applicable Export Laws: (a) software or technical data disclosed or
provided to Supplier by Company or Company's subsidiaries or affiliates; or
(b) the direct product of such software or technical data. Supplier agrees
to promptly inform Company in writing of any written authorization issued
by the U.S. Department of Commerce office of export licensing to export or
re-export any such items referenced in (a) or (b). The obligations stated
above in this clause will survive the expiration, cancellation or
termination of this Agreement or any other related agreement.
23. FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in
performance of any part of this Agreement to the extent such delay or
failure is caused by fire, flood, strike, civil, governmental, or military
authority, act of God, or other similar causes beyond its control and
without the fault or negligence of the delayed or non performing party or
its subcontractors. Supplier's liability for loss or damage to Company's
MATERIAL in Supplier's possession or control shall not be modified by this
section. When a party's delay or nonperformance continues for a period of
at least fifteen (15) days, the other party may terminate, at no charge,
this Agreement or an order under the Agreement.
24. GOVERNMENT CONTRACT PROVISIONS
The following provisions regarding equal opportunity, and all
applicable laws, rules, regulations and executive orders specifically
related thereto, including applicable provisions and sections from the
Federal Acquisition Regulation and all supplements thereto are incorporated
in this Agreement as they apply to work performed under specific U.S.
Government contracts: 41 CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7,
Reports and Other Required Information; 41 CFR 60-1.8, Segregated
Facilities; 41 CFR 60-250.4, Affirmative Action For Disabled Veterans and
Veterans of the Vietnam Era (if in excess of $10,000); and 41 CFR 60-741.4,
Affirmative Action for Disabled Workers (if in excess of $2,500), wherein
the terms "contractor" and "subcontractor" shall mean "Supplier". In
addition, orders placed under this Agreement containing a notation that the
material or services are intended for use under Government contracts shall
be subject to such other Government provisions printed, typed or written
thereon, or on the reverse side thereof, or in attachments thereto.
<PAGE> 10
Agreement No. WR71980064
Sheet 10 of 31
25. HEAVY METALS IN PACKAGING
Supplier warrants to Company that no lead, cadmium, mercury or
hexavalent chromium have been intentionally added to any packaging or
packaging component (as defined under applicable laws) to be provided to
Company under this Agreement and that packaging materials were not
manufactured using and do not contain chlorofluorocarbons. Supplier further
warrants to Company that the sum of the concentration levels of lead,
cadmium, mercury and hexavalent chromium in the package or packaging
component provided to Company under this Agreement does not exceed 100
parts per million. Upon request, Supplier shall provide to Company
Certificates of Compliance certifying that the packaging and/or packaging
components provided under this Agreement are in compliance with the
requirements set forth above in this section.
26. IDENTIFICATION
Supplier shall not, without Company's prior written consent, engage in
publicity related to this Agreement, or make public use of any
Identification in any circumstances related to this Agreement.
"Identification" means any semblance of any trade name, trademark, service
mark, insignia, symbol, logo, or any other designation, or drawing of
Company or its affiliates. Supplier shall remove or obliterate any
Identification prior to any use or disposition of any MATERIAL rejected or
not purchased by Company.
27. IMPLEADER
Supplier shall not implead or bring an action against Company based on
any claim by any person for personal injury or death to an employee of
Company for which Company has previously paid or is obligated to pay
worker's compensation benefits to such employee or claimant and for which
such employee or claimant could not otherwise bring legal action against
Company.
28. INDEMNITY
At Company's request, Supplier agrees to indemnify, defend and hold
harmless Company, its affiliates, customers, employees, successors and
assigns (all referred to as "Company") from and against any losses,
damages, claims, fines, penalties and expenses (including reasonable
attorney's fees) that arise out of or result from: (i) injuries or death to
persons or damage to property, including theft, in any way arising out of
or caused or alleged to have been caused by the Work or services performed
by, or material provided by Supplier or persons furnished by Supplier; (ii)
assertions under Workers' Compensation or similar acts made by persons
furnished by Supplier; or (iii) any failure of Supplier to perform its
obligations under this Agreement.
<PAGE> 11
Agreement No. WR71980064
Sheet 11 of 31
29. INFRINGEMENT
Supplier shall indemnify and save harmless Company, its affiliates and
their customers, officers, directors, employees (all referred to in this
section as "Company") from and against any losses, damages, liabilities,
fines, penalties, and expenses (including reasonable attorneys' fees) that
arise out of or result from any and all claims (i) of infringement of any
patent, copyright, trademark or trade secret right, or other intellectual
property right, private right, or any other proprietary or personal
interest, and (ii) related by circumstances to the existence of this
Agreement or performance under or in contemplation of it (an Infringement
Claim). If the Infringement Claim arises solely from Supplier's adherence
to Company's written instructions regarding services or tangible or
intangible goods provided by Supplier (Items) and if the Items are not (i)
commercial items available on the open market or the same as such items, or
(ii) items of Supplier's designated origin, design or selection, Company
shall indemnify Supplier. Company or Supplier (at Company's request) shall
defend or settle, at its own expense any demand, action or suit on any
Infringement Claim for which it is indemnitor under the preceding
provisions and each shall timely notify the other of any assertion against
it or any Infringement Claim and shall cooperate in good faith with the
other to facilitate the defense of any such Claim.
30. INSIGNIA
Upon Company's written request, "Insignia", including certain
trademarks, trade names, insignia, symbols, decorative designs or packaging
designs of Company, or evidences of Company's inspection will be properly
affixed by Supplier to the MATERIAL furnished or its packaging. Such
Insignia will not be affixed, used or otherwise displayed on the MATERIAL
furnished or in connection therewith without written approval by Company.
The manner in which such Insignia will be affixed must be approved in
writing by Company in accordance with standards established by Company.
Company shall retain all right, title and interest in any and all packaging
designs, finished artwork and separations furnished to Supplier. This
section does not reduce or modify Supplier's obligations under the
"IDENTIFICATION" and "USE OF INFORMATION" section.
31. INSURANCE
Supplier shall maintain and cause Supplier's subcontractors to
maintain during the term of this Agreement: (i) Workers' Compensation
insurance as prescribed by the law of the state or nation in which the Work
is performed; (ii) employer's liability insurance with limits of at least
$500,000 for each occurrence; (iii) automobile liability insurance if the
use of motor vehicles is required, with limits of at least $1,000,000
combined single limit for bodily injury and property damage for each
occurrence; (iv) Commercial General Liability ("CGL") insurance, ISO 1988
or later occurrence form of insurance including Blanket Contractual
Liability and Broad Form Property
<PAGE> 12
Agreement No. WR71980064
Sheet 12 of 31
Damage, with limits of at least $1,000,000 combined single limit for bodily
injury and property damage for each occurrence; and (v) if the furnishing
to Company (by sale or otherwise) of products or material is involved, CGL
insurance endorsed to include products liability and completed operations
coverage in the amount of $2,000,000 per occurrence. All CGL and automobile
liability insurance shall designate Company, its affiliates, and its
directors, officers and employees (all referred to as "Company") as
additional insured. All such insurance must be primary and non-contributory
and required to respond and pay prior to any other insurance or
self-insurance available. Any other coverage available to Company shall
apply on an excess basis. Supplier agrees that Supplier, Supplier's
insurer(s) and anyone claiming by, through, under or in Supplier's behalf
shall have no claim, right of action or right of subrogation against
Company and its customers based on any loss or liability insured against
under the foregoing insurance. Supplier and Supplier's subcontractors shall
furnish prior to the start of Work, certificates or adequate proof of the
foregoing insurance, including if specifically requested by Company,
endorsements and insurance policies. Company shall be notified in writing
at least thirty (30) days prior to cancellation of or any change in the
policy. Insurance companies providing coverage under this Agreement must be
rated by A-M Best with at least an A- rating.
32. INVOICING FOR GOODS
Supplier shall: (i) render original invoice, or as otherwise specified
in this Agreement, showing Agreement and order number, through routing and
weight, (ii) render separate invoices for each shipment within twenty-four
(24) hours after shipment, and (iii) mail invoices with copies of bills of
lading and shipping notices to the address shown on this Agreement or
order. If prepayment of transportation charges is authorized, Supplier
shall include the transportation charges from the F.O.B. point to the
destination as a separate item on the invoice stating the name of the
carrier used.
33. INVOICING FOR STOCKS
If Company requests for reasons other than covered by Section "FORCE
MAJEURE", that shipment be postponed beyond the date shown on a purchase
order, Supplier may invoice Company as of the original scheduled delivery
date for MATERIAL manufactured under this Agreement, if it has been
inspected and approved by Company's designated quality organization
(provided inspection has been specified in this Agreement or in an order
issued under this Agreement).
34. JURISDICTION
Subject to the section "MEDIATION", Supplier agrees that any action or
legal proceeding arising out of this Agreement shall be brought only in a
court of competent jurisdiction in the United States of America and
Supplier
<PAGE> 13
Agreement No. WR71980064
Sheet 13 of 31
expressly submits to, and accepts the jurisdiction of, any such court in
connection with such action or proceeding and Supplier further consents to
the enforcement of any judgment against it arising therefrom in any
jurisdiction in which it has or shall have any assets.
35. LICENSES
No Licenses, express or implied, under any patents are granted by
Company to Supplier under this Agreement or order.
36. MARKING
All MATERIAL furnished under this Agreement shall be marked for
identification purposes in accordance with the specifications set forth in
this Agreement and as follows:
(a) with Supplier model/serial number; and
(b) with month and year of manufacture.
(c) with Company's Comcode
In addition, Supplier shall add any other identification which might
be requested by Company such as but not limited to indicia conforming to
the Company's Serialization Plan (KS-23490) and is included by reference, a
copy being in the possession of the Supplier. Charges, if any, for such
additional identification marking shall be as agreed upon by Supplier and
Company. This section does not reduce or modify Supplier's obligations
under the "IDENTIFICATION" section.
37. MEDIATION
If a dispute relates to this Agreement, or its breach, and the parties
have not been successful in resolving such dispute through negotiation, the
parties shall attempt to resolve the dispute through mediation by
submitting the dispute to a sole mediator selected by the parties or, at
any time at the option of a party, to mediation by the American Arbitration
Association ("AAA"). Each party shall bear its own expenses and an equal
share of the expenses of the mediator and the fees of the AAA. All defenses
based on passage of time shall be suspended pending the termination of the
mediation. Nothing in this section shall be construed to preclude any party
from seeking injunctive relief in order to protect its rights pending
mediation.
38. MONTHLY ORDER AND SHIPMENT REPORTS
Supplier shall render monthly order and shipment reports on or before
the fifth (5th) working day of the succeeding month containing the
information agreed to by Company and Supplier.
<PAGE> 14
Agreement No. WR71980064
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39. NEW AND CHANGED METHODS, PROCESSES AND EQUIPMENT
Supplier shall use reasonable efforts to keep abreast of major
developments in Supplier's industry and to promptly advise Company of any
developments that might affect the production of any MATERIAL under this
Agreement.
40. NON WAIVER
The failure of either party at any time to enforce any right or remedy
available to it under this Agreement or otherwise with respect to any
breach or failure by the other party shall not be construed to be a waiver
of such right or remedy with respect to any other breach or failure by the
other party.
41. NOTICES
Any notice given or demand which under the terms of this Agreement or
under any statute must or may be given or made by Supplier or Company shall
be in writing and shall be given or made by confirmed facsimile, or similar
communication or by certified or registered mail addressed to the
respective parties as follows
To Company: Lucent Technologies Inc.
Global Procurement Organization
211 Mt. Airy Road
Room 3W222
Basking Ridge, NJ 07920
Attn.: Sourcing Manager
-OR-
To Supplier: MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
Attn.: Chief Executive Officer
Such notice or demand shall be deemed to have been given or made when
sent by facsimile, or other communication or when deposited, postage
prepaid in the U.S. mail. The above addresses may be changed at any time by
giving prior written notice as above provided.
The above addresses may be changed at any time by giving prior written
notice as above provided.
<PAGE> 15
Agreement No. WR71980064
Sheet 15 of 31
42. OPERATING SYSTEM SOFTWARE
The term MATERIAL includes any software (operating program in machine
readable form and related documentation) and storage media therefor
normally furnished with or embedded in the MATERIAL. Title to the software,
including copyright, shall remain in Supplier. The party having title to
the MATERIAL shall have title to the software storage media. For the life
of the MATERIAL listed in this Agreement, Supplier grants to Company and
any subsequent purchaser, lessee or other end user (referred to
collectively in this section as "end user") a non-exclusive license to use
said software on the MATERIAL on which it was delivered. Company and any
subsequent end user may copy the software for use on such MATERIAL with
which it was originally delivered and for archival purposes, but shall not
knowingly reproduce either the original software for distribution to
others. Company and any subsequent end user may add to, delete from or
modify the software in any manner, but no changes, however extensive, shall
alter Supplier's title to such original software. Title to any such
modification or addition to the software shall remain in the entity which
creates the modification or addition.
43. OZONE DEPLETING CHEMICALS
Supplier hereby warrants that it is aware of international agreements
and pending legislation in several nations, including the United States,
which would limit, ban and/or tax importation of any product containing, or
produced using ozone depleting chemicals ("ODCs"), including
chlorofluorocarbons, halons and certain chlorinated solvents. Supplier
hereby warrants that the MATERIAL furnished to Company will conform to all
applicable requirements established pursuant to such agreements,
legislation and regulations, and the MATERIAL furnished to Company will be
able to be imported and used lawfully (and without additional taxes
associated with ODCs not reported to Company by Supplier as set forth in
this section) under all such agreements, legislation and requirements.
Supplier also warrants that it is currently reducing, or if Supplier is not
the manufacturer of the MATERIAL, is currently causing the manufacturing
vendor to reduce and will, in an expeditious manner, eliminate, or, as
applicable, have its manufacturing vendor eliminate the use of ODCs in the
manufacture of the MATERIAL.
If the MATERIAL furnished by Supplier under this Agreement is
manufactured outside the United States, Supplier shall, upon execution of
this Agreement, and at any time that new products are added to this
Agreement or changes are made to the MATERIAL furnished under this
Agreement, complete, sign and return to Company the attached ODC Content
Certification. The ODC Content Certification must be signed by Supplier's
facility manager, corporate officer or his delegate.
The term "ODC content" on the ODC Content Certification means the
total pounds of ODC used directly in the manufacture of each unit of
<PAGE> 16
Agreement No. WR71980064
Sheet 16 of 31
MATERIAL. This includes all ODCs used in the manufacturing and assembly
operations for the MATERIAL plus all ODCs used by Supplier's vendors and
any other vendors in producing components or other products incorporated
into the MATERIAL sold to Company.
Supplier is responsible to obtain information on the ODC content of
all components and other products acquired to manufacture the MATERIAL and
to incorporate such information into the total ODC content reported to
Company. Provided however, that Supplier should not include in the ODC
content those components or other products which are manufactured in the
United States. Supplier hereby warrants to Company that all information
furnished by Supplier on the ODC Content Certification is complete and
accurate and that Company may rely on such information for any purpose,
including but not limited to providing reports to government agencies or
otherwise complying with applicable laws. Supplier shall defend, indemnify
and hold Company harmless of and from any claims, demands, suits,
judgments, liabilities, fines, penalties, costs and expenses (including
additional ODC taxes as provided for in paragraph one of this section and
reasonable attorney's fees) which Company may incur under any applicable
federal, state, or local laws or international agreements, and any and all
amendments thereto by reason of Company's use of reliance on the
information furnished to Company by Supplier on the ODC Content
Certification or by reason of Supplier's breach of this section. Supplier
shall cooperate with Company in responding to any inquiry concerning the
use of ODCs to manufacture the MATERIAL or components thereof and to
execute without additional charge any documents reasonably required to
certify the absence or quantity of ODCs used to manufacture the MATERIAL or
components thereof.
44. OZONE DEPLETING SUBSTANCES LABELING
Supplier warrants and certifies that all MATERIAL and other products,
including packaging and packaging components, provided to Company under
this Agreement have been accurately labeled, in accordance with the
requirements of 40 CFR, Part 82 entitled "Protection of Stratospheric
Ozone, Subpart E- The Labeling of Products Using Ozone Depleting
Substances."
45. PACKING, LABELING AND SERIALIZATION
MATERIAL purchased, repaired, replaced or refurbished under this
Agreement shall be packed, labeled and serialized by Supplier at no
additional charge in accordance with specifications OEMPS No. 101 "Packing
and Shipping Requirements," X-20587 "Specification Requirements for Package
Content Identification Label," and KS-23490 "Product Bar Code, Serial and
Comcode Label," is included by reference, a copy being in the possession of
the Supplier and as changed from time to time with Supplier's written
approval.
<PAGE> 17
Agreement No. WR71980064
Sheet 17 of 31
46. PRODUCT CHANGES
Supplier shall notify Company in advance, in writing of any change
proposed to be made in accordance with this Agreement, or in the
Specification and documentation covered by this Agreement that would impact
upon: (i) reliability, (ii) requirements of the Specification, or (iii)
form, fit or function (as defined below).
In order for Company to review these proposed changes, at least thirty
(30) business days advance notice will be required except for those cases
where an extremely unsatisfactory condition requires immediate action. In
that instance, verbal notification to Company shall be used, followed by
Supplier's immediate written confirmation.
"Form" shall mean changes in appearance visible to the user (customer,
repair personnel, developer) of the MATERIAL.
"Fit" shall mean changes in parts to components that are not
physically interchangeable.
"Function" shall mean changes that affect operational characteristics
of the MATERIAL or require the operator to change the method of operation.
Supplier shall submit a proposal to Company, specifically documenting
all cost factors, implementation schedules, and repair changes.
The change notice shall be sent to the following address:
Lucent Technologies Inc.
211 Mt. Airy Road
Room 3W222
Basking Ridge, NJ 07920
Attn.: Sourcing Manager:
The format of Supplier's notification document shall be the
responsibility of Supplier but said notification document shall contain at
least the following information.
1. Supplier's name.
2. Agreement number.
3. MATERIAL description.
4. Change number.
5. MATERIAL affected.
6. Reason for change.
<PAGE> 18
Agreement No. WR71980064
Sheet 18 of 31
7. Description of change (including the impact upon: (i) reliability,
(ii) requirements of the Specification and (iii) form, fit or
function.)
8. [***]
9. Marking method of identifying changed units.
10. Documentation
a. Marked up documents shall be provided until the document or
drawing is re-issued.
b. Listing of documents and drawings to be changed.
c. Field repair or modification kit documentation (if
applicable).
11. Unit in process, in stock and installed affected by change.
12. Date changes are proposed to be implemented.
13. All necessary and relevant temporary changes affected by this
notice.
14. All necessary and relevant attachments.
15. Additional comments.
If, as mutually agreed by Company and Supplier, sufficient changes
have been made to warrant a MATERIAL re-qualification, such
re-qualification will be performed at no cost to Company unless otherwise
agreed.
MATERIAL shall be in accordance with the latest information stated or
referenced in the Specification.
The quality of MATERIAL used and the method of manufacturing, handling
and shipping, shall be such that the finished MATERIAL meets the properties
and requirements shown in the Specification and in the other sections of
this Agreement.
If Company, in its sole discretion, does not agree to the change(s)
proposed by Supplier, then in addition to all other rights and remedies at
law or equity or otherwise, and without any cost to or liability or
obligation of Company, Company shall have the right to terminate this
Agreement and to terminate any or all orders for MATERIAL affected by such
change.
47. PRODUCT CONFORMANCE REVIEWS
Supplier shall, utilizing documented procedures specified herein, make
such tests and inspections as are necessary to insure that MATERIAL meets
all technical requirements of the MATERIAL specification. Supplier shall
provide, without charge, any production testing facilities and personnel
required to inspect the MATERIAL under Quality Program Specification (QPS)
Nos. 40.002 and 40.030, included by reference, a copy being in possession
of the Supplier as changed from time to time with Supplier's written
approval. Company reserves the right to inspect MATERIAL prior to shipment
from Supplier or Supplier's subcontractor(s). Such inspection shall
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 19
Agreement No. WR71980064
Sheet 19 of 31
be conducted by Company's Engineering and Environmental Technologies (EE&T)
organization utilizing a 0.65% Acceptability Level (AQL) sampling plan as
described in QPS 40.030. If MATERIAL fails inspection, Supplier agrees to
pay for all re-inspection costs. Inspection requirements may be waived only
by written notification from Company's Engineering and Environmental
Technologies (EE&T) organization. In the event that any or all work under
this Agreement is subcontracted to another Supplier, Company reserves the
right to conduct the aforementioned inspections at the subcontractors
facilities.
48. PRODUCT DOCUMENTATION
Supplier shall furnish, at no charge, product documentation, and any
succeeding changes thereto, as described in the Technical Specification.
Company may use, reproduce, reformat, modify and distribute such product
documentation.
Company shall reproduce Supplier's copyright notice contained in any
documentation reproduced without change by Company. For documentation which
is reformatted or modified by Company, Company shall have the right to
place only Company's own copyright notice on the reformatted or modified
documentation. It is the intent of the parties that Company's copyright
notice shall be interpreted to protect the underlying copyright rights of
Supplier to the documentation to the extent such underlying rights are
owned by Supplier.
49. PURCHASE ORDERS
Purchase orders issued under this Agreement shall be sent to the
following address:
MCK Communications, Inc.
313 Washington Street
Newton, MA 02158
Attn.: Vice President Sales
Purchase orders shall specify: (i) description of MATERIAL, inclusive
of any numerical/alphabetical identification referenced in the price list
in this Agreement, (ii) delivery date, (iii) applicable price, (iv)
location to which the MATERIAL is to be shipped and (v) location to which
invoices shall be sent for payment.
50. REGISTRATION AND RADIATION STANDARDS
When MATERIAL furnished under this Agreement is subject to Part 68,
Part 15 or any other part of the Federal Communication Commission's Rules
and Regulations, as may be amended from time to time (hereinafter
<PAGE> 20
Agreement No. WR71980064
Sheet 20 of 31
"FCC Rules"), Supplier warrants that such MATERIAL complies with the
registration, certification, type-acceptance and/or verification standards
of the FCC Rules including, but not limited to, all labeling, customer
instruction requirements, and the suppression of radiation to specified
levels. Supplier shall also establish periodic on-going compliance
retesting and follow a Quality Control program, submitted by Company, to
assure that MATERIAL shipped complies with the applicable FCC Rules.
Supplier shall indemnify and save Company harmless from any liability,
fines, penalties, claims or demands (including the costs, expenses and
reasonable attorney's fees on account thereof) that may be made because of
Supplier's noncompliance with the applicable FCC Rules. Supplier shall
defend Company, at Company's request, against such liability, claim or
demand.
In addition, should MATERIAL which is subject to Part 15 of the FCC
Rules, during use generate harmful interference to radio communications,
Supplier shall provide the Company information relating to methods of
suppressing such interference and pay the cost of suppressing such
interference or, at the option of Company, accept the return of the
MATERIAL and refund to Company the price paid for the MATERIAL less a
reasonable amount for depreciation, if applicable.
To the extent that MATERIAL furnished under this Agreement is also
subject to FCC Rules governing the use of the MATERIAL as a component in a
system, Company shall be responsible for compliance with the applicable FCC
Rules governing the system. Supplier shall fully cooperate with Company, by
providing technical support and information, and, upon written request from
Company, shall modify MATERIAL to enable Company to ensure ongoing
compliance with the FCC Rules. Company shall pay any increase in Supplier's
costs and/or expenses resulting from Company's request to modify MATERIAL
to enable Company to comply with the FCC Rules.
Nothing in this section shall be deemed to diminish or otherwise limit
Supplier's obligations under the "WARRANTY" section or any other section of
this Agreement.
51. REJECTIONS
If Company rejects any or all of the MATERIAL, Company may, in
addition to all its other rights and remedies at law or equity, exercise
one or more of the following remedies: (1) return rejected MATERIAL for
full credit at the price charged plus transportation charges from
Supplier's plant, and return; or (2) accept a conforming part of any
shipment; or (3) have rejected MATERIAL replaced by Supplier at the
purchase price stipulated in this Agreement.
<PAGE> 21
Agreement No. WR71980064
Sheet 21 of 31
52. RELEASES VOID
Neither party shall require (i) waivers or releases of any personal
rights or (ii) execution of documents which conflict with the terms of this
Agreement, from employees, representatives or customers of the other in
connection with visits to its premises and both parties agree that no such
releases, waivers or documents shall be pleaded by them or third persons in
any action or proceeding.
53. REPAIRS NOT COVERED UNDER WARRANTY
In addition to repairs provided for in the "WARRANTY" section Supplier
shall provide repair service on all MATERIAL ordered under this Agreement
during the term of this Agreement and until five (5) years after the
expiration of this Agreement. MATERIAL to be repaired under this section
will be returned to a location designated by Supplier, and unless otherwise
agreed upon by Supplier and Company, Supplier shall ship the repaired
MATERIAL which meets the Specifications set forth in the "SPECIFICATIONS OR
DRAWINGS" section and all other Specifications within ten (10) business
days of receipt of the defective or non-conforming MATERIAL. With the
concurrence and scheduling of Company, repair may be made by Supplier on
site.
If MATERIAL is returned to Supplier for repair as provided for in this
section and is determined to be beyond repair, Supplier shall so notify
Company. If requested by Company, Supplier will sell to Company a
replacement at the price set forth in Supplier's then current agreement
with Company for said MATERIAL or, if no such agreement exists, at a price
agreed upon by Supplier and Company. If the parties fail to agree on a
price, the price shall be a reasonably competitive price for such MATERIAL
at the time for delivery. Further, if requested by Company, Supplier shall
take the necessary steps to dispose of the unrepairable MATERIAL and pay to
Company the salvage value, if any. Replacement and repaired MATERIAL shall
be warranted as set forth in the "WARRANTY" section.
This Agreement does not grant Supplier an exclusive privilege to
repair any or all of the MATERIAL purchased under this Agreement for which
Company may require repair; and Company may perform the repairs or contract
with others for these services. In addition, Supplier authorizes Company
and any qualified repairer with whom Company may contract to perform
repairs on all MATERIAL purchased under this Agreement.
All transportation costs of and in transit risk of loss and damage to
MATERIAL returned to Supplier for repair under this section will be borne
by Company and all transportation costs of and in transit risk of loss and
damage to such repaired or replacement MATERIAL returned to Company will be
borne by Company.
<PAGE> 22
Agreement No. WR71980064
Sheet 22 of 31
Price schedules for repairs under this section are listed in APPENDIX
A.
54. REPAIR PROCEDURES
Company shall furnish the following information with MATERIAL returned
to Supplier for repair: (a) Company's name and complete address; (b)
name(s) and telephone numbers(s) of Company's employee(s) to contact in
case of questions about the MATERIAL to be repaired; (c) ship-to address
for return of repaired MATERIAL if different than (a); (d) a complete list
of MATERIAL returned; (e) the nature of the defect or failure if known; and
(f) whether or not returned MATERIAL is in warranty. Supplier shall, within
ten (10) days of the execution of this Agreement, provide a written notice
to Company specifying (i) the name(s) and telephone number(s) of the
individual(s) to be contacted concerning any questions that may arise
concerning repair, and (ii) if required, any special packing of MATERIAL
which might be necessary to provide adequate in-transit protection from
transportation damage.
MATERIAL repaired by Supplier shall have the repair completion date
stenciled or otherwise identified in a permanent manner at a readily
visible location on the MATERIAL and the repaired MATERIAL shall be
returned with a tag or other papers describing the repairs which have been
made.
All invoices originated by Supplier for repair services must be
clearly identified as such, and must contain: (i) a reference to Company's
purchase order for these repair services, (ii) a detailed description of
repairs made by Supplier and the need therefor, and (iii) an itemized
listing of parts and labor charges, if any. Replaced parts will, upon
request, be available for inspection by or returned to Company. Further,
the provisions of the "INVOICING" and "SHIPPING" sections, other than
provisions relating to transportation charges with respect to MATERIAL
repaired under warranty, shall apply to Supplier's return to Company of
repaired MATERIAL.
55. RIGHT OF ENTRY
Each party shall have the right to enter the premises of the other
party during standard business hours with respect to the performance of
this Agreement, including an inspection or a Quality Review, subject to all
plant rules and regulations, clearances, security regulations and
procedures as applicable. Each party shall provide safe and proper
facilities for such purpose. No charge shall be made for such visits. It is
agreed that prior notification will be given when access is required.
<PAGE> 23
Agreement No. WR71980064
Sheet 23 of 31
56. SAFETY CERTIFICATION
All MATERIAL purchased under this Agreement shall be designed to be in
compliance with the applicable Underwriters Laboratories (UL) and Canadian
Standards Association (CSA) rules and regulations. It is agreed that
Supplier shall be responsible for filing the required documents to obtain
compliance with said Underwriters Laboratories Standards and Canadian
Standards. Supplier shall be responsible for making the MATERIAL available
for testing.
57. SECTION HEADINGS
The headings of the sections in this Agreement are inserted for
convenience only and are not intended to affect the meaning or
interpretation of this Agreement.
58. SERVICES
Visits by Supplier's representatives or its suppliers' representatives
for inspection, adjustment or other similar purposes in connection with
MATERIAL purchased under this Agreement shall for all purposes be deemed
"Work under this Agreement" and shall be at no charge to Company unless
otherwise agreed in writing between the parties.
59. SEVERABILITY
If any of the provisions of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate or
render unenforceable the entire Agreement, but rather the entire Agreement
shall be construed as if not containing the particular invalid or
unenforceable provision or provisions, and the rights and obligations of
Supplier and Company shall be construed and enforced accordingly.
60. SHIPPING
Supplier shall: (i) ship the MATERIAL covered by this Agreement or
order complete unless instructed otherwise, (ii) ship to the destination
designated in the Agreement or order, (iii) ship according to routing
instructions given by Company, (iv) place the Agreement and order number on
all subordinate documents, (v) enclose a packing memorandum with each
shipment and, when more than one package is shipped, identify the package
containing the memorandum; and (vi) mark the order number on all packages
and shipping papers. Adequate protective packing shall be furnished at no
additional charge. Shipping and routing instructions may be furnished or
altered by Company without a writing. If Supplier does not comply with the
terms of the FOB section of the Agreement or order or with Company's
shipping or routing instructions, Supplier authorizes Company to deduct
from any invoice of Supplier (or to charge back to Supplier), any increased
cost incurred by Company as a result of Supplier's noncompliance.
<PAGE> 24
Agreement No. WR71980064
Sheet 24 of 31
61. SHIPPING INTERVAL
The delivery schedule applicable to each purchase order will be agreed
upon by Supplier and Company and set forth in the purchase order. (Note:
Supplier has indicated that MATERIAL can usually be shipped an average of
twenty (20) business days after receipt of Company's purchase order;
however, in no event shall the delivery interval exceed thirty (35)
business days after receipt of purchase order.)
If Supplier exceeds the above maximum interval then in addition to all
other rights and remedies at law or equity or otherwise, and without any
liability or obligation of Company, Company shall have the right to: (a)
cancel such purchase order, or (b) extend such delivery date to a later
date, subject, however, to the right to cancel as in (a) preceding if
delivery is not made or performance is not completed on or before such
extended delivery date. If Company elects to extend such delivery date,
Supplier shall absorb the difference between the charges to ship normal
transportation and the charges to ship premium overnight.
If a purchase order is canceled by Company pursuant to the above,
Company shall have the right to retain or return any or all MATERIAL
received by or paid for by Company under such purchase order. Within
fifteen (15) business days of Supplier's receipt of returned MATERIAL,
Supplier shall reimburse Company for the costs of shipping the MATERIAL
returned to Supplier and for any amounts, including shipping costs,
previously paid by Company for the MATERIAL. Company shall pay for any
MATERIAL if retains at the prices set forth in APPENDIX A, less applicable
discounts which shall be applied on the basis of the quantity specified in
the purchase order.
If, during the course of this Agreement, Supplier determines that
Supplier will no longer be able to ship within the above interval, Supplier
shall immediately notify Company's buyer to that effect. Supplier shall
also notify Company's buyer, as soon as it becomes apparent, if Supplier is
unable to meet the delivery date for an order. However, nothing contained
in this paragraph shall waive Company's rights as set forth above in this
section.
62. SHIPPING LOCATION
The material shall be shipped FOB Supplier's location 313 Washington
Street, Newton, MA 02158 or 130 Bowness Centre, Calgary, ALB T3B 5M5. The
1990 INCOTERM manual shall govern interpretation of shipment terms under
this Agreement.
63. STORAGE OF PAID FOR STOCK
Subject to the section "OPERATING SYSTEM SOFTWARE", Company has and
shall have at all times all right, title and interest in all
<PAGE> 25
Agreement No. WR71980064
Sheet 25 of 31
MATERIAL invoiced to Company in accordance with the section "INVOICING FOR
STOCKS". Such MATERIAL shall be referred to in this section as "Company
Property." Supplier shall store such Company Property without cost to
Company at Supplier's, 313 Washington Street, Newton, MA, facility and ship
such Company Property as ordered by Company. In addition, Supplier shall:
(i) Be responsible for the safekeeping of the Company Property,
assume all risks of loss or damage to the same and be liable for the full
actual value of such Company Property. In case of removal of all or any
part of the Company Property from one building to another, Supplier's
responsibility for loss or damage shall continue and Supplier shall give
Company at least ten (10) days advance notice in writing of the removal,
except when the removal is required to comply with Company's shipping
orders or to protect the Company Property from loss or damage.
(ii) Permanently mark or if impracticable to do so then affix labeling
stating that the Company Property is the "PROPERTY OF LUCENT TECHNOLOGIES
INC." For purposes of this section, the term "LUCENT TECHNOLOGIES INC."
shall be deemed to mean Company or the Company affiliated or associated
company which owns the tooling, as applicable.
(iii) Store the Company Property safely, indoors in protected areas
approved by Company. Store the Company Property segregated from other
property in sections of Supplier's plant marked Property of Company.
(iv) Deliver the Company property only to Company or Company's
designated customers in accordance with Company's orders or upon Company's
demand, FOB Supplier's plant without additional charge for removal,
packing, or crating.
(v) Supplier shall not allow an security interest, lien, tax lien or
other encumbrance (collectively referred to as "encumbrance") to be placed
on any Company Property. Supplier shall give Company immediate written
notice should any third party attempt to place or place an encumbrance on
such Company Property. Supplier shall indemnify and hold Company harmless
from any such encumbrance. Supplier shall, at Company's request, promptly
execute a "protective notice" UCC-1 form and all other documents reasonably
necessary to enable Company to protect its interest in such Company
Property. This Agreement shall constitute the security agreement required
by the UCC of the appropriate state.
(vi) Company may inspect, inventory, and authenticate the account of
the Company Property during Supplier's normal business hours. Supplier
<PAGE> 26
Agreement No. WR71980064
Sheet 26 of 31
shall provide Company access to the premises where all such Company
Property is located.
The obligations assumed by Supplier with respect to the Company
Property are for the protection of Company's property. If Supplier defaults
in carrying out Supplier's obligations under this Agreement, then, at no
cost to Company and upon twenty-four (24) hours notice to Supplier, Company
may cancel this Agreement in whole or in part or withdraw all or any part
of the Company Property, or both. Supplier shall, at Company's option,
return to Company or hold for Company's disposition any or all of such
Company Property in Supplier's possession.
64. SUPPLIER'S INFORMATION
Supplier shall not provide under, or have provided in contemplation
of, this Agreement any idea, data, program, technical, business or other
intangible information, however conveyed, or any document, print, tape,
disc, semiconductor memory or other information-conveying tangible article,
unless Supplier has the right to do so, and Supplier shall not view any of
the foregoing as confidential or proprietary. If Supplier must furnish any
such information to Company with restrictions, it shall only be furnished
after negotiation and execution on behalf of Company of a separate written
agreement specifically identifying the documents to be furnished and
setting forth Company's rights and obligations with respect hereto.
65. SURVIVAL OF OBLIGATIONS
The obligations of the parties under this Agreement which by their
nature would continue beyond the termination, cancellation or expiration of
this Agreement shall survive termination, cancellation or expiration of
this Agreement.
66. TAXES
Company shall reimburse Supplier only for the following tax payments
with respect to transactions under this Agreement unless Company advises
Supplier than an exemption applies: state and local sales and use taxes, as
applicable. Taxes payable by Company shall be billed as separate items on
Supplier's invoices and shall not be included in Supplier's prices. Company
shall have the right to have Supplier contest any such taxes that Company
deems improperly levied at Company's expense and subject to Company's
direction and control.
67. TECHNICAL SUPPORT
Company shall be entitled to ongoing technical support including field
service and assistance, provided, however, that the availability or
performance of this technical support service shall not be construed as
<PAGE> 27
Agreement No. WR71980064
Sheet 27 of 31
altering or affecting Supplier's obligations as set forth in the "WARRANTY"
section or elsewhere provided for in this Agreement.
Ongoing technical support via telephone will be at no charge to
Company from Monday to Friday between hours of 8:00AM and 5:00PM.
68. TERMINATION OF PURCHASE ORDER
Company may at any time terminate any portion or the total quantity of
any purchase order(s) placed under this Agreement. Company's liability to
Supplier with respect to such termination shall be limited to (i)
Supplier's purchase price of all components for the MATERIAL (not usable in
Supplier's other operations or salable to Supplier's other customers), plus
(ii) the actual costs incurred by Supplier in procuring and manufacturing
MATERIAL (not usable in Supplier's other operations or salable to
Supplier's other customers) in process as of the date of giving notice of
termination, less (iii) any salvage value thereof. However, no such
termination charges will be invoiced if, within [***] days of notice of
termination, MATERIAL equivalent in kind to that being terminated is
ordered by Company. If requested, Supplier shall substantiate such cost and
price with proof satisfactory to Company.
69. TIMELY PERFORMANCE
If Supplier has knowledge that anything prevents or threatens to
prevent the timely performance of the Work under this Agreement, Supplier
shall immediately notify Company's Representative thereof and include all
relevant information concerning the delay or potential delay.
70. TITLE AND RISK OF LOSS
Title (other than software) and risk of loss and damage to MATERIAL
including software purchased by Company under this Agreement or an order
issued pursuant to this Agreement shall vest in Company when the MATERIAL
has been delivered at the FOB point. If this Agreement or an order issued
pursuant to this Agreement calls for additional services including, but not
limited to, unloading, installation, or testing to be performed after
delivery, Supplier shall retain title and risk loss and damage to the
MATERIAL until the additional services have been performed. If Supplier is
authorized to invoice Company for MATERIAL prior to shipment or prior to
the performance of additional services, title to MATERIAL (other than
software) shall vest in Company upon payment of the invoice, but risk of
loss and damage shall pass to Company when the additional services have
been performed.
71. TOXIC SUBSTANCES AND PRODUCT HAZARDS
Supplier hereby warrants to Company that, except as expressly stated
elsewhere in this Agreement, all MATERIAL furnished by Supplier as
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 28
Agreement No. WR71980064
Sheet 28 of 31
described in this Agreement is safe for its foreseeable use, is not defined
as a hazardous or toxic substance or material under applicable federal,
state or local law, ordinance, rule, regulation or order (hereinafter
collectively referred to as "law" or "laws"), and presents no abnormal
hazards to persons or the environment. Supplier also warrants that it has
no knowledge of any federal, state or local law, that prohibits the
disposal of the MATERIAL as normal refuse without special precautions
except as expressly stated elsewhere in this Agreement. Supplier also
warrants that where required by law, all MATERIAL furnished by Supplier is
either on the EPA Chemical Inventory compiled under Section 8 (a) of the
Toxic Substance Control Act, or is the subject of an EPA-approved pre
manufacture notice under 40 CFR Part 720. Supplier further warrants that
all MATERIAL furnished by Supplier complies with all use restrictions,
labeling requirements and all other health and safety requirements imposed
under federal, state, or local laws. Supplier further warrants that, where
required by law, it shall provide to Company, prior to delivery of the
MATERIAL, a Material Safety Data Sheet which complies with the requirements
of the Occupational Safety and Health Act of 1970 and all rules and
regulations promulgated thereunder.
Supplier shall defend, indemnify and hold Company harmless for any
expenses (including, but not limited to, the cost of substitute material,
less accumulated depreciation) that Company may incur by reason of the
recall or prohibition against continued use or disposal of MATERIAL
furnished by Supplier as described in its Agreement whether such recall or
prohibition is directed by Supplier or occurs under compulsion of law.
Company shall cooperate with Supplier to facilitate and minimize the
expense of any recall or prohibition against use or disposal of MATERIAL
directed by Supplier or under compulsion of law.
Supplier further shall defend, indemnify and hold Company harmless of
and from any claims, demands, suits, judgments, liabilities, costs and
expenses (including reasonable attorney's fees) which Company may incur
under any applicable federal, state or local laws, and any and all
amendments thereto, including but not limited to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980; the
Consumer Product Safety Act of 1972; the Toxic Substance Control Act;
Fungicide, Rodenticide Act; the Occupational Safety and Health Act; and the
Atomic Energy Act; and any and all amendments to all applicable federal,
state, or local laws, by reason of Company's acquisition, use, distribution
or disposal of MATERIAL furnished by Supplier under this Agreement.
72. TRAINING
If requested by Company, Supplier will, without charge to Company:
<PAGE> 29
Agreement No. WR71980064
Sheet 29 of 31
(a) provide instructors and the necessary instructional material of
Supplier's standard format to train Company's personnel in the
installation, planning and practices, operation, maintenance and repair of
MATERIAL furnished under this Agreement. These classes shall be conducted
at reasonable intervals at locations agreed upon by Supplier and Company.
Or, at the option of Company,
(b) provide to Company training modules or manuals and any necessary
assistance, covering those areas of interest outlined in (a) of this
section, sufficient in detail, format and quantity to allow Company to
develop and conduct a training program.
73. USE OF INFORMATION
Supplier shall view as Company's property any idea, data, program,
technical, business or other intangible information, however conveyed, and
any document, print, tape, disc, tool, or other tangible
information-conveying or performance-aiding article owned or controlled by
Company, and provided to, or acquired by Supplier under or in contemplation
of this Agreement (Information). Supplier shall, at no charge to Company,
and as Company directs, destroy or surrender to Company promptly at its
request any such article or any copy of such Information. Supplier shall
keep Information confidential and use it only in performing under this
Agreement and obligate its employees, subcontractors and others working for
it to do so, provided that the foregoing shall not apply to information
previously known to Supplier free of obligation, or made public through no
fault imputable to Supplier.
74. VARIATION IN QUANTITY
Company assumes no liability for MATERIAL produced, processed or
shipped in excess of the amount specified in this Agreement or in an order
issued pursuant to this Agreement.
75. WARRANTY
Supplier warrants to Company and Customer, as defined in this section,
that MATERIAL furnished will be new, merchantable, free from defects in
design, material and workmanship and will conform to and perform in
accordance with the Specifications, drawings and samples set forth in this
Agreement. These warranties extend to the future performance of the
MATERIAL and shall continue for a period of twelve (12) months from the
date of delivery to an end user customer (hereinafter "Customer") or, for
MATERIAL installed by Company or its re-sellers, for a period of twelve
(12) months from the completion of installation.
Supplier also warrants to Company and Customers that services will be
performed in a first class, workmanlike manner. In addition, if MATERIAL
<PAGE> 30
Agreement No. WR71980064
Sheet 30 of 31
furnished contains one or more manufacturer's warranties, Supplier hereby
assigns such warranties to Company and Customers. Supplier warrants that at
the time of delivery to Company such MATERIAL shall be free of any security
interest or any other lien or any other encumbrance whatsoever. All
warranties shall survive inspection, acceptance and payment.
Defective or non-conforming MATERIAL will, at Company's option, either
be returned to Supplier for repair or replacement, at no cost to Company,
with risk of in-transit loss and damage borne by Supplier and freight paid
by Supplier, or be repaired or replaced by Supplier on Customer's site or
another site designated by Company at no cost to Company. Unless otherwise
agreed upon by Supplier and Company, Supplier shall complete repairs and
ship the repaired MATERIAL within ten (10) business days of receipt of
defective or non- conforming MATERIAL, or at Company's option, ship
replacement MATERIAL within ten (10) business days after verbal
notification is given Supplier by Company. Supplier shall bear the risk of
in-transit loss and damage and shall prepay and bear that cost of freight
for shipments to Company of repaired or replaced MATERIAL. If requested by
Company, Supplier shall begin on-site repairs within ten (10) business days
after verbal notification is given Supplier by Company.
If MATERIAL returned to Supplier or made available to Supplier on site
for repair as provided for in this section is determined to be beyond
repair, Supplier shall promptly so notify Company and, unless otherwise
agreed to in writing by Supplier and Company, Supplier shall ship
replacement MATERIAL without charge within ten (10) business days of such
notification.
Replacement MATERIAL shall be warranted as set forth above in this
"WARRANTY" section. Any MATERIAL which is repaired, modified, or otherwise
serviced by Supplier shall be warranted as provided in this "WARRANTY"
section for the remainder of the warranty period (based upon the date
repair, modification or other service is completed and accepted by Company)
or ninety (90) business days after the MATERIAL is returned to a Customer,
whichever is later.
Supplier also warrants that software will record, store, process and
present calendar dates falling on or after January 1, 2000, in the same
manner and with the same functionality as it performed before January 1,
2000. This maintenance will be considered part of and covered under the
maintenance provisions of the Agreement at no additional charge to Company.
<PAGE> 31
Agreement No. WR71980064
Sheet 31 of 31
76. ENTIRE AGREEMENT
This Agreement shall incorporate the typed or written provisions on
Company's orders issued pursuant to this Agreement and shall constitute the
entire agreement between the parties with respect to the subject matter of
this Agreement and the order(s) and shall not be modified or rescinded,
except by a writing signed by Supplier and Company. Printed provisions on
the reverse side of Company's orders (except as specified otherwise in this
Agreement) and all provisions on Supplier's forms shall be deemed deleted.
Estimates or forecasts furnished by Company shall not constitute
commitments. The provisions of this Agreement supersede all contemporaneous
oral agreements and all prior oral and written communications, and
understandings of the parties with respect to the subject matter of this
Agreement.
Accepted (Date) 4-29 19 99
---------- ---
<TABLE>
MCK COMMUNICATIONS, INC. LUCENT TECHNOLOGIES INC.
<S> <C>
------------------------------------------------- ------------------------------------------------
By: /s/ Paul Zurlo By: /s/ R. A. Murphy
------------------------------------------------- ------------------------------------------------
Name (Print) Paul Zurlo Name (Print) R. A. Murphy
------------------------------------------------- ------------------------------------------------
Title CFO Title Purchasing Manager
------------------------------------------------- ------------------------------------------------
</TABLE>
ATTACHMENTS - The following Attachments are hereby made part of the Agreement:
Appendix A, Price Schedule
Appendix B, Specifications
<PAGE> 32
Agreement No. WR71980064
Appendix A
1 of 4
DEFINITY EXTENDER PRODUCT MATRIX
<TABLE>
<CAPTION>
COMCODE DESCRIPTION MODEL PEC PRICE
<S> <C> <C> <C> <C>
40733931 Analog DEFINITY Extender - Switch Module 845 2174-PSB [***]
This PEC will drive out 1 box, containing the stand-alone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25' long), and a System Administrator's
Guide.
407389907 Analog DEFINITY Extender - Remote Module 846 2174-RSM [***]
This PEC will drive out 1 box, containing the Remote Module,
a stand-alone power supply, a seven foot/two conductor
mounting cord, and a User's Guide.
407444934 POWER, MTCE. STND ALONE - 120V PS120 2174-MSP [***]
This PEC can be used to order a maintenance spare, or
replacement stand alone power supply for stand alone switch
modules, and/or stand-alone remote modules.
407445733 MOUNTING BRACKET - SINGLE UNIT WB102 2174-MTG [***]
This PEC will drive out one metal mounting bracket. This
bracket may be used to mount either one stand alone switch,
or one stand alone remote module, to a wall, desk, or other
suitable vertical surface.
407564905 EXTENDER-PBX-PLUG IN UNIT 855L1 2174-PCB [***]
This PEC is used to order one rack mountable DEFINITY
Extender Switch Module. This rack mountable module can not
be used on a stand-alone basis. A DEFINITY Extender
multi-mount (PEC #2174-BMM or #2174-48V), listed above, is
required for use with this unit.
407564921 EXTENDER MULTI-MOUNT - 120V AC 855L1 2174-BMM [***]
This PEC will provide one box containing one DEFINITY
Extender Multi-Mount Card Frame, and one 120 Volt/60 Hz
power supply. This multi-mount will hold up to twelve (12)
rack mountable DEFINITY Extenders (Analog Version). In
addition to providing a nesting place and power for the
plug- in DEFINITY Extender Modules, the multi-mount also
provides a means to connect the analog circuits and DCP
ports to the modules, A twenty five pair connecting cable,
of proper length for the particular installation, and the
appropriate connecting block(s) for the wall field must be
sourced locally.
407564939 EXTENDER MULTI-MOUNT - 48V DC 855L3 2174-48V [***]
This DC to DC converter should be ordered only for those
applications where input voltage will be 48 Volts Direct
Current. This product is not stocked, and is offered with an
eight week interval. This PEC will provide one box
containing one DEFINITYa Extender Multi-Mount Card Frame,
and one 48 volt DC to DC converter. This multi-mount will
hold up to twelve (12)
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
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Securities and Exchange Commission.
<PAGE> 33
Agreement No. WR71980064
Appendix A
2 of 4
<TABLE>
<S> <C> <C> <C> <C>
rack mountable DEFINITY Extenders (Analog Version). In
addition to providing a nesting place and power for the
plug-in DEFINITYa Extender Modules, the multi-mount also
provides a means to connect the analog circuits and DCP
ports to the modules. A twenty five pair connecting cable,
of proper length for the particular installation, and, the
appropriate connecting block(s) for the wall field must be
sourced locally.
407564897 PASSWORD ADMIN SOFTWARE 855L4 2174-PSA [***]
This PEC will drive out one Windows based, 3.5" floppy disk,
which is required to administer passwords for the rack
mountable DEFINITYa Extenders (Analog Version).
407578392 POWER SUPPLY SHELF 2174-PSS 2174-PSS [***]
This PEC is used to order a metal shelf, which can be used
as a flat surface on which to mount up to three Multi-mount
power supplies. It can be used with either the 120 volt AC
power supply, or the 48 volt DC to DC converter.
407578368 MTCE BULK POWER - 120V AC PSF110- 2174-PAC [***]
120VAC
This PEC can be used to order a maintenance spare, or a
replacement bulk stand alone power supply for maintenance
purposes.
407578384 MTCE BULK POWER - 48V DC 2174-PDC 2174-PDC [***]
This PEC ran be used to order a maintenance spare, or a
replacement bulk stand alone power supply (DC to DC
converter) for maintenance purposes.
407582899 EXTENDER MULTI-MOUNT - without power P855L2 2174-CFO [***]
407802966 ISDN DEFINITY Extender - Remote Module 876 2174-R2D [***]
This PEC will drive out 1 box, containing the Remote Module,
a stand-alone power supply, a seven foot/two conductor
mounting cord, and a User's Guide. Does not include TA.
407802958 ISDN DEFINITY Extender - Switch Module 875 2174-P2D [***]
This PEC will drive out 1 box, containing the standalone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25' long), and a System Administrator's
Guide. Does not include TA.
407802982 ISDN DEFINITY Extender for Western Europe-- Remote 876WE 2174-RWE [***]
Module
This PEC will drive out I box, containing the Remote Module,
a stand-alone power supply, a seven foot/two conductor
mounting cord, and a User's Guide. Does not include TA.
407802974 ISDN DEFINITY Extender for Western Europe- Switch Module 875WE 2174-PWE [***]
This PEC will drive out 1 box, containing the stand alone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25' long), and a
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 34
Agreement No. WR71980064
Appendix A
3 of 4
<TABLE>
<S> <C> <C> <C> <C>
System Administrator's Guide. Does not include TA.
407809433 ISDN DEFINITY Extender for the UK- Remote Module 876UK 2174-RUK [***]
This PEC will drive out 1 box, containing the Remote Module,
a stand-alone power supply, a seven foot/two conductor
mounting cord, and a User's Guide. Does not include TA.
407809425 ISDN DEFINITY Extender for the UK- Switch Module 875UK 2174-PUK [***]
This PEC will drive out 1 box, containing the stand-alone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25'long), and a System Administrator's
Guide. Does not include TA.
New
407924653 ISDN DEFINITY Extender - Switch Module 2100 2174-P1D [***]
This PEC will drive out 1 box. containing the stand-alone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25' long), and a System Administrator's
Guide. Includes integrated TA.
407924661 ISDN DEFINITY Extender - Remote Module 2101 2174-R1D [***]
This PEC will drive out 1 box, containing the Remote
Module, a stand-alone power supply, a seven foot/two
conductor mounting cord, and a User's Guide. Includes
integrated TA.
New
407975051 Analog DEFINITY Extender - Remote Module 1101 2174-RSP [***]
This PEC will drive out 1 box, containing the Remote Module,
a stand-alone power supply, a seven foot/two conductor
mounting cord, and a User's Guide.
407974831 Analog DEFINITY Extender - Switch Module 1100 2174-PSP [***]
This PEC will drive out 1 box, containing the stand-alone
Switch Module, a stand-alone power supply, a D8W cord (7'
long), a D2R cord (25' long), and a System Administrators
Guide.
407995489 Trade-In Analog DEFINITY Extender - Switch Module 1100T 2174-TI [***]
This PEC will drive out 1 box, containing the standalone
Switch Module, a stand-alone power supply, and a System
Administrators Guide.
407995497 Trade-In Analog DEFINITY Extender - Remote Module 1101T 2174-TIP [***]
This PEC will drive out 1 box, containing the Remote Module,
a stand-alone power supply, and a Users Guide.
============================================================================================================================
408039996 DEFINITY EXTENDER Rack System 3000 2174-RAK [***]
This PEC will provide one box containing one DEFINITY
Extender Rack System. This rack will hold up to twelve (12)
cards, either analog or ISDN. The rack includes a built-in
power supply and fan.
The rack also provides a means to connect the analog and
ISDN circuits and DCP ports to the modules. A
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 35
Agreement No. WR71980064
Appendix A
4 of 4
<TABLE>
<CAPTION>
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twenty five pair connecting cable, of proper length for the
particular installation, and the appropriate connecting
block(s) for the wall field must be sourced locally.
406040020 Switch Management Interface SOFTWARE SMI 2174-RAK [***]
This PEC will drive out two Windows based, 3.5" floppy disk,
used for simultaneous configuration, status,
troubleshooting, monitoring, and software upgrades for all
12 Switch Cards. The Switch Management Interface software is
year 2000 compliant. and requires Windows 95, or Windows NT
4.0 or higher to operate properly.
408039980 Analog DEFINITY Extender Rack Card 3100 2174-ACD [***]
This PEC will drive out one analog rack card that will
extend one remote user per card for a-total of 12 users per
rack.
408088714 ISDN DEFINITY Extender Rack Card 3200 2174-ICD [***]
This PEC will drive out one ISDN rack card that will extend
two remote users per card for a total of 24 users per rack.
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been filed separately with the
Securities and Exchange Commission.
<PAGE> 36
Agreement No. WR71980064
Appendix B
1 of 2
DEFINITY EXTENDER PRODUCT DESCRIPTIONS
ANALOG DEFINITY EXTENDER - MODEL 845/846
The Lucent Technologies DEFINITY(R) Extenders (Analog Version), one at the
switch location and one at a remote site, will allow customers to use
proprietary Lucent Technologies DCP Telephone Sets at locations other than where
the DEFINITY(R) ECS is located. The full function digital DCP terminal at the
remote site will look and perform exactly as it would if it were connected
directly to the DEFINITY(R) ECS.
This will be accomplished through the use of two (2) DEFINITY(R) Extenders
(Analog Version), and either a dial-up analog line, or a dedicated circuit.
Prior to the introduction-of this product, users were required to be co-located
with their DEFINITY(R) System in order to use a digital DCP telephone set.
The introduction of the DEFINITY(R) Extenders (Analog Version) provides a much
requested solution for our customers, who are experiencing ever increasing
pressure to provide remote office solutions for their employees.
ANALOG CENTRAL SITE RACK DEFINITY EXTENDER - MODEL 855
The Lucent Technologies DEFINITY(R) Extenders Central Site Rack System (Analog
Version) one at the switch location, will allow customers to use proprietary
Lucent Technologies DCP Telephone Sets at locations other than where the
DEFINITY(R) ECS is located. The full function digital DCP terminal at the remote
site will look and perform exactly as it would if it were connected directly to
the DEFINITY(R) ECS.
This will be accomplished by packaging analog switch module cards into a rack
system. Each rack has 12 slots across. This allows for reduced footprint, for
multiple installs and a reduction in the per port cost.
ISDN DEFINITY EXTENDER - MODEL 875/876
The ISDN DEFINITY Extender* system adjunct allows users to make and receive
calls from a remote location via an ISDN circuit while appearing to be in the
office. The ISDN DEFINITY Extender has two modules- the DEFINITY Extender Switch
Module and the DEFINITY Extender Remote Module.
Using an 8410D, 8410DR, 8411D, 8434, or a Callmaster(R) III (603E) voice
terminal, the Extender allows remote users to access system features such as
display, multiple call appearance, transfer, voice mail, message light and
conference. Outgoing calls can be made by the remote user using the DEFINITY
Enterprise Communications Server (ECS) network facilities. A terminal adapter is
required at both ends of an ISDN circuit to make an ISDN connection.
<PAGE> 37
Agreement No. WR71980064
Appendix B
2 of 2
The introduction of this product permits users to enter a Call-On-Demand (COD)
Mode which automatically drops the dial-up connection to the central site after
a predetermined period of time.
With the analog version of this product, users can also connect a remote digital
telephone set to their DEFINITY ECS. Because standard analog call connections
take much longer than the two seconds it takes to establish an ISDN call, users
must usually remain logged-on for the duration of their work tour.
NEW ISDN DEFINITY EXTENDER - MODEL 2100/2101
The (SDN DEFINITY Extender central site (model 2100) and remote site (model
2101) data modules improve upon the first generation of ISDN DEFINITY Extender
units (PEC 2174-R2D and 2174-P2D). The new units include an integrated terminal
adapter, support 56 Kbps or 64 Kbps of data on one B-channel, and deliver
improved voice quality on the second B-channel for the same price as the first
generation product.
NEW ANALOG DEFINITY EXTENDER - MODEL 1100/1101
The Analog DEFINITY Extender central site module (model 1100) and remote site
module (model 1101) data modules improve upon the first generation of Analog
DEFINITY Extender units (PEC 2174-PSB and 2174-RSM). The new units include an
advanced V.34 modem, which enhances voice quality and reduces retrains. The data
transmission rate supports up to 20 Kbps with voice traffic. In addition two new
features have been added: Call On Demand and Dial Back.
<PAGE> 1
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN REDACTED PROVISIONS OF
THIS AGREEMENT. THE REDACTED PROVISIONS ARE IDENTIFIED BY THREE ASTERISKS AND
ENCLOSED BY BRACKETS. THE CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 10.16
MASTER SUPPORT AGREEMENT
This Master Support Agreement is made this 28th day of June, 1999, (the
"Effective Date"), by and between MCK Communications, Inc. ("MCK"), located at
313 Washington Street, Newton, MA 02458 and VITAL NETWORK SERVICES, L.L.C.
("VITAL") 6 Rubber Avenue, Naugatuck, CT 06770.
WHEREAS, MCK markets certain equipment and services to Customers worldwide, and
in connection therewith offers on-site installation, maintenance and value-add
services to such Customers;
WHEREAS, VITAL provides on-site installation, maintenance and value-add
servicing of communications equipment worldwide;
WHEREAS, VITAL has a worldwide infrastructure to perform on-site installation,
maintenance and value-add services and desires to provide such services for MCK;
and
WHEREAS, MCK desires to engage VITAL as an independent contractor in performing
global on-site installation, maintenance and value-add services;
NOW, THEREFORE, in consideration of the mutual promise and covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, MCK and VITAL hereby agree as
follows:
1. DEFINITIONS.
1.1 "Affiliate" shall mean any entity worldwide, which directly or
indirectly controls, is controlled by or under common control with
VITAL.
1.2 "Advance Replacement" means a process to ship replacement Product
components in advance of receipt of failed/defective Product
components.
1.3 "Authorized Service Area" means an area within one hundred (100)
miles of a VITAL Service City.
1.4 "Customer" means the final end-user, purchaser or licensee who has
acquired Product(s) for their own internal use and not for resale,
remarketing, or redistribution, whether directly from MCK or through
other sources, and of whom MCK has received notification of and who is
entitled to support and maintenance services for such Products.
1.5 "First Level Support" means the ability to provide general Product
information and configuration support; collect relevant technical
problem identification information; perform base problem
determination; provide basic support on the standard protocols and
features; go on-site at Customer location to obtain information if
situation requires.
1.6 "Response" means the time period commencing upon MCK's or a
Customer's request for service hereunder and ending when the VITAL
Field Engineer is on-site.
1.7 "Hardware" means tangible Product made available to VITAL.
1.8 "Maintenance Release" or "Patch" means an incremental release of
MCK Software that provides maintenance fixes.
1.9 "Parts Depot" means MCK Parts Depot which provides support
required for this program.
<PAGE> 2
1.10 "Product" means both Hardware and/or Software listed in Appendix
A, which VITAL may support under the terms of this Agreement. Products
include Service Parts.
1.11 "RMA" means Return Material Authorization.
1.12 "Second Level Support" means First Level Support plus the ability
to support problem isolation and Product specification defect
determination; provide lab simulation and interoperability testing;
define an action plan; analyze traces; provide support on all
protocols and features; reproduce problems in a lab, diagnose problems
remotely and provide MCK with complete steps to reproduce a problem.
1.13 "Service(s)" means support provided by VITAL that includes but is
not limited to installation, maintenance and value-add programs.
1.14 "Service Part" means a component or sub-assembly of a Product,
excluding cables and/or all software, and is also referred to as Field
Replaceable Unit (FRU).
1.15 "Site" means and includes the premises where the Product is to be
installed or is located.
1.16 "Software" means the machine-readable object code software
programs licensed by MCK.
1.17 "Standard Business Hours" means 8:00 AM to 5:00 PM Local Standard
Time, Monday through Friday, excluding VITAL observed holidays.
1.18 "Third Level Support" means fixing or generating workarounds for
Hardware and Software bugs and troubleshooting bugs that were not
diagnosed during Second Level Support.
1.19 "Unrelated Services" means any other Service, in addition to the
Services authorized by MCK and provided by VITAL to a Customer.
1.20 "Update" means Maintenance Releases, Version Releases and/or
Major Releases which contain the same configuration as originally
acquired.
1.21 "Primary Provider" means MCK will promote VITAL internally and to
its Customers for worldwide service deliveries.
1.22 Valued- Added Services means Help Desk and telephone support
services.
2. SCOPE, SERVICE ORDERS AND TERM.
2.1 Authorization. MCK hereby appoints VITAL as a non-exclusive,
primary provider of on-site services to MCK's Customers located
throughout the world.
2.2 Support Services. MCK support services specified below at Section
4 are provided to VITAL as backup to the support staff of VITAL. VITAL
is primarily responsible for providing on-site support and telephone
support Services to MCK's Customers for whom VITAL receives a purchase
order hereunder.
2.3 MCK shall issue a purchase order to order Services. Such order
requires a Services schedule and/or Statement of Work for the specific
Customer or site location signed by MCK.
2
<PAGE> 3
2.4 Obligation to Customers. Other than the Services agreed to in this
document, neither VITAL nor MCK will make any obligation to Customers
on behalf of the other, nor commit the resources of the other to
Customers without the other's consent.
2.5 Implementation. MCK and VITAL will implement the terms of this
Agreement worldwide.
2.6 Term. This Agreement shall be effective as of the Effective Date
and shall remain in full force and effect for an initial term of
twenty-four (24) months, unless sooner terminated pursuant to Section
7. This Agreement shall be automatically renewed for additional
successive twelve (12) month terms unless either party gives the other
party at least ninety (90) days written notice of its intention not to
renew prior to the anniversary date of the Agreement.
2.7 Relationship of Parties. It is understood by the parties hereto
that VITAL is an independent contractor and not an employee or agent
of MCK and MCK is not an agent of VITAL. MCK will not provide fringe
benefits or insurance coverage on behalf of VITAL except for sales tax
payable by MCK as provided in Section 7.2. VITAL shall be responsible
for the withholding and/or payment, as required by law, of all
federal, state and local taxes imposed on VITAL and its employees due
to the performance of Services or any other obligation under this
Agreement.
3. VITAL OBLIGATIONS. VITAL shall provide the following Services to MCK:
3.1 On-site Support.
3.1.1 Services. VITAL shall provide on-site installation,
maintenance and value-add Services to MCK Customers during
contracted local business hours. Available Services, response
times and hours are identified in VITAL supplements provided
under separate cover.
3.1.2 On-site service includes: 1-800 number access,
round-the-clock travel to the Customer site, on-site labor,
problem diagnosis, fault isolation, equipment adjustment,
equipment replacement and on-line testing with VITAL standard
test equipment.
3.1.3 Special test equipment. Special test equipment
requirements identified by MCK will be provided by MCK to VITAL
prior to development of VITAL price calculations.
3.2 Technical Support.
3.2.1 VITAL will provide first and second Level Support.
VITAL shall establish problem priorities with MCK consistent with
problem priority definitions as described below. All problems
reported to VITAL technical support will be prioritized and
escalated to MCK based on such guidelines set forth by MCK.
(Reference Attachment C)
3.2.2 VITAL shall report unresolved cases to MCK within the
following time frames beginning at such time that a problem is
given a priority as defined below:
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Priority 1. No later than four (4) hours from initial
MCK notification to VITAL. Priority 1 calls defined as
responding to MCK / End Users while in a troubleshooting
mode.
Priority 2. No later than eight (8) business hours from
initial MCK notification to VITAL. Priority 2 call defined
as responding to MCK / End User configuration questions
during normal network operation.
Priority 3. No later than three (3) business days from
initial MCK notification to VITAL. Priority 3 calls defined
as responding to MCK / End User general technical questions
during normal network operation.
3.3 Software Distribution Rights. VITAL may distribute, on a
non-exclusive basis, MCK provided Updates and Patches to Customers.
3.4 Service Parts Inventory
3.4.1 MCK will consign local spare parts kits to VITAL
Logistics per VITAL recommendations and/or mutually agreed to
spare ratio. Repair of such consigned Product will be at MCK
expense.
3.4.2 VITAL will use all consigned service parts kits only
for the remedial maintenance of MCK Product. VITAL will not
resell service parts to Customers for upgrades, system expansion
or any other reason outside the scope of remedial maintenance.
3.4.3 A Logistics Management fee will be applied by VITAL to
the Customer only if there is not a contract arrangement in place
that requires VITAL to provide the consigned part. (See
Attachment B).
3.5 Consigned Product Receipt/Return; Notification.
3.5.1 VITAL is responsible for the following when receiving
consigned spare parts and/or Advance Replacements and returning
replaced Product under Section 4.1.3:
3.5.1.1 When receiving consigned spare parts,
Advance Replacements and/or returning replaced product under
Section 4.1.3, VITAL is responsible for the following:
VITAL Logistics will inspect all parts received from MCK to
verify any damage in transit. Damaged and/or mis-shipments
will be reported to MCK immediately but not longer than five
(5) business days of receipt.
3.5.1.2 Returns Coordination.
3.5.1.2.1 VITAL shall return all
defective Product(s) within ten (10) days of the
receipt of the replacement Product.
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3.5.1.2.2 VITAL shall coordinate the
return of all failed Product, freight and insurance
prepaid, to the MCK designated repair center.
3.5.1.2.3 VITAL shall comply with the
following RMA procedure:
i. VITAL will ensure all Products are properly
packaged prior to being shipped, and will include
a description of the failure and written
specification of any changes or alterations made
to the Product. Product returned to MCK will
conform in quantity and to the RMA request.
ii. VITAL shall tag each Product returned with a
transaction number and a brief description of the
problem.
3.5.2 For consigned products utilized during remedial
maintenance service as defined in Section 4.1.3, VITAL will be
responsible for the following:
3.5.2.1 Accountability. VITAL will provide and
retain records for all operational activities for MCK
Customers supported under this Agreement, including the
location(s) and hardware configuration of that
Customer.
3.5.2.2 Technical Assistance. Isolate product
problems to the Service Parts level, including
providing technical assistance to VITAL's field support
engineers which includes, at a minimum, hardware
problem identification and resolution.
3.5.2.3 Repackaging/Return of Service Parts. VITAL
will comply with the following return procedure.
i. VITAL will return defective Service Parts per
MCK's instructions.
ii. VITAL will repackage defective Service parts
and deliver to central pick-up location at the
Customer site.
iii. VITAL will inform MCK of pick-up location and
site contact/focal point for defective Service
Parts retrieval.
3.6 Help Desk Coordination. VITAL will represent MCK in answering and
coordinating a toll free customer service number. (See Attachment E)
3.7 Product Inspection. If required by MCK prior to putting previously
installed product under support, VITAL will visit the Customer to
ensure Product has been maintained in adherence to the maintenance
procedures as detailed in the applicable user information (supplied
with product upon initial sale/resale). Each Site visit will be
charged at current Time and Material rates in effect or pre-agreed to
price schedule.
3.8 Significant New Products. For significant new Products added to
the price list and/or not directly listed in Appendix A of this
Agreement, including Products which become MCK Products as a result of
an acquisition by MCK of another entity, MCK may require certain
certification, installation, or training requirements be completed by
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VITAL, as MCK would for all other MCK service providers, prior to
allowing VITAL to support such Products from MCK.
3.9 Focal Points. VITAL will identify at least one (1) individual to
manage the implementation of this Agreement, serve as focal point for
MCK's monitoring of support services provided under this Agreement,
and act as the focal point for day-to-day service issues.
3.10 Records. VITAL will maintain electronic records of Product under
coverage at all Customer sites.
3.11 Direct Customer Services Option. VITAL may resell its own brand
of services for Products directly to MCK customers under the following
circumstances: 1) In a multi-vendor environment where the MCK
installation base is less than 50% of the network and 2) if there is
not an existing service agreement directly with MCK in the first
twelve months after the initial installation. It is not the intention
of VITAL to directly solicit existing or potential Customers of MCK
for service of Products without prior approval of MCK. Under every
circumstance, VITAL will not solicit any such business unless MCK
gives prior approval. If VITAL is granted permission by MCK to quote
and support a customer as the prime to the extent permitted by law,
VITAL 1) will resell services at a higher rate than the published
prices in MCK's service offering and 2) guarantee MCK at least
comparable service revenue as detailed in the terms of Schedule B.
3.12 Personnel. VITAL shall select, employ, pay, supervise, direct and
discharge all VITAL personnel providing Services hereunder. VITAL
shall be solely responsible for the payment of all fringe benefits and
any other direct and indirect compensation for VITAL personnel
assigned to perform Services under this Agreement, as well as be
responsible for their worker's compensation insurance, employment
taxes, and other employer liabilities relating to such personnel as
required by law to be provided.
3.13 Staffing of Personnel. VITAL shall be solely responsible for
assigning personnel to perform the Services, which personnel will be
instructed by VITAL to perform the Services in a timely, efficient and
workmanlike manner. MCK shall have the right to request that personnel
not performing Services properly and in accordance with reasonable
technical or general work standards who do not promptly correct such
performance be replaced by VITAL with competent and suitable
personnel.
4. MCK OBLIGATIONS. MCK will provide the following services to VITAL:
4.1 Support for VITAL includes technical support, training, and
software support and hardware/spare support as follows:
4.1.1 Technical Support.
4.1.1.1 MCK shall provide 24-hour 7- day a week
access to MCK Engineering Resources. MCK will respond
to VITAL within one half (1/2) hour to all calls
received during Standard Local Business hours and to
Priority 1 and 2 calls received outside Standard Local
Business Hours. For Priority 3 calls received outside
Standard Local Business Hours, MCK will respond no
later than the next business day. (Reference 3.2.2 for
Priority definitions)
4.1.1.2 MCK will provide Third Level Support to
VITAL.
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4.1.1.3 Once a problem is reported by MCK or a
Customer, MCK and VITAL will work closely together to
resolve the Customer problem. It is VITAL's
responsibility to log the incoming fault report
received by VITAL and to provide the necessary local
on-site and headquarters technical resources to resolve
problems reported by MCK within the scope of this
Agreement.
4.1.1.4 If a problem is escalated back to MCK,
VITAL will assign a local technical support person to
work the resolution of the problem with MCK. MCK will
supply the appropriate level of technical resources,
based on problem priority and elapsed time, to assist
VITAL with problem resolution and to ensure adherence
to MCK's Problem Prioritization and Escalation
Guideline as described in Attachment C. During such
problem escalation, if it is mutually agreed that MCK
on-site technical resources are required for final
resolution, MCK will dispatch the necessary level of
technical support to assist VITAL at no charge. VITAL
will ensure a local technical support person is
available to work with MCK on-site. VITAL, with the
assistance of MCK, will be responsible for providing
the Customer with the necessary updates for resolution
of the problem.
4.1.2 Software and Software Support
4.1.2.1 Software Releases. MCK will provide
Updates and one (1) paper copy of supporting
documentation for Product supported under this
Agreement as identified in Attachment A for VITAL lab
use. For Product noted by an asterisk, only Maintenance
Releases are available. MCK shall also provide
supporting documentation on Disk/CD ROM, upon request,
and if available. Additional paper copies of supporting
documentation may be reproduced by VITAL.
4.1.2.2 Release Support. MCK, in meeting support
obligations, may require VITAL to upgrade its Customer
to a supported release which may be charged at VITAL's
current Time and Material rates or agreed to price
schedule to MCK.
4.1.2.3 Software Patches. When required to fix a
fault, MCK will provide new Software to VITAL to
initiate corrective action or provide a
network-bootable Software image, as VITAL and MCK
agree.
4.1.2.4 Software Updates and/or Patches will be
provided to VITAL for distribution only on Product for
which Customer is licensed to use the Software and
pursuant to a current maintenance agreement for such
Product.
4.1.3 Hardware Support. MCK shall provide the following
hardware replacement service at no charge for Product supported
by VITAL and identified in Appendix A.
4.1.3.1 Product used for replacement may be new or
equivalent to new, at MCK's discretion.
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4.1.3.2 Product used for replacement will be
repaired by MCK at no charge to VITAL.
4.1.3.3 Product documentation will be provided to
VITAL at no charge.
4.1.3.4 End of Life. For the duration of this
Agreement, MCK agrees to provide Hardware replacement
support for three (3) years following the date of
announced end of life of the Product.
4.2 Training and Education
4.2.1 As part of the initial training, MCK shall train a
minimum of four (4) VITAL central technical support persons with
MCK recommended training course(s). Up to four training course(s)
will be provided by MCK at no cost to VITAL. Training will be
held at VITAL's headquarters in Naugatuck, Connecticut and/or
regional offices throughout the world; dates and locations to be
determined by mutual agreement. Employee expenses will be borne
by VITAL. VITAL agrees to have at least eight (8) trained
regional technical support employees within two (2) months from
the effective date of this Agreement.
4.2.2 MCK shall train additional employees as mutually
agreed necessary to support Customer contract obligations covered
under contracted VITAL support programs. Additional training for
field staff will be the responsibility of VITAL based on
like/same hardware and software.
4.2.3 If requested by VITAL, MCK will provide a
Train-the-Trainer Program at no charge that allows VITAL
instructors to train internal staff on MCK's Products.
4.2.4 Alternative Training. Videos, CD-ROM's or diskettes,
if available by MCK, will be provided to VITAL at no charge to
train field personnel and will be returned to MCK upon completion
of training.
4.3 Alternative Provisioning Purchase of Product to VITAL
4.3.1 MCK will permit purchase of Service Parts for VITAL to
provide support to VITAL direct Customers. MCK will sell to VITAL
Service Parts at MCK's then current published list price, less a
[***] discount.
4.3.2 To assist VITAL in setting up a working laboratory for
network simulation and integration analysis, MCK agrees to
consign VITAL an appropriate number of laboratory units per year.
VITAL agrees to use such units solely for support purposes under
the terms of this agreement and not for resale purposes.
4.4 Record Keeping. Product Configuration and Location Change Notice.
MCK will provide Notice of or any change in i) the Hardware or
Software component and ii) the location of any Customer Product. If
notification is not provided to VITAL, VITAL will invoice for
additional charges due to changes in product configuration or
location, calculated from the date of installation.
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
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5. INTELLECTUAL PROPERTY
5.0 Ownership of Property. Title to and ownership of any and all
intellectual property utilizing Product information (e.g. patents,
copyrights, trademarks)), including but not limited to Hardware,
Software, Updates, Patches, reports, code and data, developed and/or
created by VITAL in connection with this Agreement shall immediately
vest in MCK and VITAL shall have no rights to such property except a
nonexclusive license to use in connection with service of Products.
6. SERVICE EXCLUSIONS
Services provided by VITAL do not include nor shall VITAL be
responsible for any of the services listed below. VITAL shall provide
MCK with a time and materials quotation to perform such services if
requested by MCK.
6.1 Any customization of Software.
6.2 Support or replacement of Product that is altered, modified,
mishandled, destroyed or damaged by natural causes or damaged during
unauthorized use.
6.3 Services to resolve Software or Hardware problems resulting from
third party product or causes beyond MCK's control.
6.4 Services for non-MCK Software installed on any MCK Product.
6.5 Any Hardware upgrade required to run new or updated Software.
6.6 Non-contract related on-site diagnostics and/or remedial services
unless authorized by MCK.
7. CHARGES AND PAYMENTS
7.1 VITAL shall invoice MCK for the Contract Price for Services, as
defined by Appendix B, performed and for any amounts due for Unrelated
Services performed according to the payment schedule described in
Attachment B. Each invoice shall include supporting documentation and
details of the Services and Unrelated Services performed. MCK shall
pay any amounts due within thirty (30) days of receipt thereof.
7.2 The stated charges, prices, fees or other amounts to be invoiced
and paid pursuant to this Agreement, do not include any applicable
Federal, State, County or local sales, use, property, excise taxes
customs, import and export duties, VAT or other tax however
designated, regardless of how or on whom the tax is levied and whether
such tax is based on any charge, price, fee or other amount, (the
Product, or service or their use) pursuant to this Agreement. Any such
taxes and interest on them (except taxes based on VITAL's or MCK' net
income) required to be paid by VITAL shall be added to the invoices.
Any taxes to be paid by MCK, but in fact paid by VITAL, shall be
reimbursed to VITAL. In the event any taxes to be paid by MCK, but
levied on VITAL, are not paid until audit, VITAL may then invoice
Customer. Customer may submit a certificate of Exemption for each
state in which it is registered to do business and exempted from
payment of any tax, and failure to do so does not imply the
responsibility as that of VITAL.
7.3 Unrelated Service. VITAL shall not perform any Unrelated Service
without the prior written or verbal consent of an authorized MCK
representative. MCK will supply a list of authorized individuals under
separate cover. If MCK agrees that such Unrelated
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Service is necessary for a Customer, VITAL shall supply such Unrelated
Service and invoice MCK therefore at the rates set forth in Attachment
B.
7.4 Invoicing. Invoices for installation and Unrelated Service shall
be rendered monthly. Invoices for maintenance and value-add contract
Services shall be rendered quarterly, in advance subject to the
minimum payments under Section 7.5.
7.5 Minimum Payments. As defined by Appendix B in consideration of
VITAL's entering into this Agreement and commitment to provide
services, MCK owes VITAL minimum quarterly payments that aggregate
$250,000 for Year 1 of the contract and $200,000 for Year 2 of the
contract. Any service revenue generated by VITAL from MCK contracts is
automatically applied against these minimum payments. Any service
revenue generated by MCK in Year 1 that is in excess of $250,000 is
automatically applied against MCK's Year Two minimum payment. If
revenue meets or exceeds the total twenty four (24) month commitment
of $450,000 anytime during the contract term, MCK has met all its
minimum revenue obligations to VITAL.
7.6 In addition to other remedies available to VITAL, overdue invoices
may bear a late payment charge at the rate of one (1) percent
commencing on the 31st day, but in no event in excess of the lawful
maximum. In the event an invoice is more than sixty (60) days past due
and such invoice has not been paid by MCK within sixty (60) days after
the receipt by MCK of written notice that such invoice is more than
sixty (60) days due, VITAL may withhold performance hereunder until
such invoice is paid.
7.7 Books and Records; Audits. VITAL shall maintain full and accurate
books, records and accounts of all Services rendered pursuant to this
Agreement in such a way as to disclose clearly and accurately the
nature and detail thereof, including without limitation such
accounting information as is necessary to support the reasonableness
of charges under this Agreement and such additional information as MCK
may reasonably request for purposes of its internal bookkeeping and
accounting operations. VITAL shall keep such books, records and
accounts insofar as they pertain to the computation of charges
hereunder available at its principal offices for audit, inspection and
copying by MCK and persons authorized by MCK during reasonable
business hours.
MCK shall have the right, on two (2) occasions per each twelve (12)
month period of this Agreement, to conduct an audit of the relevant
books, records and accounts of VITAL upon giving reasonable notice of
its intent to conduct such an audit. In the event of such audit, VITAL
shall give to the party requesting the audit its cooperation and
access to all books, records and accounts reasonably necessary to
audit. If during the course of any such audit it is determined that
the charges actually invoiced to MCK by VITAL are more than [***]
percent greater than the charges which should have been invoiced
according to such audit, then VITAL shall (1) pay to MCK the sum of
(x) the difference between such audited invoice amount and the amount
actually invoiced and (y) interest calculated from the data of the
invoice and (2) reimburse MCK for all costs associated with such audit
not to exceed the amount of the overcharge. If it is determined that
VITAL was underpaid then MCK shall pay to VITAL the amount of the
underpayment.
8. TERMINATION.
8.1 This Agreement may be terminated immediately by either party
through written Notice under any of the following conditions:
8.1.1 By either party if the other party breaches any of the
material provisions of this Agreement and fails to remedy such breach
within thirty (30) days after written notification by the other party
of such breach.
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
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8.1.2 By VITAL if MCK fails to pay any amount when due and such
failure continues for sixty (60) days after written notification by
VITAL of such past due amount except for quarterly advance payments
under Section 7.4 if such failure continues for sixty (60) days after
the quarterly due date.
8.2 Provisions after Termination of the Agreement.
8.2.1 Upon termination of this Agreement (i) each party shall
immediately return to the other all Confidential Information (as
defined below) of the other party in its possession and (ii) VITAL
shall return to MCK immediately after the effective date of
termination all MCK-owned consigned spare parts
9. SOFTWARE LICENSE AND PROPRIETARY RIGHTS.
VITAL acknowledges that it may receive Software as a result of
services provided under this Agreement. VITAL agrees that it is
licensed to distribute such Software only on Product covered under the
Services. Except as otherwise specified, VITAL shall not: (i) copy, in
whole or in part, Software or documentation; (ii) reverse compile or
reverse assemble all or any portion of the Software; or (iii) rent,
lease, distribute, sell, or create derivative works of the Software.
10. CONFIDENTIAL INFORMATION.
10.1 As used in this Agreement, "Confidential Information" means any
business or technical information disclosed, either written or orally,
by one party to the other under this Agreement provided, that if the
information disclosed is in writing, it must be clearly labeled as
"Confidential", "proprietary" or with a similar legend, and if the
information is disclosed orally, it must be i) identified as
Confidential Information at the time of disclosure by the disclosing
party.
10.2 Confidential Information does not include any information which:
10.2.1 is, or subsequently becomes, legally and publicly
known or readily ascertainable by the public, and through no
wrongful act of the receiving party;
10.2.2 is rightfully obtained and received by receiving
party from a third party without any obligation of
confidentiality;
10.2.3 is independently developed by the receiving party or
for the receiving party without access to or benefit from the
Confidential Information; or
10.2.4 is disclosed to a third party by the disclosing party
without restriction on disclosure.
10.3 Each party agrees to hold the other party's Confidential
Information in strict confidence and not to disclose such Confidential
Information to any third party except as specifically authorized by
this Agreement or by the other party in writing. Each party may
disclose the other's Confidential Information to its employees who are
under confidentiality obligations to it and who have a bona fide need
to know such Confidential Information, but only to the extent
necessary to carry out the purposes of this Agreement.
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10.4 Both parties acknowledge and agree that both parties list of
employees is confidential and shall prevent the unauthorized
disclosure of this Confidential Information. Each party shall use at
least the same degree of care to protect such information as it uses
to protect its own confidential or proprietary information of a
similar nature but in no event less than reasonable care. Each party
shall use such information solely for the purposes contained in this
Agreement, and shall make no other use of such information.
10.5 All Confidential Information disclosed hereunder is and shall
remain the property of the disclosing party. No right or license is
granted other than as expressly set forth in this Agreement. These
Section 10 obligations shall survive the expiration or termination of
this Agreement.
11. MCK LIABILITY AND INDEMNIFICATION.
11.1 MCK agrees to defend and indemnify VITAL, its officers, employees
and Affiliates from and against all claims, damages, liabilities,
awards, judgments and settlements against them of whatever nature for
damage to tangible personal property and bodily injury (including
death) arising out of or resulting from the authorized use of the
Product as provided to the Customer or VITAL by MCK in accordance with
the terms of this Agreement.
11.2 MCK, at its own expense, shall defend and indemnify VITAL and its
Affiliates against claims that the authorized repair, installation and
possession of a Product by VITAL in accordance with the terms of this
Agreement infringes a U.S. patent or copyright or misappropriates
trade secrets of a third party provided VITAL (i) gives MCK prompt
notice of such claim, (ii) gives MCK sole control of any defense and
settlement of such claims and (iii) provides any and all reasonably
required assistance requested by MCK at MCK's expense.
11.3 MCK's obligations under this Section 11 shall not extend to
liabilities of VITAL, VITAL officers, employees, or VITAL Affiliates
which are caused by VITAL's negligence or intentional misconduct in
performance of its obligations under this Agreement.
11.4 VITAL shall give MCK prompt notice of any suit or other
proceeding against VITAL for which VITAL may wish to seek
indemnification hereunder. In addition, the parties agree not to
settle or compromise any claim or cause of action, which may affect an
interest of the other party, without the prior written approval of the
other party, providing such approval shall not be unreasonably
withheld.
11.5 MCK shall have full control of the defense of any claim or cause
of action for which it is obligated to indemnify VITAL, and for all
negotiations for its settlement or compromise. VITAL shall reasonably
cooperate with MCK, at MCK's expense, in the defense of the action.
11.6 Non-Solicitation. During the term of this Agreement and
for one (1) year thereafter, MCK shall not, without the prior written
consent of VITAL, directly or indirectly solicit, recruit, hire or use
the services of any VITAL employee whose identity is learned hereunder
so long as such employee is employed by VITAL and for sixty (60) days
thereafter. In the event of breach of this obligation MCK shall
promptly pay to VITAL, as liquidated damages and not as a penalty, an
amount equal to two (2) times such employee's total annual
compensation determined as of the date of the breach.
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11.7 IN NO EVENT SHALL MCK OR ANY MCK AFFILIATE BE LIABLE FOR ANY
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS, OR LOST
DATA, OR ANY OTHER INDIRECT DAMAGES EVEN IF MCK HAS BEEN INFORMED OF
THE POSSIBILITY THEREOF OR WHETHER SUCH EXPENSES OR DAMAGES ARE
SUFFERED INTERNALLY BY VITAL OR ARE PAID BY VITAL TO A THIRD PARTY.
12. VITAL LIABILITY AND INDEMNIFICATION.
12.1 VITAL agrees to defend and indemnify MCK and its directors,
stockholders, officers and employees from and against all claims,
damages, liabilities, awards, judgments, and settlements against them
of whatever nature for damage to tangible property and bodily injury
(including death) arising out of VITAL's negligence, willful
misconduct or breach with respect to the performance of its or its
obligations under this Agreement.
12.2 IN NO EVENT SHALL VITAL OR ANY VITAL AFFILIATE BE LIABLE FOR ANY
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS, OR LOST
DATA, OR ANY OTHER INDIRECT DAMAGES EVEN IF VITAL HAS BEEN INFORMED OF
THE POSSIBILITY THEREOF OR WHETHER SUCH EXPENSES OR DAMAGES ARE
SUFFERED INTERNALLY BY MCK OR ARE PAID BY MCK TO A THIRD PARTY.
12.3 VITAL's obligations under this Section shall not extend to
liabilities of MCK and its officers and employees which arise out of
MCK's negligence or intentional misconduct or breach of third party
intellectual property rights in the design, manufacture, distribution,
installation or servicing of the Product.
12.4 MCK shall give VITAL prompt notice of any suit or other
proceeding instituted against MCK for which MCK may wish to seek
indemnification hereunder. The parties agree to cooperate in the
defense of any such action or proceeding. In addition, the parties
agree not to settle or compromise any claim or cause of action, which
may affect an interest of the other party, without the prior written
approval of the other party.
12.5 THE ENTIRE CUMULATIVE LIABILITY OF EITHER PARTY's EXCLUSIVE
REMEDY FOR DAMAGES FROM ANY CAUSE related to or arising out of this
Agreement, its making, performance or interpretation, including claims
of Customers related to performance of Services by VITAL, regardless
of the form of action, whether in contract or tort and including
negligence, shall not exceed the actual amount paid by MCK for
Services directly related to the specific claim, during the twelve
(12) month period immediately prior to MCK's written notice of a
claim.
12.6 Non-Solicitation. During the term of this Agreement and for one
(1) year thereafter, VITAL shall not, without the prior written
consent of MCK, directly or indirectly solicit, recruit, hire or use
the services of any MCK employee whose identity is learned hereunder
so long as such employee is employed by MCK and for sixty (60) days
thereafter. In the event of breach of this obligation VITAL shall
promptly pay to MCK, as liquidated damages and not as a penalty, an
amount equal to two (2) times such employee's total annual
compensation determined as of the date of the breach.
13. INSURANCE
13.1 VITAL shall maintain during the term of this Agreement at VITAL's
expense, commercial general liability insurance including Property
Damage insurance and
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Personal Injury insurance in such amounts and upon such terms which
are reasonably satisfactory to MCK and with MCK named as an additional
insured for purposes of this Agreement.
13.2. Workers Compensation: VITAL will maintain Workers Compensation
insurance to the statutory amount and Employer's Liability of at least
$1,000,000.
14. GENERAL
14.1 Assignments. Neither this Agreement nor any rights under this
Agreement, other than monies due or to become due, shall be assigned
or otherwise transferred by either party (by operation of law or
otherwise) without the prior written consent of the other party. This
Agreement may be transferred or otherwise assigned to any entity which
owns or acquires all or substantially all of the assets of either
party or to any Affiliate with the prior written approval of the other
party, which approval shall not be unreasonably withheld. This
Agreement shall bind and inure to the benefit of the successors and
permitted assigns of the parties.
14.2 Warranty.
14.2.1 VITAL shall not make any warranty commitment, whether
written or oral, on MCK' behalf.
14.2.2 VITAL warrants that the Services provided shall be
performed in a competent manner by qualified, trained maintenance
personnel and shall be free from defects in workmanship for
thirty (30) days following its provision.
14.3 Modifications. This Agreement may not be changed or modified in
any way subsequent to the first date of execution except by an
instrument in writing cosigned by authorized representatives of both
parties. No contract or agreement entered into after the Effective
Date shall amend by implication any provision of this Agreement.
14.4 Severability. If any provision of this Agreement is or becomes
illegal, invalid or void under any applicable state or federal law
under which performance hereunder is required, such provision shall be
considered severable, and the remaining provisions hereof shall not be
impaired, and this Agreement shall be interpreted as far as possible
so as to give effect to its stated purpose.
14.5 Defined Relationship. Other than the services agreed to in this
document, neither party is hereby designated nor appointed an agent to
the other and neither party shall have any authority, either express
or implied, to create or assume any agency or obligation on behalf of
or in the name of the other. The relationship of VITAL and MCK shall
be that of independent contractors and, except as expressly set forth
herein, neither party shall have any responsibility for or obligations
to the employees of the other.
14.6 Disclosure of Agreement. VITAL acknowledges and agrees that in no
event shall any of the information contained in this Agreement be
disclosed to anyone other than VITAL's employees with a need to know.
Neither party shall disclose, advertise, or publish the terms and
conditions of or transactions under this Agreement without the prior
written consent of the other party, which will not be unreasonably
withheld.
14.7 Trademarks. Neither VITAL or MCK will use each other's trademark
or trade name in any manner except as mutually agreed upon. Neither
VITAL or MCK have any right, title or interest in each other's
trademark or trade name. Both parties agree to allow
14
<PAGE> 15
the other party to use their name and logo on the other parties
respective web site upon such terms and conditions as the parties
hereto may agree upon.
14.8 Force Majeure. Neither party shall be deemed to be in default nor
be responsible for delays or failures in performance resulting from
acts beyond the reasonable control of such party. Such acts shall
include, but not be limited to, acts of God, strikes, lockouts, riots,
acts of war, epidemics, governmental action or inaction, trade
embargoes, fire, communication line failures, power failures,
earthquakes, or other disasters.
14.9 Notices. Any Notices required or authorized to be given shall be
deemed to have been given when received via certified or registered
first-class mail, postage prepaid, or via any other public or private
delivery service providing for written acknowledgment of receipt to
the address set forth on the signature page of this Agreement.
14.10 Waiver. No delay, failure or refusal on behalf of either party
to require or demand any performance or obligation hereunder, or to
exercise any right or remedy to which it may be or become entitled,
shall constitute or be deemed a waiver or relinquishment thereof, or
of any other right, demand or obligation, and shall not prejudice
either party's right to demand or insist upon any other prior or
subsequent performance or obligation hereunder.
14.11 Disputes and Governing Law. The rights and obligations of the
parties and all interpretations and performance of this Agreement
shall be governed in all respects by the laws of the Commonwealth of
Massachusetts except for its rules with respect to the conflict of
laws.
14.12 Paragraph Headings. Paragraph headings contained in this
Agreement are for ease of reference only and shall not affect the
interpretation or meaning of this Agreement.
14.13 Integration. This agreement, including the attached Exhibits,
and any amendments as may from time to time be agreed and integrated
is intended to be the sole and complete statement of the obligations
of the parties and supersedes any other negotiation, agreement or
understanding, whether written or oral, that may have been made or
entered into with regard to the subject matter hereof by MCK or VITAL
or by any officer or other representative of either party. This
Agreement and the performance of the parties pursuant to it shall not
affect any other Agreement between them which relates to matters
extraneous hereto.
14.14 Conflicts. In the event that any specific wording of this
Agreement shall conflict with any provision or wording of any printed
terms and conditions contained on Purchase Orders, acceptance forms,
procurement and functional specifications, the wording of this
Agreement shall prevail.
14.15 Survival. Sections 8, 10, 11 and 12, shall survive termination
of this Agreement.
15
<PAGE> 16
MCK COMMUNICATIONS, INC. VITAL NETWORK SERVICES, L.L.C.
By: /s/ Woody Benson By: /s/ Philip John Woods
------------------------------ -------------------------------
Name: Woody Benson Name: Philip John Woods
---------------------------- -------------------------------
Title: CEO Title: President
---------------------------- -------------------------------
Address: 313 Washington Street Address: 6 Rubber Avenue
Newton, Ma 02458 Naugatuck, Ct 06770
Date: 6/28/99 Date: 6/29/99
---------------------------- -------------------------------
16
<PAGE> 17
APPENDIXES
Appendix A: MCK Product List (Accelerated to provide Hard/Soft version)
Appendix B: VITAL Payment Schedule/Minimum Commitments (provided in prior
e-mail)
Appendix C: MCK Escalation/Priority Schedule- TBD
Appendix D: MCK Support Services - TBD
Appendix F: VITAL Installation & Maintenance Service Descriptions
17
<PAGE> 18
APPENDIX A: MCK PRODUCT LIST
<TABLE>
<CAPTION>
SWITCH UNIT REMOTE UNIT
<S> <C> <C>
Branch Office EXTender 6000 E-6000-SLM08 E-6000-RLM08
(Definity Compatible)
Branch Office EXTender 6000 E-6000-SNM08 E-6000-RNM08
(Meridian/Norstar Compatible)
Branch Office EXTender 6000 E-6000-SEM08 E-6000-REM08
(Neax Compatible)
</TABLE>
18
<PAGE> 19
[VITAL NETWORK LOGO]
APPENDIX B - REVENUE SPLITS & PRICING SCHEDULE
NOTE: VITAL NETWORK SERVICES CHARGES MCK THE PERCENTAGE OF END-USER LIST PRICE
OR FLAT RATE AS INDICATED.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TOLL FREE/ HELP DESK CHARGE TO MCK
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
I. 8 X 5 HELP DESK [***] (annual)
24 X 7 HELP DESK [***] (annual)
(OPTIONAL - DOES NOT INCLUDE COST OF LINE)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SECTION SERVICE DESCRIPTION CHARGE TO MCK
- --------------------------------------------------------------------------------------------------------------------------
I. LOGISTICS MANAGEMENT
NON MAINTENANCE CUSTOMERS
PRICE PER STOCKING LOCATION [***]
- --------------------------------------------------------------------------------------------------------------------------
SECTION SERVICE DESCRIPTION END USER PRICE MCK VITAL
(% OF PRODUCT LIST)
- --------------------------------------------------------------------------------------------------------------------------
II. HARDWARE INSTALLATION SERVICES
(PRICING REFLECTS ZONE A & B ONLY)
BUSINESS DAY (1ST UNIT) TBD [***] [***]
ADDITIONAL UNITS* TBD
NON BUSINESS DAY (1ST UNIT) TBD
ADDITIONAL UNITS* TBD
SITE SURVEY **(PER REQUEST)
*ADDITIONAL UNIT PRICING APPLIES IF
INSTALLED AT THE SAME SITE. MINIMUM
INSTALLATION CHARGE IN $[***].
**FEE IS WAIVED IF INSTALLATION IS [***]
PURCHASED AT TIME OF SITE SURVEY REQUEST
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
III. SOFTWARE INSTALLATION (ON-SITE) SERVICES
LOAD S/W, CONFIGURE & TEST
BUSINESS DAY [***] [***] [***]
NON BUSINESS DAY [***] [***] [***]
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
IV. REMOTE SERVICES
TS/SOFTWARERELEASE (NO LABOR) /ADVANCED [***] [***] [***]
REPLACEMENT
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
V. MAINTENANCE SERVICES
(PRICING REFLECT ZONE A & B ONLY)
BASIC 8 X 5 (M-F) [***] [***] [***]
PREMIUM 7 X 24 (PENDING AVAIL)
ALL MAINTENANCE SERVICES LISTED ABOVE CARRY [***]
FOUR (4) HOUR RESPONSE FROM ZONE A
LOCATIONS TO THE END-USER, LOGISTICS
MANAGEMENT INCLUDED.
MCK IS RESPONSIBLE FOR CONSIGNMENT OF
SPARING.
- --------------------------------------------------------------------------------------------------------------------------
SECTION SERVICE DESCRIPTION END USER MCK VITAL
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
<PAGE> 20
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
VI. DEDICATED FIELD ENGINEER
ONE (1) YEAR (40 HOURS PER WEEK)* [***] [***] [***]
*PRICE BASED ON LEVEL OF ENGINEER REQUIRED
- --------------------------------------------------------------------------------------------------------------------------
ZONES TO END USER TO END USER
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VII. TIME AND MATERIAL SERVICES (TO END USER) TRAVEL (FIXED LABOR(PER HOUR)
(CONTRACT CUSTOMERS OUTSIDE SCOPE OF RATE)
CONTRACT)
ZONE A [***]
ZONE B [***]
BUSINESS DAY* ZONE C [***]
[***]
ZONE A [***]
ZONE B [***]
NON BUSINESS DAY ZONE C [***]
[***]
[***]
HOLIDAYS & WEEKENDS
[***]
NON- CONTRACT CUSTOMER RATES
ZONE A [***]
ZONE B [***]
BUSINESS DAY ZONE C [***]
[***]
ZONE A [***]
ZONE B [***]
NON BUSINESS DAY ZONE C [***]
[***]
HOLIDAYS & WEEKENDS [***]
ZONE A = 50 MILE RADIUS OF VITAL SERVICE
CENTER
ZONE B=51-100 MILE RADIUS OF VITAL SERVICE
CENTER
ZONE C=100+ RADIUS OF VITAL SERVICE CENTER
*ALL TYPE CALLS CARRY A [***]
MINIMUM EXCEPT WHERE SPECIFIED
- --------------------------------------------------------------------------------------------------------------------------
DISCOUNT TO MCK LIST PRICES NOTE:
- --------------------------------------------------------------------------------------------------------------------------
VIII. BLOCK OF HOURS (TO MCK)
- TIME & MATERIAL [***] [***] [***]
- PROJECT MANAGEMENT [***] [***]
- PROFESSIONAL SERVICES [***]
- CUSTOMER SERVICE [***] [***]
- OTHER [***]
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
20
<PAGE> 21
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
END USER MCK VITAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IX. PROFESSIONAL SERVICES/ PROJECT MANAGEMENT CUSTOM QUOTE REQUIRED [***] [***]
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions.
The confidential redacted portion has been omitted and filed separately
with the Securities and Exchange Commission.
21
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SECTION SERVICE DESCRIPTION MCK CHARGE TO MCK
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
X. TECHNOLOGY TRAINING
TRAIN THE TRAINER (PROVIDED BY MCK) [***] [***]
INITIAL CONSULTATION/COURSE INVESTIGATION -----------------> [***]
COURSE DEVELOPMENT* -----------------> [***]
COURSE OFFERING IN NAUGATUCK#
-----------------> [***]
COURSE OFFERING ON CUSTOMER OR MCK PREMISES* [***]
----------------->
*TRAVEL & EXPENSES, SHIPPING WILL BE CHARGED AT ACTUAL
COSTS. SET UP WILL BE BILLED AT [***]
#DEPENDENT ON SUBJECT- PLAN FOR 3-5 DAY COURSE OFFERINGS.
MINIMUM REQUIREMENT, (4) STUDENTS PER CLASS.
(1) BUDGETARY ONLY-EACH PROJECT TO BE REVIEWED ON MERIT.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with
the Securities and Exchange Commission.
22
<PAGE> 23
VITAL NETWORK SERVICES / MCK
START UP FEES, CONDITIONS & PAYMENT SCHEDULES
Contract Commencement is JULY 1, 1999. The initial contract term is TWENTY-FOUR
(24) MONTHS.
PAYMENT SCHEDULE (1999-2001)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR 1 YEAR 2
(PAYMENT IS QUARTERLY IN ARREARS) (PAYMENT IS QUARTERLY FOR ACTUAL SERVICES RENDERED)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QTR 1 July, Aug, SEPT 1999 30K QTR 1
- --------------------------------------------------------------------------------------------------------------------------
QTR 2 Oct, Nov, DEC 1999 50K QTR 2
- --------------------------------------------------------------------------------------------------------------------------
QTR 3 Jan, Feb, MAR 2000 75K QTR 3
- --------------------------------------------------------------------------------------------------------------------------
QTR 4 Apr, May, JUN 2000 95K QTR 4
- --------------------------------------------------------------------------------------------------------------------------
July 2000- June 2001
- --------------------------------------------------------------------------------------------------------------------------
Total 250K 12 Month Target 200K
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONDITIONS:
1. MCK MINIMUM COMMITMENT TO VITAL NETWORK SERVICES IS 250K IN YEAR 1 AND
200K IN YEAR 2.
2. PRICING WILL BE REVIEWED EVERY 250K AND IS SUBJECT TO CHANGE UPON
MUTUAL AGREEMENT.
3. IF ACTUAL REVENUE EXCEEDS QUARTERLY TARGETS IN YEAR 1, THE NEXT QUARTERS
INVOICE WILL BE ADJUSTED ACCORDINGLY. THE GOAL FOR THE FIRST TWELVE (12)
MONTH PERIOD IS TO EQUAL OR EXCEED 250K. IN YEAR 2, PAYMENT WILL BE
QUARTERLY IN ARREARS FOR ACTUAL SERVICES RENDERED. IF THERE IS A SHORTFALL
OF THE TWELVE (12) MONTH TARGET, THE FINAL BILLING WILL INCLUDE THE
SHORTFALL AMOUNT.
4. REVENUE MINIMUM'S ONLY APPLY TOWARDS SERVICES HIGHLIGHTED IN SECTIONS I
(A&B), II, III, IV, VIII AND IX ONLY.
5. IF REVENUE MEETS OR EXCEEDS THE TOTAL TWENTY-FOUR (24) MONTH COMMITMENT OF
450K ANYTIME DURING THE CONTRACT TERM, MCK HAS MET THEIR REVENUE MINIMUMS
TO VITAL NETWORK SERVICES.
[***] Confidential treatment has been requested for the bracketed portions. The
confidential redacted portion has been omitted and filed separately with
the Securities and Exchange Commission.
23
<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, except for Note 14, as to
which the date is October 8, 1999, in the Registration Statement
(333-85821) on Form S-1 and related Prospectus of MCK Communications, Inc. for
the registration of 3,400,000 shares of its common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 8, 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, except for the first paragraph of Note 14, as to which the date
is October 8, 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/ PricewaterhouseCoopers LLP
Calgary, Alberta
October 8, 1999
