<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
REGISTRATION STATEMENT NO. 333-85821
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------- ------------------ -------------------- -------------------- ---------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
- ----------------------------------------------- ------------------ -------------------- -------------------- ---------------------
Common Stock, $.001 par value per share....... 3,910,000 $16.00 $62,560,000 $17,392
- ----------------------------------------------- ------------------ -------------------- -------------------- ---------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 510,000 shares which the underwriters have an option to purchase
from MCK and certain of our stockholders to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Includes $17,214 previously paid by MCK in connection with the initial
filing and $178 which is paid in connection with this Amendment No. 2.
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 SEPTEMBER 24, 1999
[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 4.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to MCK............................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MCK and certain of our stockholders have granted the underwriters a 30-day
option to purchase up to 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.
------------------------------
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST
The date of this prospectus is , 1999
<PAGE> 3
[MCK LOGO]
A leading supplier of remote voice access products that extend the full range of
features and applications of PBX systems to branch offices and telecommuters
over data networks.
CUSTOMER PREMISE EQUIPMENT (CPE)
SINGLE-USER EXTENDERS connect corporate PBXs to
telecommuters and remote call center agents over data
network. Single-user models include both integrated access
devices that deliver both PBX voice and PC data over an
Integrated Services Digital Network (ISDN) or a traditional
telephone network connection, and products that require an
external network termination device such as a router,
Digital Subscriber Line (DSL) modem or cable modem for
delivery of PBX voice over cable, DSL or IP network
connections. [picture of a MCK product (a small black box) and a telephone]
MULTI-USER EXTENDERS deliver PBX functionality to a single branch office
location.
Each unit works with a customer's existing data network
to provide a simultaneous voice connection to the
corporate PBX for up to 8 employees located in a branch
office. A 4-port daughter card, soon to be released,
will enable this product to support 12 simultaneous
users. Our branch office EXTenders deliver PBX voice
over a variety of networks including ATM, digital data
service, DSL, fiber, frame relay, IP, ISDN, T-1 and
fractional T-1 network connections.
[picture of a MCK product (a small black box)]
CORPORATE PBX GATEWAY PRODUCTS
PBX GATEWAYS, located at the corporate PBX site, interface
with the line side of the PBX and create seamless
extensions of voice and PBX applications to our remote CPE
products. Our PBX Gateways deliver PBX voice to our CPE
devices over a variety of networks including ATM, digital
data service, DSL, fiber, frame relay, IP, ISDN, T-1,
fractional T-1 and traditional telephone network
connections.
[picture of MCK product (a small black box)]
<PAGE> 4
Edgar description for Interior Fold-out Page:
(MCK LOGO)
CAPTION: EXTENDING CORPORATE VOICE SYSTEMS TO
REMOTE LOCATIONS OVER DATA NETWORKS
Selected Examples of Applications and Network Options
The page is divided into three sections, labeled "Enterprise" on the left,
"Multi-user sites" in the center and "Single-user sites" on the right. The
diagram shows a large corporate office with a PBX connected to a PBXgateway and
PBXtender. The PBXgateway connects to a network termination device which
connects directly, or through the Internet, to public and private networks. The
PBXtender and a non-MCK data server independently connect to public and private
networks. At the multi-user location, the diagram shows a network termination
device that connects to public and private networks, specifically ATM, DDS, DSL,
Frame, ISDN and T-1. A Branch Office EXTender 6000 connects to a network
termination device and multiple telephone sets connect to the Branch Office
EXTender 6000. In another multi-user location, a network termination device
connects to public and private networks over a fiber or ATM network connection.
Two Branch Office EXTender 6000s and an IP EXTender 4000 connect to this network
termination device to show a campus LAN. Multiple telephone sets connect to the
Branch Office EXTender 6000s and one telephone set connects to the EXTender
4000. At the single-user location, the diagram shows three single-user
locations: (i) a telephone set and a personal computer connected to an EXTender
1000+; (ii) a telephone set and personal computer connected to an EXTender 3000,
and (iii) a telephone set and personal computer connected to an EXTender 4000
which is connected to a modem; 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................................................ 4
Note on Forward Looking Statements.......................... 14
Use of Proceeds............................................. 14
The Company................................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 28
Management.................................................. 46
Certain Transactions........................................ 54
Principal Stockholders...................................... 56
Description of Capital Stock................................ 57
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 63
Experts..................................................... 63
Change in Independent Accountants........................... 63
Where You Can Find More Information......................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
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\
<PAGE> 7
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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 , 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 remote access products for
voice networks that enable corporations to seamlessly extend the features and
applications of large corporate voice switches known as private branch
exchanges, or PBXs, from the corporate office to remote branch offices and
telecommuters over geographically dispersed public networks known as wide area
networks, or WANs. Our EXTender products cost-effectively deliver a unified,
enterprise-wide voice network by enabling the PBX to function as a corporate
voice server that transmits voice and PBX signaling information to remote
locations over corporations' existing data networks. PBX signaling information
contains all the information required to enable digital telephone sets to
communicate with the PBX and utilize the features and applications supported by
the PBX. In addition, our products reduce the total cost of ownership by
leveraging corporations' current investment in voice and data equipment, and
streamline network administration through the utilization of industry standard
network management techniques.
Large corporations are increasingly shifting towards a decentralized
business model of distributed work forces with multiple branch offices and
numerous telecommuters in order to realize the competitive advantages of being
located near key customers, suppliers and partners and to attract qualified
employees. We believe Fortune 5000 businesses maintain approximately 1.6 million
branch offices. According to the Gartner Group, the number of telecommuters
worldwide is expected to grow from 35 million in 1998 to 140 million in 2003.
As corporations decentralize, they seek to extend their voice and data
networks across multiple locations due to their dependence upon company-wide
communications to facilitate internal collaboration, provide superior customer
service and maintain efficiency and productivity. Advances in data networking
technologies 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, PBX-based voice networks, which are known for their reliability and
functionality in centralized environments, have not been efficiently extended
from corporate locations to branch offices and telecommuters due to technical
signaling limitations and cost constraints. As a result, corporations have had
to deploy separate voice networks for each remote location, limiting the
effectiveness of corporate communications and increasing the burden on systems
administrators.
Furthermore, in order to lower costs and simplify network administration,
corporations are increasingly demanding that distributed voice and data services
be offered over one centrally-managed corporate communications infrastructure.
This convergence of voice and data is made possible by the packetization of
voice and advances in Quality of Service which enable the transmission of voice
over private managed data networks and public data networks such as the
Internet. Thus, solutions for the remote voice marketplace must offer a
centrally-managed interface to corporate PBX systems and have the capability of
packetizing and transmitting PBX voice over both traditional circuit-based data
networks and emerging packet networks.
Our remote access solutions for voice networks enable corporations to
realize the following key benefits:
- Full-Featured Remote Voice Access. Our solutions seamlessly provide PBX
features and applications to branch office employees and telecommuters
over existing data networks.
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1
<PAGE> 8
Branch office employees benefit from having digital telephone sets that function
as extensions of their corporate PBX providing these employees with the same
features and applications utilized by employees at the corporate headquarters.
Telecommuters can utilize their personal computers and digital telephone
sets at remote locations and enjoy the same features and applications of
corporate voice and data networks as if they were at the corporate office.
- Digital Line Extension Technology. Our solutions utilize our proprietary
hardware and software interfaces to extract voice and PBX signaling
information from PBX digital line cards, which are located on the user
side and access the rich features and applications of PBXs, for
transmission across WANs.
- Packet Voice Architecture. Utilizing our proprietary Remote Voice
Protocol, or RVP, software platform, we packetize voice and PBX signaling
information extracted from PBX digital line cards for transmission over
data networks to remote locations.
- Lower Cost Solution. Our solutions enable corporations to lower costs,
including network transmission, network management, equipment and
infrastructure costs. 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 in the remote voice access
marketplace;
- establishing our Gateway products as platforms for new voice
applications;
- expanding our distribution, marketing and technology relationships;
- working with broadband equipment vendors and next generation service
providers; and
- targeting Fortune 5000 corporations.
We primarily sell our products through an indirect distribution system
including the following channels: original equipment manufacturers and private
label partners, incumbent local exchange carriers, systems integrators and
distributors, telecom and datacom value-added resellers and broadband service
providers. We support our sales channels with our own internal sales
professionals as well as marketing programs, educational programs, and field and
telephone technical support.
Our principal executive offices are at 313 Washington Street, Newton,
Massachusetts 02458 and our telephone number at that address is (617) 454-6100.
Information contained on our web site at www.mck.com does not constitute part of
this prospectus.
THE OFFERING
Common stock offered by MCK................ 3,400,000 shares
Common stock to be outstanding after the
offering................................... 17,864,432 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:
- 1,451,155 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $1.40 per share; and
- 2,864,848 additional shares of common stock reserved for future issuance
under our 1999 Stock Option and Grant Plan. See "Management -- Executive
Compensation," "-- 1996 Stock Option Plan" and "-- 1999 Stock Option and
Grant Plan."
2
<PAGE> 9
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SUMMARY CONSOLIDATED FINANCIAL DATA
The as adjusted consolidated balance sheet data summarized below reflects
the conversion of our convertible preferred stock into 8,674,491 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 , 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..... -- -- -- -- -- -- 976
Transaction-related
charges.................... -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 892 1,239 3,060 5,434 8,854 1,922 3,781
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... 122 1,677 548 (358) 26 6 (949)
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) (181) (123) (1,044)
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) $ (378) $ (173) $ (1,094)
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) $ (2,344) $ (566) $ (1,645)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net income
(loss) per common share...... $ .04 $ .33 $ (0.39) $ (0.67) $ (0.60) $ (0.15) $ (0.38)
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 net
income (loss) per share...... $ (0.25) $ (0.18)
Shares used in computing pro
forma basic and diluted net
income (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) 26,379
</TABLE>
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3
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
WE DERIVE ALMOST ALL OF OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS AND OUR
REVENUES MAY DECLINE SIGNIFICANTLY IF ANY MAJOR CUSTOMER CANCELS OR DELAYS A
PURCHASE OF OUR PRODUCTS
We have historically derived the majority of our revenues from a small
number of customers, most of whom resell our products to end users. Our business
would be seriously harmed if we do not generate as much revenue as expected from
these customers or if any of these customers cease purchasing our products,
particularly Lucent. For the fiscal year April 30, 1999, Lucent accounted for
46.7% of our revenues, and our ten largest customers, including Lucent,
accounted for 78.7% of our revenues. None of these large customers is obligated
to purchase additional products or services. Accordingly, we cannot be certain
that present or future customers will not terminate their purchasing
arrangements with us or significantly reduce or delay their orders. Any
termination, change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and size of future purchases by our largest
customers and, in particular:
- the product requirements of these customers;
- the financial and operational success of these customers; and
- the success of the underlying products and services that our products
support.
The loss of any one of our major customers or the delay of significant
orders from such customers, even if only temporary, could reduce or delay our
recognition of revenues, harm our reputation in the industry and reduce our
ability to accurately predict cash flow, and, as a consequence, could seriously
harm our business, financial condition and results of operations.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
DEVELOP AND MAINTAIN RELATIONSHIPS WITH KEY PBX VENDORS
Our success will depend to a significant degree upon our relationships with
leading PBX vendors, including those with Alcatel, Lucent, NEC and Nortel
Networks. The PBX systems sold by these vendors account for approximately 65% of
the U.S. market for corporate PBX sales, and approximately 99% of our revenues
for fiscal year 1999 were attributable to products which interoperate with PBX
systems offered by these vendors. We may not have access in the future to the
proprietary protocols for the major PBX systems marketed by those vendors, which
access may be essential to ensure the continued interoperability of our
products. Moreover, there is no assurance that we will be able to develop
products that interoperate with PBX systems offered by other vendors.
Additionally, the standards for IP telephony equipment and data networks are
evolving and there is no assurance that our products will be compatible with any
new technology standards that may emerge. If we are unable to provide our
customers with interoperable solutions, they may make purchases from vendors who
provide the requisite product interoperability. This could seriously harm our
business, financial condition and results of operations.
In addition, we currently have varying distribution, marketing and
development arrangements with the PBX vendors noted above. These relationships
are not exclusive and there is no assurance that we will continue to enjoy the
support and cooperation that we have historically experienced from these parties
or
4
<PAGE> 11
their distribution channels. Moreover, it is possible that the PBX vendors may
seek to offer broader product lines and solutions that are competitive with our
products.
UNLESS WE ARE ABLE TO KEEP PACE WITH THE RAPIDLY CHANGING PRODUCT REQUIREMENTS
OF OUR CUSTOMERS, WE WILL NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
The telecommunications market is characterized by rapid technological
advances, evolving industry standards, changes in end-user requirements,
frequent new product introductions and evolving offerings by telecommunications
service providers. We believe our future success will largely depend on our
ability to anticipate or adapt to such changes and to offer, on a timely basis,
products that meet customer demands. Our failure to produce technologically
competitive products in a cost-effective manner or on a timely basis could cause
our customers to purchase competitive products from other suppliers. 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. If we are
unable to compete effectively in this market, our revenues and future
profitability would be materially adversely affected. Many of our current and
potential competitors have significantly greater sales and marketing, technical,
manufacturing, financial and other resources, more established distribution
channels and stronger relationships with service providers. For instance, in
June 1999 Nortel Networks announced its intention to develop new products which
will compete directly with our products. Moreover, our competitors may foresee
the course of market developments more accurately than we do and could in the
future develop new technologies that compete with our products or even render
our products obsolete. Realizing and maintaining technological advantages over
our competitors will require a continued high level of investment in research
and development, sales and marketing and customer support. Due to the
opportunities in and the rapidly evolving nature of the market in which we
compete, additional competitors with significant market presence and financial
resources, including large communications equipment manufacturers, may enter our
market, thereby further intensifying competition. We may not have sufficient
resources to continue to make the investments or achieve the technological
advances necessary to compete successfully with existing competitors or new
competitors.
Increased competition is likely to result in price reductions, reduced
gross margins, longer sales cycles and loss of market share, any of which would
seriously harm our business and results of operations. We cannot be certain that
we will be able to compete successfully against current or future competitors or
that competitive pressures will not seriously harm our business.
FUTURE CONSOLIDATION IN THE COMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE
COMPETITION THAT COULD HARM OUR BUSINESS
The markets in which we compete are characterized by increasing
consolidation both within the communications sector and by companies combining
or acquiring communications assets.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 certain strategic
relationships with third parties in our industry, any consolidation involving
these parties could reduce the demand for our products and otherwise harm our
business prospects.
5
<PAGE> 12
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 eight most recent fiscal quarters, our
net results of operations have ranged from a net loss before dividends on
subsidiary redeemable preferred stock of $473,000 to net income of $32,000. 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. Fluctuations in our
quarterly results could be caused by a number of factors, including, but not
limited to:
- the timing and amount of, or cancellation or rescheduling of, orders for
our products, particularly large orders from our key customers;
- our ability to develop, introduce, ship and support new products and
product enhancements, and manage product transitions;
- new product introductions and announcements, and reductions in the prices
of products offered by our competitors;
- our ability to sustain our technology relationships, particularly with
the major PBX manufacturers and service providers;
- availability and changes in the prices of components provided by third
parties;
- our ability to attain and maintain production volumes and quality levels
for our products;
- the mix of products sold and the mix of distribution channels through
which they are sold;
- fluctuations in demand for our products;
- costs relating to possible acquisitions and integration of technologies
or businesses;
- telecommunications market conditions and economic conditions generally;
- our ability to hire, train, integrate and retain new personnel; and
- changes in the level of our operating expenses.
Given that any one or more of these or other factors could have an adverse
effect on our business, the prediction of future quarterly results is difficult
and uncertain. In addition, some of our operating expenses are relatively fixed
in advance of any particular quarter. As a result, we may not be able to reduce
our operating costs in response to unanticipated reductions in our revenues or
the demand for our products.
OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS AND SUPPLIERS COULD RESULT IN
PRODUCT DELIVERY DELAYS
We currently use two independent manufacturers, Celestica and Electronic
Manufacturing Group, to manufacture all of our products. We are also
contemplating using an additional manufacturer to manufacture our multi-user
products. Our reliance on independent manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control over
delivery schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products and components in required volumes, we will have to
identify acceptable alternative manufacturers, which could take in excess of six
months. Furthermore, the use of a new manufacturer may cause significant
interruptions in supply if the new manufacturer has difficulty manufacturing
products to our specifications. Further, the introduction of a new manufacturer
may increase the variance in the quality of our products. In addition, we rely
upon third-party suppliers of specialty components and intellectual property
used in our products. It is possible that a component needed to complete the
manufacture of our products may not be available to us at acceptable prices or
on a timely basis, if at all. Inadequate supplies of components, or the loss of
intellectual property rights, could affect our ability to deliver products to
our customers. Any significant interruption in the supply of our products would
result in the reduction of product sales to customers, which in turn could
permanently harm our reputation in the industry.
6
<PAGE> 13
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
7
<PAGE> 14
depending on the timing and amount of orders from our indirect distribution
channels. We cannot assure you that our indirect distribution channels will
market our products effectively or continue to devote the resources necessary to
provide us with effective sales, marketing and technical support.
In order to support and develop leads for our indirect distribution
channels, we plan to significantly expand our field sales staff. We cannot
assure you that this internal expansion will be successfully completed, that the
cost of this expansion will not exceed the revenues generated or that our
expanded sales and support staff will be able to compete successfully against
the significantly more extensive and well-funded sales and marketing operations
of many of our current or potential competitors. Our inability to effectively
develop and expand our distribution channels or manage the expansion of our
sales and support staff would adversely affect our ability to grow and increase
revenues.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
There has previously not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. The trading price of our
common stock could be subject to wide fluctuations in response to factors such
as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- general technology or economic trends;
- revenues and operating results failing to meet or surpass the
expectations of securities analysts or investors in any quarter;
- changes in general market conditions;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
- additions or departures of key personnel;
- the demand for our common stock;
- the number of market makers for our common stock;
- sales of a large number of shares of our common stock in the public
market after this offering or the perception that such sales could occur;
and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market
and technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices are
substantially above historical levels. These trading prices may not be
sustained. These broad market and industry factors may materially adversely
affect the market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would reduce the amount of resources and management time focused on
growing our business and improving operating results.
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<PAGE> 15
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 our customers may be impacted by general economic
downturns, the ability of these customers to purchase our products could be
adversely affected. Payment cycles for international customers are typically
longer than those for customers in the United States. We cannot assure you that
foreign markets for our products will not develop more slowly than currently
anticipated.
We anticipate that our non-Canadian, foreign sales will generally be
invoiced in U.S. dollars, and we do not currently plan to engage in foreign
currency hedging transactions. As we expand our international operations,
however, we may allow payment in foreign currencies, and exposure to losses in
foreign currency transactions may increase. We may choose to limit any currency
exposure through the purchase of forward foreign exchange contracts or other
hedging strategies. 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.
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<PAGE> 16
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. We cannot assure you that we would prevail in such
litigation given the complex technical issues and inherent uncertainties in
patent litigation. In the event a claim against us is successful and we cannot
obtain a license to the relevant technology on acceptable terms, license a
substitute technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be materially
adversely affected.
IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
Our products have in the past contained, and may in the future contain,
undetected or unresolved errors when first introduced or as new versions are
released. Despite extensive testing, errors, defects or failures may be found in
our current or future products or enhancements after commencement of commercial
shipments. If this happens, we may experience delay in or loss of market
acceptance and sales, product returns, diversion of development resources,
injury to our reputation or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. For example, certain 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 certain
damages arising from the implementation and use of our products, our insurance
may not cover any claims sought against us. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages. As
a result, any such claims, whether or not successful, could seriously damage our
reputation and our business.
WE MAY HAVE DIFFICULTY IDENTIFYING THE SOURCE OF THE PROBLEM WHEN THERE IS A
PROBLEM IN A NETWORK 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.
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<PAGE> 17
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
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<PAGE> 18
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, the cost of remediation is not
expected to be material to our operating results. If implementation of
replacement systems is delayed, however, or if significant new non-compliance
issues are identified, our business, financial condition or results of
operations could be materially adversely affected.
We intend to contact our critical suppliers and contract manufacturers to
determine whether their operations and the products and services they provide
are Year 2000 compliant. Where practicable, we will attempt to mitigate our
risks with respect to the failure of our suppliers and contract manufacturers to
be prepared for any Year 2000 problems. However, failures remain a possibility
and could have a material adverse effect on our business, financial condition or
results of operations.
In addition, litigation regarding Year 2000 compliance issues is expected
to escalate. For these reasons, the impact of customer claims could have a
material adverse effect on our business, financial condition or results of
operations.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own 13,307,792 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."
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PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred stock without
further stockholder approval, which provisions could adversely affect the
holders of our common stock.
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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 August 1999, the Nevada corporation
became our wholly-owned subsidiary.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not currently anticipate paying any cash dividends
in the foreseeable future. Future dividends, if any, will be determined by our
Board of Directors.
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<PAGE> 21
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 8,674,491 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, 14,349,525 shares issued and
outstanding, pro forma; and 40,000,000 shares authorized,
17,749,525 shares issued and outstanding, pro forma as
adjusted.................................................. 6 14 $ 18
Paid-in capital............................................. 8,283 13,074 59,401
Accumulated deficit......................................... (25,542) (25,542) (25,542)
Deferred compensation....................................... (6,519) (6,519) (6,519)
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."
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<PAGE> 22
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.............. 14,349,525 80.8% $ 5,593,000 9.9% $ 0.39
New investors...................... 3,400,000 19.2 51,000,000 90.1 15.00
---------- ----- ----------- -----
Total.................... 17,749,525 100.0% $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.
16
<PAGE> 23
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.... -- -- -- -- -- -- 976
Transaction-related
charges................... -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 892 1,239 3,060 5,434 8,854 1,922 3,781
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations.................. 122 1,677 548 (358) 26 6 949
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) (181) (123) (1,044)
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) $ (378) $ (173) $ (1,094)
========== ========== ========== ========== ========== ========== ==========
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) $ (2,344) $ (566) $ (1,645)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted net income
(loss) per share............ $ .04 $ .33 $ (.39) $ (.67) $ (.60) $ (.15) $ (0.38)
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
net income (loss) per
share....................... $ (0.25) $ (0.18)
Shares used in computing pro
forma basic and diluted net
income (loss) per share..... 8,132,866 8,674,492
</TABLE>
17
<PAGE> 24
<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>
18
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
MCK Communications is a leading provider of remote voice access products
that enable corporations to distribute the full range of features and
applications of PBX systems to branch offices and telecommuters over data
networks. Our technology makes it possible for corporations to build a unified
voice network by enabling the PBX to act like a corporate voice server that
delivers packetized voice to remote locations over the same wide area network,
or WAN, used for remote data connectivity. We market and distribute our products
through an international network of original equipment manufacturers, or OEMs,
and private label partners, incumbent local exchange carriers, or ILECs, systems
integrators and distributors, telecom and datacom value-added resellers, or
VARs, broadband service providers and, to a lesser extent, through direct sales.
We are headquartered in Newton, Massachusetts and have a development center in
Calgary, Canada.
From our inception in 1989 through 1993, we were a small company based in
Calgary, Canada that designed and marketed a number of niche, voice products
targeted at the oil industry. Commencing in 1993, we altered our business focus
and began developing remote voice access solutions by leveraging the technology
derived from this initial business. These efforts led to the development of our
EXTender product line. During the period from 1993 through 1995, our operating
activities related primarily to establishing a research and development
organization, developing and testing prototype designs, and developing OEM
relationships. We shipped our first remote voice access product, the EXTender
1000, in February 1995. In June 1996, Summit Partners acquired a majority of our
stock pursuant to a leveraged recapitalization. In June 1997, we recruited a new
chief executive officer and moved our headquarters to Newton, Massachusetts.
Since then we recruited the rest of our management team, focused our research
and development efforts on developing additional remote voice access products
and product enhancements, created a product validation laboratory, built
international indirect sales channels, developed additional technology
relationships, and established our sales, marketing and customer support
organizations. We began shipments of the EXTender 3000 and Branch Office
EXTender 6000 in December 1997 and April 1999, respectively.
Through the fiscal year ended April 30, 1999, our revenues consisted
primarily of product sales of our single-user remote voice access products and,
to a lesser degree, our digital-to-analog converter products. In fiscal 1999,
Lucent accounted for approximately 46.7% of our revenues. In April 1999, we
released our first multi-user remote voice access product, the Branch Office
EXTender 6000, and we are presently developing additional remote voice access
products that operate over broadband networks. For the foreseeable future, we
anticipate that substantially all of our revenues will be attributable to sales
of our remote voice access products, with sales of digital-to-analog converters
representing a decreasing percentage of our revenues. Among our remote voice
access products, we believe that the multi-user products and next generation
single-user products will represent a substantial and increasing percentage of
our revenues, while the sales of our existing single-user products may decline
as a percentage of our revenues. Going forward, we expect to generate service
and maintenance revenues. Service revenues will be recognized as the services
are performed. Maintenance revenues will be deferred and recognized over the
period of the contract. We do not expect maintenance or service revenues to be a
significant portion of our revenues. Periodically, we have received
non-recurring engineering fees, although such fees have not been material to
date.
We recognize product revenues upon shipment to the customer. We routinely
analyze and establish, as necessary, reserves at the time of shipment for
product returns and allowances, which amounts to date have not been significant.
As of July 31, 1999, our backlog was $1.4 million. This compares to $350,000 at
the same time last year. We expect to ship the entire backlog during the current
fiscal year. We believe
19
<PAGE> 26
backlog is not an indicator of future success and our contracts generally allow
customers to cancel orders prior to shipment with little or no liability.
Our cost of goods sold consists primarily of purchased finished products
from Celestica, one of our two contract manufacturers, and purchased
subassemblies that we buy from our other contract manufacturer. We incur
additional costs to test, assemble and prepare these subassemblies for shipment
to our customers. Cost of goods sold also includes certain manufacturing
overhead costs, primarily facilities and related depreciation. In August 1999,
we began offering maintenance and support services to our distribution channels
and end users through Vital Network Services, a third-party support provider. We
expense services provided by Vital Network Services as they are performed.
Research and development expenses consist primarily of salaries and related
personnel costs and contract engineering, purchased software and prototype
expenses related to the design, development, enhancement and testing of our
remote voice access products. As of July 31, 1999, all research and development
costs have been expensed as incurred. We intend to increase our investment in
research and development, which is critical to achieving our product objectives.
We will also increase our expenditures on our product validation laboratory to
test the interoperability of our products with PBXs and other products. This
competency is becoming increasingly critical to our business as we develop
additional products that function over data networks in conjunction with
third-party data equipment. We expect research and development expenses to
increase significantly in the future as we continue to develop new products and
enhance existing products.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales, marketing and support
of products as well as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect distribution system
that includes the following channels: OEMs and private label partners, ILECs,
systems integrators and distributors, telecom and datacom VARs and broadband
service providers. Our sales force and marketing efforts are primarily directed
at developing brand awareness and supporting our indirect distribution channels.
We intend to pursue sales and marketing campaigns aggressively and increase our
sales force headcount and, therefore, expect these expenses to increase in the
future.
General and administrative expenses consist primarily of salaries and
related personnel expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. As we add
personnel and incur additional costs related to the growth of our business and
our becoming a public company, we expect that general and administrative
expenses will also increase. Furthermore, we expect to add office space in our
current building in Newton, Massachusetts or move our corporate headquarters to
new office space in the next 6 to 12 months.
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. We recorded total deferred stock compensation of
$7,494,575 in the three months ended July 31, 1999 and amortized $975,856 in the
same period leaving approximately $6,519,000 to be amortized in future periods.
20
<PAGE> 27
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................... -- -- -- -- 21.6
Transaction-related charges................ 8.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 51.7 69.0 62.0 61.7 83.6
----- ----- ----- ----- -----
Income (loss) from operations................ 9.2 (4.5) 0.2 0.2 (21.0)
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) (1.3) (3.9) (23.1)
Provision for income taxes................... (5.1) -- -- -- --
----- ----- ----- ----- -----
Net loss before dividends on subsidiary
redeemable preferred stock................. (1.6)% (12.1)% (1.3)% (3.9)% (23.1)%
===== ===== ===== ===== =====
</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
21
<PAGE> 28
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%.
22
<PAGE> 29
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 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.
23
<PAGE> 30
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.... -- -- -- -- -- -- -- -- 976
------ ------ ------ ------ ------ ------ ------ ------ -------
Total operating
expenses................ 857 1,434 1,477 1,665 1,922 2,103 2,231 2,597 3,781
------ ------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from
operations.................. 31 (309) (77) (2) 6 8 2 11 (949)
------ ------ ------ ------ ------ ------ ------ ------ -------
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) $ (123) $ (83) $ (6) $ 32 $(1,044)
====== ====== ====== ====== ====== ====== ====== ====== =======
</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... -- -- -- -- -- -- -- -- 21.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 59.9 83.0 71.6 62.8 61.7 61.2 61.9 63.3 83.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................. 2.2 (17.9) (3.8) (0.1) 0.2 0.2 0.0 0.3 (21.0)
----- ----- ----- ----- ----- ----- ----- ----- -----
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)% (3.9)% (2.5)% (0.2)% 0.8% (23.1)%
===== ===== ===== ===== ===== ===== ===== ===== =====
</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
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<PAGE> 31
costs associated with the opening of our Newton office, and the recruitment of a
new chief executive officer and chief financial officer. General and
administrative expenses have generally decreased as a percentage of revenues,
primarily due to increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from the sale of preferred stock
and other financing arrangements, such as a bank line of credit, a subordinated
debt offering and a capital equipment 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. Consequently, 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 valuation allowance
covering our net deferred tax asset.
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
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<PAGE> 32
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.
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
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<PAGE> 33
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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<PAGE> 34
BUSINESS
OVERVIEW
MCK Communications is a leading provider of remote access products for
voice networks that enable corporations to seamlessly extend the features and
applications of large corporate voice switches known as private branch
exchanges, or PBXs, from the corporate office to remote branch offices and
telecommuters over geographically dispersed public networks known as wide area
networks, or WANs. Our EXTender products cost-effectively deliver a unified
enterprise-wide voice network by enabling the PBX to function as a corporate
voice server that transmits voice and PBX signaling information to remote
locations over corporations' existing data networks. In addition, our products
reduce the total cost of ownership by leveraging corporations' current
investment in voice and data equipment, and streamline network administration
through the utilization of industry standard network management techniques.
INDUSTRY BACKGROUND
Most businesses today have deployed separate networks to support voice and
data communications. As the corporate world shifts from large, centralized
organizations to distributed workforces with multiple branch offices and a large
number of telecommuters, new demands are being placed on the traditionally
localized corporate communications networks. While data networks have evolved to
meet this challenge by offering high-speed remote data access and a high degree
of interoperability among data systems and components, corporate voice networks
have remained largely centralized and proprietary. Consequently, branch offices
and telecommuters do not have cost-effective access to the features and
applications of corporate voice systems.
This shift toward corporate decentralization results from a number of
factors. The competitive advantage of being located near key customers,
suppliers and partners and the competition for qualified employees are driving
corporations to open branch offices in numerous geographic locations. We believe
Fortune 5000 businesses 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 remote access solutions that deliver an integrated network
environment with all the features and applications found at corporate
headquarters to distributed locations and employees.
Corporate Data Networks
Initially, data networks were built upon mainframe computers that served a
single office location, were accessible by a limited number of users and were
too costly for small organizations. Over the past 20 years, advances in computer
processing and networking technology have altered this centralized model to
deliver cost-effective, high-speed distributed data processing and
communications by using a client-server architecture. Corporations have been
able to deploy equipment from multiple vendors that is interoperable throughout
a local area network, or LAN, using multiple network protocols because of the
adoption of standard communication protocols, internetworking technologies, and
industry-standard system management platforms, as well as the use of open
architectures. These same developments have also facilitated widespread data
access through the deployment of remote access equipment capable of extending
the reach of the data network beyond the LAN over public and private networks to
create WANs.
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Today, most remote data access capabilities are deployed to branch offices
and telecommuters over a variety of circuit-based networks that were 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
WAN infrastructure. Next generation telecommunications service providers are
creating new service offerings over private managed networks and public
networks, such as the Internet and are using new technologies, such as Quality
of Service, to offer both services over the same network. Widespread access to
corporate data networks, coupled with the deployment of new packet-based
networks, is enabling corporations to realize tremendous productivity gains due
to increased collaboration, internal communication and sharing of resources.
Examples of specific benefits include company-wide e-mail capabilities,
company-wide access to the files and applications that are run from the
corporate server and immediate access for remote workers.
Corporate Voice Networks
Large corporate voice systems are generally based on circuit-based networks
and corporate voice switches known as private branch exchanges, or PBXs. Given
the mission critical nature of voice communications and related applications,
PBX systems have been architected with numerous built-in fault tolerant and
redundancy features and are designed to deliver 99.999% up-time reliability. In
addition to delivering reliable voice service, PBXs have the capability to serve
as the platform for more than 500 critical voice features and applications.
PBX-based applications include:
- voicemail systems;
- unified messaging systems that create a single interface for accessing
voicemail, e-mail and fax messages;
- automatic call distribution, or ACD systems;
- auto-attendant systems;
- call accounting software;
- least-cost routing applications; and
- interactive voice response 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 systems in the United States in 1998 exceeded 45 million.
In addition, the MMTA has reported that the PBX market is growing. Since 1991
over 44 million PBX lines have been added to both new PBX
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<PAGE> 36
systems and existing systems. In 1998 alone, 7.4 million new lines were added to
PBX systems. Full-featured PBXs typically cost between $100,000 and $1.0
million, and are designed for large, centralized corporate environments with 50
or more users. In addition, corporations often spend as much on the applications
supported by their PBXs as they do on the equipment itself. According to the
MMTA, over $25 billion has been spent on PBX systems in the United States since
1991.
Despite the reliability and functionality of centralized circuit-based
voice networks, the features and applications of today's PBXs cannot be
cost-effectively extended to small branch offices and telecommuters. A number of
factors have created this deficiency. Technical signaling limitations cause the
quality of voice transmission to degrade beyond a limited distance from the PBX.
In addition, the high cost associated with deploying a PBX and its supported
voice applications typically makes them prohibitively expensive for small branch
offices and telecommuters. Accordingly, corporations seeking to extend voice
applications to small branch offices have the following voice options, all of
which have significant limitations:
- Key Systems/Hybrid PBXs. Key systems and hybrid PBXs are small,
proprietary voice switches that have functionality similar to PBXs but
have been cost-effectively architected to service small office
environments. Accordingly, they lack the full feature set and scalability
of more expensive PBX systems. Key systems have limited interoperability
with PBX systems, and consequently function as stand-alone voice systems
with separate voice applications that create inefficiencies and network
management complexities in a multi-office environment.
- Centrex. Centrex is a business telephone service that is offered by
local telephone companies from their central office switches. While
Centrex offers many of the same features as PBXs, its effectiveness is
constrained by phone companies' switch capacity, its lack of
interoperability with PBXs, its geographic limitations and its reliance
upon the local phone company for service and support. In addition,
full-featured Centrex service for a small office can be a prohibitively
expensive solution.
- Off-Premises Extension, or OPX. An OPX is a dedicated telephone line
that originates from a PBX and extends a subset of PBX features and
applications to remote users. OPX offerings cannot support digital
telephone sets, and require an expensive dedicated leased line or private
network connection.
- LAN and NT PBXs. Recently introduced solutions from data networking
vendors, such as LAN and NT-server based PBXs, lack the full feature set
of traditional PBXs and have limited ability to network with the
corporate PBX, thus also failing to give an enterprise a unified voice
network.
The inability of these voice options to fully network with the PBX has caused
corporations to deploy separate voice networks for their branch offices and
telecommuters, limiting the effectiveness of corporate communications and
increasing the burden on systems administrators. In addition, corporations
seeking to extend voice applications to telecommuters presently have no
cost-effective, full-featured solutions.
The Opportunity for PBX-based Remote Voice Access over Data Networks
As business organizations decentralize, remote access to the corporate
communications network is becoming increasingly important. While data networks
have evolved to meet this critical business requirement, there is a need for a
suitable voice solution that cost-effectively leverages the PBX and its features
and applications to offer corporate voice applications to small branch offices
and telecommuters. Furthermore, in order to lower costs and simplify network
administration, corporations are increasingly demanding that distributed voice
and data services be offered over the same centrally-managed corporate
communications infrastructure. This convergence of voice and data is made
possible by the packetization of voice and advances in Quality of Service which
enable the transmission of voice over private managed data networks and public
data networks, such as the Internet. Accordingly, to deliver remote voice access
over data networks, a solution should be capable of packetizing voice and PBX
signaling information. As a result of its reliability, the wide variety of
applications that it supports and the size of its installed base,
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<PAGE> 37
PBXs are pervasive in large, corporate enterprises and are likely to remain
entrenched as the central corporate system on which new voice applications are
developed and deployed. Thus, solutions for the remote voice marketplace must
offer a centrally-managed interface to proprietary PBX systems and have the
capability of packetizing and transmitting voice and PBX signaling information
over both traditional circuit-based data networks and emerging packet networks.
THE MCK EXTender SOLUTION
We develop and market products that enable enterprises to seamlessly
deliver all of the PBX features and applications that exist at the corporate
office to branch offices and telecommuters. Our technology allows enterprises to
create a unified, enterprise-wide voice network by enabling the PBX to function
as a corporate voice server that transmits packetized voice and PBX signaling
information to remote locations over existing data networks. In addition, our
products reduce the total cost of ownership by leveraging corporations' current
investments in voice and data equipment, and streamline network administration
through the utilization of industry standard network management techniques.
Following are the key attributes of our solution:
Full-Featured Remote Voice Access. Our EXTender solutions seamlessly
provide the features and applications of the PBX to branch office employees,
telecommuters and remote call center agents over circuit and packet networks.
Our solutions allow these remote workers to utilize PBX features such as three-
or four-digit internal dialing, call transferring and conferencing, and
applications such as voicemail, unified messaging and automated call
distribution. Extending these corporate voice applications to remote employees
increases productivity, facilitates internal collaboration and delivers to
external callers transparent access to all telephone extensions throughout a
corporation.
Digital Line Extension Technology. The features and applications of the
PBX reside on the digital line cards of the PBX. We have developed proprietary
software and hardware interfaces that extract the voice and PBX signaling
information from these digital line cards. Our products then packetize and
transmit this information to our remote devices over existing data networks.
Utilizing this captured information, our remote products mimic the digital line
card, thereby transparently connecting the user's digital telephone set to the
corporate PBX. As a result of this product architecture and our experience in
interfacing with the proprietary digital line cards of most leading PBX vendors,
our products enable corporations to deploy effective remote voice solutions
without significant reconfigurations or upgrades to their existing PBX systems.
Similarly, our products enable branch offices and telecommuters to use their
digital telephone sets and existing user interfaces to transparently access
their corporate PBXs.
Packet Voice Architecture. Our extensive experience in packetizing voice,
PBX signaling information and voice applications enables us to deliver a
complete remote voice solution over traditional circuit-based networks and
emerging packet-based networks. Utilizing our proprietary Remote Voice Protocol,
or RVP, software platform and our standardized hardware architecture, we
packetize, compress, encode, transmit and decode voice over networks such as
asynchronous transfer mode, or ATM, digital data service, digital subscriber
line, or DSL, fiber, frame relay, IP, integrated services digital network, or
ISDN, T-1, fractional T-1 and traditional telephone networks. Our products
enable next generation service providers such as the emerging DSL and cable
network operators to provide MCK EXTender functionality as a value-added service
offering to corporations for branch offices and telecommuters over WANs.
Lower Cost Solution. Our products provide a cost-effective solution to
enable full-featured remote voice access, lowering costs in the following areas:
- Transmission. Our products lower transmission costs by consolidating
voice and data traffic over a single network, eliminating local loop
service charges and enabling remote users to utilize volume-based,
corporate long distance rates.
- Management. Our recently introduced products provide telecom managers
the ability to centrally manage our remote devices using Telnet,
hypertext mark-up language, or HTML, and simple network management
protocol, or SNMP, with graphical user interfaces. Our customers can use
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these remote monitoring and diagnostic capabilities to solve problems
on-line, thereby reducing the time and cost associated with dispatching a
technician to a remote site.
- Equipment. Our products enable corporations to leverage their existing
capital investment in PBX systems, voice applications and data networks,
thereby eliminating the need to expend significant additional capital on
disparate, incompatible solutions such as key systems.
- Facilities. Our products allow corporations to reduce physical facility
costs and infrastructure investments by enabling employees to work
effectively outside of corporate locations.
Compatibility with Leading PBX Manufacturers. We have worked with Alcatel,
Lucent, NEC and Nortel Networks to develop interfaces between our RVP software
platform and their primary proprietary PBX protocols. These manufacturers have
tested and validated in their labs that our RVP platform is interoperable with
their primary PBX products, including 4400/4200 (Alcatel), DEFINITY (Lucent),
NEAX 1000/2000/2400 (NEC), Meridian (Nortel Networks), and Norstar (Nortel
Networks) equipment. According to Dataquest, these four manufacturers represent
approximately 65% of the U.S. PBX market share for large enterprise customers.
STRATEGY
Our strategy is to become the leading provider of remote voice access
solutions for branch offices and telecommuters of Fortune 5000 businesses. The
following are the principal elements of our business strategy:
Maintain technology leadership in the remote voice access marketplace. Our
technology enables us to provide leading remote voice access products that
distribute PBX features and applications to branch offices and telecommuters.
Our technology leadership is the result of our knowledge and experience
interfacing with proprietary PBX systems, our ability to packetize voice and PBX
signaling information and our understanding of how to condition packet voice for
transmission over circuit and packet networks. We intend to continue to leverage
our existing expertise in packetized PBX voice applications to develop new
products and applications that target broadband markets, in particular DSL and
cable. We will also continue to work with third-party software and hardware
manufacturers to ensure the interoperability between our solutions and a wide
range of networking equipment in order to facilitate ease of deployment and
ensure that we can transmit packet voice within multiple network environments.
Establish our Gateway products as platforms for new voice applications. We
intend to establish our Gateway products as platforms for the delivery of new
applications and services to branch offices and telecommuters. Our products are
positioned on the line-side of the PBX, which enables us to extend the full
features and applications of the PBX to remote locations with minimal impact on
the PBX or its resident software applications. We believe that this
non-intrusive implementation, and our products' positioning within the corporate
voice switch room, strategically positions us to develop new software
components, as well as incorporate third-party software applications, to provide
new features and applications for remote users.
Expand distribution, marketing and technology relationships. We will
continue to establish distribution, marketing and technology relationships with
PBX vendors, service providers and distribution channel partners to further
penetrate our target markets and develop our products. We have development,
marketing and distribution relationships with Alcatel, Lucent and NEC and
distribution relationships with Nortel Networks and its major channel partners
such as Bell Canada, BellSouth, GTE and Williams Communications. We have also
established a number of other important distribution channel relationships such
as with SBC and Sprint North Supply. In addition to expanding our field sales
and systems engineering forces, we will continue to work with our channel
partners to focus on major corporate accounts. Furthermore, we will continue to
build additional channels, both in the U.S. and international markets, to expand
the distribution of our products.
Work with broadband equipment vendors and next generation service
providers. We are working with a number of leading broadband equipment vendors
and next generation service providers to jointly
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<PAGE> 39
develop service offerings based on our technology that can deliver our
application over broadband networks such as DSL and cable. We jointly developed
a DSL product with Copper Mountain and are in the process of developing other
product sets with Copper Mountain and other broadband equipment vendors. We are
also working with leading service providers such as Rhythms NetConnections to
develop service offerings based on our new broadband product set. We have
entered into a distribution agreement with Rhythms pursuant to which it markets
a service called PBXpress that delivers remote PBX voice to its customers by
bundling our equipment into this service offering. We anticipate entering into
new relationships with broadband equipment vendors and next generation service
providers such as competitive local exchange carriers, or CLECs, Internet
service providers, or ISPs, and managed service providers to enhance our
leadership position.
Continue to target Fortune 5000 corporations. We intend to continue to
focus our distribution strategies on Fortune 5000 corporations. These
organizations have made substantial capital investments in PBX systems and have
significant numbers of branch offices and telecommuters. Accordingly, these
corporations have the most to gain from an integrated, PBX-based voice network.
We are well positioned to target the Fortune 5000 market because our products
interface with PBX systems from Alcatel, Lucent, NEC and Nortel Networks. We
will work with our existing and new partners to increase the market opportunity
for, and drive market acceptance of, our products.
TECHNOLOGY
We have developed expertise in digital line extension and the packetization
of voice for transmission over data networks to address the technology
challenges of extending the features and applications of corporate PBXs to
remote locations. Another key component of our technological advantage is the
highly flexible software and hardware architecture upon which we build our
remote voice solutions. We will continue to invest significant resources to
maintain and extend our technological advantage.
Digital Line Extension Technology
The rich features and applications of proprietary PBX systems are accessed
through digital line cards that reside on the user or line side of the PBX.
These line-side interfaces enable the delivery of the features and applications
of PBX systems to digital telephone sets. As a result of our years of experience
in working with major PBX manufacturers, we have gained a significant
understanding of these digital line cards and have developed line-side software
interfaces to a number of different proprietary digital line cards used in
today's PBX systems. In addition to our software interfaces, we have developed a
hardware subsystem capable of duplicating the electrical interfaces of Alcatel,
Lucent, NEC and Nortel Networks PBX systems. These line-side software and
hardware interfaces extract the voice and PBX signaling information from the
digital line cards located on the PBX and, using our RVP software platform,
packetize this voice and PBX signaling information for transmission over data
networks to our remote voice access products. We have developed messaging
software that transmits this voice and PBX signaling information from our remote
voice access products to the digital telephone sets of the PBX manufacturers
that we support, thereby transparently connecting these sets to the PBX.
Delivery of Packet Voice with Remote Voice Protocol
To deliver voice over data networks, solutions must convert voice into
packet form and then transmit these voice packets alongside data packets.
Despite the advantages of simultaneous transmission of voice and data, there are
also a number of technological challenges to delivering voice over data networks
because audio quality can be distorted by jitter and latency associated with
congestion on the data network.
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 efficiently
while also ensuring that delay sensitive voice packets are delivered with the
quality expected
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<PAGE> 40
from voice. Much of this technology revolves around our core expertise in
developing software that runs on standard digital signal processors, which are
required for encoding voice for transmission over bandwidth constrained
networks. In particular, we have designed and implemented the following software
features in our products to improve the quality of packet voice transmission,
minimize system delay and jitter, and utilize bandwidth efficiently:
- Voice Compression. We integrate a number of industry standard voice
coding algorithms, including G.711, G.726, G.729A and G.723.1, that
compress voice to reduce the total bandwidth required for transmission.
- Echo Cancellation. We deliver echoless voice by integrating industry
standard acoustic echo cancellation technology, known as G.165, to which
we have made proprietary enhancements.
- Silence Detection. Our proprietary silence detection technology
eliminates unnecessary transmission of voice packets during the periods
of silence that occur in normal conversation, freeing bandwidth for other
uses.
- Comfort Noise. We incorporate technology that inserts comfort noise
during periods of silence so that users do not inadvertently think that
the phone call is no longer active.
- Jitter Buffering Techniques. Our products adapt to the real-time
irregularities in network transmission and ensure all traffic reaches its
endpoint at the appropriate time by introducing delay that is
unrecognizable to the user.
- DTMF Processing Technology. Dual tone multi frequency, or DTMF, tones
are generated by depressing buttons on digital telephone sets, enabling
the digital telephone set to recognize dialed numbers used for outbound
calls and for applications such as voicemail. Our proprietary technology
improves the transmission of DTMF tones over packet networks.
We have significant experience in transmitting packet voice over both
low-speed, traditional telephone networks and higher speed, broadband networks.
We have developed network interfaces for the delivery of remote voice over
traditional telephone connections and ISDN networks and have incorporated
third-party network devices to support T-1, digital data service and frame relay
networks. In addition, to deliver data connectivity alongside our packet voice
transmission, we have expertise in terminating dial-up networking connections
and bridging standard data traffic such as TCP/IP.
Remote Voice Product Architecture
We develop our products using a combination of proprietary and commercial
hardware and software subsystems. Our product architecture enables these
subsystems to be configured and adapted in order to deliver a broad range of
enterprise voice product solutions, thereby minimizing product development
cycles and maximizing manufacturing efficiency. Our products are fully
compatible with the large installed base of telephone systems from Alcatel,
Lucent, NEC and Nortel Networks, and require no design modifications or upgrades
to these PBX systems or their respective digital telephone sets.
We have designed a standard hardware architecture that serves as a common
platform for our software modules. We use industry standard digital signal
processors and programmable logic devices to build a standard hardware platform
that can be software modified to support different applications or PBX protocols
without requiring a hardware change. We have also architected our products with
a variety of standard telephony and WAN interfaces to ensure that we can
transmit packet voice over the multiple network environments currently
available.
All of our products share a common software library of functional modules
that comprise our digital line interface software subsystem and our RVP software
platform. Our digital line interface software subsystem is responsible for the
interface to the proprietary software protocols on the digital line cards of
PBXs. This software subsystem has been designed to emulate a majority of the
digital line cards on the market today without requiring a change to our
hardware architecture. This flexible software architecture also enables us to
easily add software support for new PBX protocols. Our RVP software platform is
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<PAGE> 41
responsible for packetizing voice and PBX signaling information, as well as
conditioning these voice packets for transmission over data networks. RVP has
been engineered to enable new features to be easily and quickly introduced in
parallel to its existing capabilities.
All the software development for our IP EXTender 4000, EXTender 3200 for
IDSL, Branch Office EXTender 6000 and PBXgateway IP product lines runs on the
VxWorks real-time operating system from Wind River Systems. This industry
standard operating system provides our engineers with a standard development
environment in which to design new proprietary software applications and easily
incorporate third-party software applications. A standard development
environment such as VxWorks allows for the rapid prototyping and application
development necessary for our products that serve as platforms for future
applications.
PRODUCTS
We have worked with Alcatel, Lucent, NEC and Nortel Networks to develop
seamless interfaces between the proprietary protocols of these leading PBX
vendors and our RVP software platform and standard hardware architecture. We
generally enter into contracts with these PBX vendors which provide us access to
their proprietary protocols and grant us rights to develop, manufacture and sell
products which interface with each vendor's PBX system. As a result of these
relationships, we have developed substantial expertise in understanding and
interfacing with these proprietary PBX protocols. These PBX manufacturers have
tested and validated in their own labs that our RVP platform is interoperable
with a variety of their PBX equipment. Currently, our EXTender series of
products is compatible with the following PBX systems: 4400/4200 (Alcatel);
DEFINITY (Lucent); NEAX 1000/2000/2400 (NEC); Meridian (Nortel Networks) and
Norstar (Nortel Networks).
The EXTender solution consists of the following component parts:
- Customer Premise Equipment, or CPE, Devices. Single- or multi-user
remote location client devices that service branch offices, remote call
centers and telecommuters; and
- Corporate PBX Gateways. PBX switch site products, located at the
corporate location, that seamlessly extend voice traffic, PBX signaling
information and PBX applications to our CPE devices.
Our EXTender series of products enables corporations to provide the
functionality of the PBX and all of its supported applications to users who
traditionally have not had access to the corporate PBX and its voice
applications because of the limitations of current voice systems. Our products
enable the PBX to act as a server that seamlessly distributes the features and
applications of PBX-based voice systems to remote locations over networks such
as ATM, digital data service, DSL, fiber, frame relay, IP, ISDN, T-1, fractional
T-1 and traditional telephone connections. Remote voice users can utilize
digital telephone sets identical to the sets deployed in the corporate
headquarters and access the corporate voice system for applications such as
voicemail, ACD and interactive voice response, and features such as three- or
four-digit internal dialing, conferencing and call forwarding. By enabling all
employees, regardless of location, to have access to the corporate voice system,
our EXTender solutions create a single, unified voice network.
[Diagrams: 3 network topology diagrams that show the implementation of our
products.]
EDGAR DESCRIPTIONS FOR PRODUCT SECTION:
CAPTION: SINGLE-USER PRODUCTS
1. Diagram of single-user product configuration between a corporate location at
which a PBX and data server reside, utilizing PBXtender, and two remote
locations, each with a personal computer and telephone set, utilizing an
EXTender 3000 and EXTender 1000+ via ISDN or a traditional telephone network.
CAPTION: MULTI-USER PRODUCTS
2. Diagram of multiple-user product configuration between a corporate location
at which a PBX resides, utilizing an EXTender 6000 which connects to a network
termination device which connects to public and private networks, and a remote
location. The remote location connects to the public and private network via a
network termination device. A Branch Office EXTender 6000 connects to the
network termination device. Multiple phones connect to the Branch Office
EXTender 6000.
CAPTION: BROADBAND NETWORK PRODUCTS CURRENTLY IN BETA TRIALS
3. Diagram of a corporate location with a PBX connected to a PBXGateway IP which
connects to a network termination device which is connected, through broadband
networks, to remote locations which contain (i) an IP EXTender 4000 connected to
a telephone set and personal computer, (ii) a Branch Office EXTender 6000
connected to a telephone set, and (iii) an EXTender 3200 for ISDL connected to a
telephone set and personal computer. The EXTender 3200 connects directly to the
public and private network. The Branch Office EXTender 6000 and IP EXTender 4000
connect to the public and private network via a network termination device.
CPE Devices
Our single-user product line enables telecommuters and remote call center
agents to seamlessly connect to the corporate PBX and the LAN over data
networks.
- EXTender 1000+. The EXTender 1000+ is a single-user, integrated access
device that supports both PBX voice and personal computer, or PC, data
over a single traditional telephone line. The remote user's PC and
full-featured digital telephone set plug into the product, which
terminates and multiplexes voice and data over a single telephone line.
The product contains a built-in, industry-standard 56 kilobits per
second, or Kbps, modem which enables the user to access the corporate
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<PAGE> 42
LAN and supports standard Windows-based, dial-up networking technology.
The EXTender 1000+ unit is situated at the remote location and connects
to either another EXTender 1000+ unit or a PBXtender gateway product
located at the corporate PBX site. In the future, the EXTender 1000+ will
also be able to connect to a PBXgateway IP product located at the
corporate PBX site.
- EXTender 3000. The EXTender 3000 is a single-user, integrated access
device that supports both PBX voice and PC data over an ISDN basic rate
interface, or BRI, connection. An ISDN BRI connection is composed of two
64 Kbps lines, or b-channels, that each can deliver a separate network
connection. With its built-in ISDN line interface, the EXTender 3000
enables the remote user to connect a digital telephone set and a personal
computer into the EXTender 3000. The EXTender 3000 unit situated at the
remote location is connected to either another EXTender 3000 unit or a
PBXtender gateway product located at the corporate PBX site. In the
future, the EXTender 3000 will also be able to connect to a PBXgateway IP
product located at the corporate PBX site. There are three versions of
the EXTender 3000:
- EXTender 3000S and EXTender 3000T. The EXTender 3000S and the
EXTender 3000T utilize a serial data connection and offer simultaneous
voice and PC data multiplexed over one ISDN BRI b-channel. The second
b-channel is available for analog devices such as a fax, additional
phone or a modem. The EXTender 3000T uses standard Windows-based,
dial-up networking technology to enable the user to set up a dial-up
network connection to a remote access server at the corporate location
for remote LAN access.
- EXTender 3000E. The EXTender 3000E offers dedicated voice over one
ISDN BRI b-channel and a 64 Kbps Ethernet data connection on the
second b-channel. The EXTender 3000E uses an Ethernet port and
bridging technology to enable simultaneous voice and LAN access
capabilities. In addition, standard hardware compression technology is
utilized to significantly enhance data throughput. When not used for
Ethernet data, the second b-channel is available as an analog port,
supporting a fax, additional phone or modem.
- EXTender 3200 for IDSL. The EXTender 3200 for IDSL is a single-user,
integrated access device that delivers voice and PC data over an
integrated digital subscriber line, or IDSL, network connection. IDSL is
DSL-enabled ISDN network connection that combines both b-channels into
one digital connection that can simultaneously transmit packet voice and
data. The product was developed in conjunction with Copper Mountain and
interoperates with Copper Mountain's digital subscriber line access
multiplexer, or DSLAM, product line. DSLAMs are telecommunications
equipment located in the central offices of service providers that
transmit DSL traffic to and from end users. The EXTender 3200 for IDSL
connects to a PBXgateway IP product located at the corporate PBX site.
This product is currently in beta testing and is expected to be
commercially available by the fourth quarter of calendar year 1999.
- IP EXTender 4000. The IP EXTender 4000 is a single-user product that
delivers PBX voice over IP networks. The product requires an external
network termination device such as a DSL or cable modem and delivers
IP-based remote voice over data networks. The IP EXTender 4000 connects
to a PBXgateway IP product located at the corporate PBX site. This
product is currently in beta testing and is expected to be commercially
available by the fourth quarter of calendar year 1999.
Our branch office product provides remote offices with seamless
connectivity to the corporate PBX and the LAN over data networks.
- Branch Office EXTender 6000. The Branch Office EXTender 6000 is a
multi-user product that supports 8 remote users and will scale to support
12 users following the release of a 4-port daughter card that is expected
to be commercially available in the fourth quarter of calendar year 1999.
The product was constructed with standard 19-inch, rack-mountable
hardware so a number of units can easily be deployed together to service
larger remote offices. In addition, the product has dual external WAN
interfaces that allow for multiple network options and redundancy
capability and transmits voice over a wide variety of data networks
including ATM, digital data service, DSL,
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fiber, frame relay, IP, ISDN, T-1 and fractional T-1 connections. The
Branch Office EXTender 6000 can be centrally administered over a Telnet
connection, an in-band RVP connection, or with SNMP or HTML interfaces.
The product's ability to dynamically allocate bandwidth between multiple
users allows for flexible configurations and bandwidth conservation. The
Branch Office EXTender 6000 located at the remote office connects to
either another Branch Office EXTender 6000 unit or a PBXgateway IP
located at the corporate PBX site.
Corporate PBX Gateway Products
Our PBX gateway products, located at the corporate PBX site, interface with
the line side of the PBX and create seamless extensions of voice, PBX signaling
information and PBX applications to our remote CPE products.
- PBXtender. The PBXtender is a high density PBX gateway product that can
support up to 24 ports per chassis. The PBXtender currently supports our
EXTender 1000+ and EXTender 3000 CPE product lines. The PBXtender can be
configured with up to 12 line cards that may be mixed and matched to
support up to 12 analog users or 24 ISDN users simultaneously. The
product also has a Windows-based graphical user interface to enable
remote management and diagnostics of our CPE equipment.
- PBXgateway. The PBXgateway supports a range of our CPE products,
including both multi-user and single-user clients. Depending upon the
version of the product, the PBXgateway will transmit voice over a wide
variety of data networks including ATM, digital data service, DSL, fiber,
frame relay, IP, ISDN, T-1 and fractional T-1 connections. The PBXgateway
can be centrally administered over a Telnet connection, an in-band RVP
connection, or with SNMP and HTML interfaces.
- Branch Office EXTender 6000. The Branch Office EXTender 6000 unit,
located at the corporate PBX site, seamlessly extends the
functionality of the corporate PBX to a Branch Office EXTender 6000
located at the remote office site. This product will transmit voice
over ATM, digital data service, fiber, frame relay, ISDN, T-1 or
fractional T-1 network connections.
- PBXgateway IP. The PBXgateway IP seamlessly extends the functionality
of the corporate PBX to a variety of our multi-user and single-user IP
CPE devices, including the Branch Office EXTender 6000, EXTender 3200
for IDSL, and the IP EXTender 4000. The PBXgateway IP can support up
to 12 simultaneous users across any of these CPE devices over multiple
types of networks, including DSL and IP networks. As part of our
strategy, we intend to utilize this product as a platform to deliver
new applications and services to our remote CPE devices utilizing both
new software components that we intend to develop and third-party
software applications that we intend to incorporate into the product.
The PBXgateway IP is currently in beta testing and is expected to be
commercially available by the fourth quarter of calendar year 1999.
Other Products
- Digital-to-Analog Recording Interface. Our Digital-to-Analog Recording
Interface converts proprietary digital PBX signaling into a standard
analog audio output so that voice calls can be recorded on any voice
logger or recording device. We offer 3 configurations that support from 2
to 48 lines, and are modular in nature, allowing for easy expansion to
accommodate more users. Our Digital-to-Analog Recording Interface is
compatible with the following voice systems: DEFINITY (Lucent); Meridian
(Nortel Networks); Norstar (Nortel Networks); and DMS Centrex (Nortel
Networks).
- Telebridge. The Telebridge series of products emulates digital PBX
telephone sets and terminates calls, allowing computer telephony
integration, or CTI, applications to interface with legacy PBX systems.
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SALES AND MARKETING
We primarily sell our products through an indirect distribution system that
includes the following channels: OEMs and private label partners, ILECs, systems
integrators and distributors, telecom and datacom VARs, and broadband service
providers. We support our sales channels with our own internal sales
professionals as well as marketing programs, educational programs, field
technical support and telephone technical support. At July 31, 1999, our sales
team was composed of a vice president of sales, eight regional sales managers,
three systems engineers, three channel sales managers and two sales
administrators. Our multi-channel strategy enables us to create end-user demand
for our products and services, and access corporate opportunities identified by
our channel partners, while also allowing the customers to choose the reseller
that is most appropriate for delivering those products and services to them.
OUR PRIMARY DISTRIBUTION CHANNELS
<TABLE>
<S> <C>
OEMs and Private Label Partners..... Alcatel, Bell Canada, Dictaphone, Lucent,
NEC
ILECs............................... BellSouth, GTE, SBC
Systems Integrators and
Distributors...................... Anixter, Dacon, Ingram Micro, Sprint North
Supply, Williams Communications
Telecom and Datacom VARs............ Northwest Extension, PB Exchange, Stevens
Communications, TeleCommute Solutions
Broadband Service Providers*........ AT&T Local Services, HarvardNet, JATO
Communications, Northpoint Communications,
Rhythms NetConnections, UUNet (MCI WorldCom)
</TABLE>
- ---------------
* Products in 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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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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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) Argon
Option One CNN Circuit City
Prudential Securities Harte-Hanks Federal Express
Safeco Sitel Otis Elevator
Sun Trust TCI Pacificorp
TD Waterhouse Group Turner Broadcasting Pfizer
</TABLE>
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 seamless access to their
corporate PBX and its applications.
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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 seamlessly 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 line side of proprietary PBX systems;
- digital audio technology, such as echo cancellation and voice compression
algorithms;
- IP telephony;
- wide area network and telephony interfaces; and
- network diagnostic and management frameworks.
At July 31, 1999, we employed 31 people in our engineering organization,
and intend to continue to expand all functional areas of the engineering
organization. We perform research and product development activities at our
principal offices in Newton, Massachusetts, as well as at our Calgary, Alberta
development facility.
Our research and development process is driven by market demand. Product
development begins with a comprehensive functional product specification based
on input from all functional groups and levels within our company. In addition,
we value feedback from our end-user customers and distribution channel partners,
and have incorporated a significant amount of customer-requested functionality
to date. We are also active in industry bodies and standards committees and
utilize information from these organizations in the product development process.
Finally, we have maintained an ongoing dialogue and established technology
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 protocols and new network environments,
developing additional software applications, expanding the port density of our
existing products and implementing additional network management capabilities.
Finally, we will continue to work with third-party software and hardware
manufacturers to establish interoperability between our products and other
important elements within common network environments.
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<PAGE> 48
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 the following equipment and network
circuits to conduct these tests:
- ATM switches, DSLAMs and frame relay access devices;
- enterprise routers that support multiple network interfaces and protocols
including ATM, Ethernet, frame relay, T-1 and V.35;
- multiplexers, inverse multiplexers, channel banks, and channel service
units, or CSUs, and data service units, or DSUs;
- CPE equipment such as DSL modems; and
- traditional telephone, ISDN, 56 Kbps leased line, T-1 and DSL circuits.
By combining the capabilities of our two facilities, we have implemented a
product validation procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is compatible with
most widely deployed network equipment and is capable of adapting to a wide
range of network conditions. Furthermore, the engineers in our product
validation laboratory work continually with validation engineers at other
equipment companies in order to compile feedback and recommendations to improve
our products.
MANUFACTURING
We outsource our manufacturing to two contract manufacturers. Celestica,
which is located in Exeter, New Hampshire and is ISO 9002 registered,
manufactures the Branch Office EXTender and PBXgateway IP products. They provide
full turnkey services, including material procurement, final assembly, testing,
shipment to our customers and warranty repair. Electronic Manufacturing Group
located in Calgary, Alberta manufactures all of our other product lines.
Electronic Manufacturing Group also provides us with printed circuit assemblies.
We are ISO 9001 registered and complete the final assembly, testing and
inspection of these printed circuit assemblies at our Calgary, Alberta facility.
We design and develop the key components, including printed circuit boards
and software, for all of our products. In addition, we determine the components
that are incorporated in our products and select
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<PAGE> 49
the appropriate suppliers of these components. We design the tests and specify
the testing equipment for the product testing performed at Celestica and at our
facility in Calgary, Alberta.
We use a rolling six-month forecast based upon anticipated product orders
to determine our material requirements. Lead times for the materials and
components that we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at a given time.
We, along with our contract manufacturers, may terminate our contracts without
cause at any time. At that time, the terminating party must honor all open
purchases.
COMPETITION
We compete in a new, rapidly evolving and highly competitive and fragmented
industry that is subject to increasing product, market and technology changes
brought about by the introduction of new technologies, the deployment of
broadband networks and changes in the regulatory environment. We believe that
the main competitive factors in our market are the following:
- technology partnerships, particularly with the major PBX manufacturers
and service providers;
- system reliability and performance;
- sales and distribution capability;
- price/performance characteristics;
- access to third-party technology;
- conformance to industry standards;
- 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
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<PAGE> 50
additional features or be introduced earlier than our solutions. Given the
market opportunity, we also expect that other companies may enter our market
with better products and technologies. If any technology that is competing with
ours is more reliable, has better quality, is less expensive or has other
advantages over our technology, then the demand for our products could decrease.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. Successful new
product introductions or enhancements by our competitors could reduce the sales
or market acceptance of our products, perpetuate intense price competition or
make our products obsolete. To be competitive, we must continue to invest
significant resources in research and development, sales and marketing and
customer support. We cannot be sure that we will have sufficient resources to
make these investments or that we will be able to make the technological
advances necessary to be competitive.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark, trade
secret and other intellectual property law, nondisclosure agreements and other
protective measures to protect our proprietary rights. We also utilize
unpatented proprietary knowledge and trade secrets, and employ various methods
to protect our trade secrets and knowledge. We presently have no patents 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.
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<PAGE> 51
EMPLOYEES
At July 31, 1999, we had a total of 80 employees, of which 31 were in
research and development, 29 were in sales, marketing, business development and
customer support, 7 were in manufacturing, and 13 were in finance,
administration and operations. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider relations with
our employees to be good.
FACILITIES
We currently lease approximately 8,000 square feet of space at our
headquarters in Newton, Massachusetts under a lease that expires in June 2002,
and lease an additional 1,500 square feet at our headquarters building in Newton
on a month-to-month basis. We are currently in need of more space and anticipate
leasing additional office space in our current building in Newton, Massachusetts
or moving our corporate headquarters to new office space in the Newton area in
the next 6 to 12 months. We also lease approximately 8,500 square feet at our
development center in Calgary, Alberta under a lease that expires in December
2000.
LEGAL PROCEEDINGS
We are currently not a party to any material legal proceedings.
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<PAGE> 52
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> 53
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 agreed to serve as our Vice President of Product
Marketing commencing 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> 54
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> 55
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,
$96,089; Mr. Zurlo, $11,246; Mr. Williams, $6,748; Mr. Dickerson, $5,848;
and Ms. Lockhart, $8,247. The values of the restricted stock holdings were
calculated on the basis of the fair market value of $0.196 per share at
April 30, 1999, as determined by the Board of Directors, minus the
consideration paid for such shares.
(2) Includes amounts paid in respect of interest due to us from the Named
Executive Officers on certain promissory notes. See "Certain Transactions."
(3) Represents premiums paid for term life insurance.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended April 30, 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Benson........ 244,629 32.7% $0.098 7/16/03 $30,609.32 $38,625.18
Paul K. Zurlo........... 28,359 3.8 0.098 7/16/03 3,548.38 4,477.62
7,650 1.0 0.196 11/13/03 1,913.66 2,414.80
Michael D. Williams..... 17,302 2.3 0.098 7/16/03 2,164.83 2,731.75
7,650 1.0 0.098 9/15/03 957.21 1,207.88
3,825 0.5 0.196 11/13/03 956.83 1,207.40
3,825 0.5 0.196 2/23/04 956.83 1,207.40
</TABLE>
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<PAGE> 56
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey P. Dickerson.... 7,650 1.0 0.098 6/23/03 957.21 1,207.88
16,918 2.3 0.098 7/16/03 2,116.78 2,671.11
7,650 1.0 0.196 11/13/03 1,913.66 2,414.80
Joan E. Lockhart........ 20,986 2.8 0.098 7/16/03 2,625.82 3,313.46
7,650 1.0 0.196 11/13/03 1,913.66 2,414.80
</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 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
$0.098 per share, as determined by the Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Benson........................... -- 244,629 -- $23,983.24
Paul K. Zurlo.............................. -- 36,009 -- 3,530.29
Michael D. Williams........................ -- 32,602 -- 3,196.18
Jeffrey P. Dickerson....................... -- 32,218 -- 3,158.53
Joan E. Lockhart........................... -- 28,636 -- 2,804.02
</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> 57
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> 58
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> 59
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> 60
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 table below does 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> 61
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> 62
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 17,864,432 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)................................ 6,072,989 42.0% 34.0%
Lazard Freres Group(2).................................. 2,158,019 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)...................................... 6,072,989 42.0 34.0
Michael H. Balmuth(9)................................... 6,072,989 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).......................................... 11,232,467 77.2 62.6
</TABLE>
- ---------------
* Less than 1%
(1) Represents 5,537,921 shares held by Summit Ventures IV, L.P., 251,988
shares held by Summit Subordinated Debt Fund, L.P., and 251,362 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> 63
(2) Represents 1,715,353 shares held by Lazard Technology Partners L.P.,
301,472 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 17,864,432 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 23 stockholders of record; (2) 5,640,738 shares of
convertible preferred stock (convertible into 8,630,332 shares of common 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 1,451,155 shares of common stock.
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<PAGE> 64
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 11,787,082 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> 65
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> 66
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, 17,864,432 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 14,464,432
shares of common stock outstanding upon completion of the offering are
restricted securities in that they may be sold in the public market only if
registered or if they qualify for an exemption from registration under the
Securities Act or Rules 144 or 701 of the Securities Act.
All of our officers, directors and stockholders have entered into lock-up
agreements generally providing that they will not offer, pledge, sell, offer to
sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any of the shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
common stock owned by them, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens
Inc. Transfers may be made earlier:
- as a bona fide gift or gifts, provided the donee or donees agree in
writing to be bound by this restriction;
- as a distribution to partners, stockholders or beneficiaries of the
transferor, provided that the distributees agree in writing to be bound
by the terms of this restriction;
- with respect to dispositions or purchases of common stock acquired on the
open market; or
- with the prior written consent of BancBoston Robertson Stephens Inc.
BancBoston Robertson Stephens Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, BancBoston Robertson Stephens Inc. will consider, among
other factors, the stockholder's reasons for requesting the release, the number
of shares for which the release is being requested and market conditions at the
time. Following the expiration of the 180 day lock-up period, additional shares
of common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of MCK or a
person, or persons whose shares are aggregated, who has beneficially owned
restricted securities for at least one year, including the holding period of any
prior owner except an affiliate of MCK, would be entitled to sell within any
three month period a number of shares that does not exceed the greater of 1% of
our then outstanding shares of common stock or the average weekly trading volume
of our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about MCK. Any person, or persons whose shares are aggregated, who
is not deemed to have been an affiliate of MCK at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least two years
including any period of ownership of preceding non-affiliated holders, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
60
<PAGE> 67
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 1,451,155 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 8,678,709 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.
61
<PAGE> 68
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 14,165,181 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
62
<PAGE> 69
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.
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.
63
<PAGE> 70
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.
64
<PAGE> 71
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> 72
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 , 1999
The foregoing report is in the form that will be signed upon the completion
of the 1.53 to 1 stock split contemplated in the first paragraph of Note 14 to
the financial statements. The accompanying consolidated statements of
operations, common stockholders' deficit and cash flows have been adjusted to
reflect this stock split.
/s/ Ernst & Young LLP
Boston, Massachusetts
September 21, 1999
F-2
<PAGE> 73
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 , 1999.
The foregoing report is in the form that will be signed upon the completion
of the 1.53 to 1 stock split contemplated in the first paragraph of Note 14 to
the financial statements. The accompanying consolidated statements of
operations, common stockholders' deficit and cash flows have been adjusted to
reflect this stock split.
/s/ PricewaterhouseCoopers LLP
Calgary, Alberta
September 21, 1999
F-3
<PAGE> 74
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 14,349,525 shares
pro forma at July 31, 1999............ 4,979 5,300 5,675 $ 14,350
Additional paid-in capital.............. 152,352 176,350 8,283,050 13,073,576
Accumulated deficit..................... (19,901,160) (23,897,510) (25,542,271) (25,542,271)
Deferred compensation................... -- -- (6,518,719) (6,518,719)
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> 75
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...................... 975,856
Transaction-related charges......... 493,284 -- -- -- --
----------- ----------- ----------- ---------- -----------
Total operating expenses.......... 3,060,319 5,433,518 8,853,765 1,921,699 3,780,611
----------- ----------- ----------- ---------- -----------
Income (loss) from operations......... 547,311 (357,733) 26,281 6,158 (948,164)
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) (181,082) (122,806) (1,043,412)
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) (378,029) (172,420) (1,093,627)
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) $(2,343,950) $ (565,654) $(1,644,761)
=========== =========== =========== ========== ===========
Basic and diluted net loss per common
share............................... $ (0.39) $ (0.67) $ (0.60) $ (0.15) $ (0.38)
=========== =========== =========== ========== ===========
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 net income
(loss) per share.................... $ (0.25) $ (0.18)
Shares used in computing pro forma
basic and diluted net income (loss)
per share........................... 8,132,866 8,674,492
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 76
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) -- -- -- -- --
Dividends on preferred stock......... -- -- -- (1,965,921) --
Issuance of preferred stock in
exchange for redemption premium.... -- -- -- (1,652,400) --
Net loss............................. (378,029) -- -- -- (378,029) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss).... $ (388,482) -- -- -- --
===========
Balance at April 30, 1999............ 5,300,183 5,300 176,350 (23,897,510) --
Foreign currency translation
adjustment (unaudited)............. $ (40,581) -- -- -- -- --
Deferred compensation associated with
stock option grants................ 7,494,575 (7,494,575)
Amortization of deferred
compensation....................... 975,856
Sale of restricted stock
(unaudited)........................ 374,850 375 612,125 -- --
Dividends on preferred stock
(unaudited)........................ -- -- -- (551,134) --
Net loss (unaudited)................. (1,093,627) -- -- -- (1,093,627) --
----------- --------- ------ ---------- ------------ -----------
Total comprehensive income (loss)
(unaudited)........................ $ (158,352) -- -- -- --
===========
Balance at July 31, 1999
(unaudited)........................ 5,675,033 $5,675 $8,283,050 $(25,542,271) $(6,518,719)
========= ====== ========== ============ ===========
<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)
Dividends on preferred stock......... -- -- (1,965,921)
Issuance of preferred stock in
exchange for redemption premium.... -- -- (1,652,400)
Net loss............................. -- (378,029)
--------- --------- ------------
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 associated with
stock option grants................
Amortization of deferred
compensation....................... 975,856
Sale of restricted stock
(unaudited)........................ -- (612,500) --
Dividends on preferred stock
(unaudited)........................ -- -- (551,134)
Net loss (unaudited)................. -- -- (1,093,627)
--------- --------- ------------
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> 77
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) $ (378,029) $ (172,420) $1,093,627
Depreciation and amortization................. 160,075 230,342 393,977 72,943 132,031
Stock based compensation...................... -- -- -- -- 975,856
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> 78
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> 79
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> 80
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.
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> 81
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> <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) 14,312
-------- --------- ---------
Total.......................................... $204,792 $(953,183) $(181,082)
======== ========= =========
</TABLE>
F-11
<PAGE> 82
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) $ (63,379)
Tax loss with no current benefit......................... -- 330,104 45,843
Foreign tax differential................................. 12,573 (16,290) (12,214)
Non-deductible expenses.................................. 220,103 19,800 29,750
Other, net............................................... (2,244) -- --
-------- --------- ---------
Total.......................................... $302,109 $ -- $ --
======== ========= =========
</TABLE>
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals....................................... $ 201,000 $ 198,000
Tax credits................................................. 32,000 63,000
Net operating loss carryforward............................. -- 48,000
--------- ---------
Total deferred tax assets......................... 233,000 309,000
--------- ---------
Deferred tax liabilities:
Depreciation................................................ (14,000) (18,000)
Other....................................................... (15,000) (10,000)
--------- ---------
Total deferred tax liabilities.................... (29,000) (28,000)
--------- ---------
Valuation allowance......................................... (204,000) (281,000)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
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
$112,600 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> 83
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> 84
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> 85
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. During the three months ended July
31, 1999, the Company recorded a deferred compensation charge of $7,494,575
related to stock options granted below market exercise prices. 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 $380,000, $1,114,000, and $232,000, respectively and net loss per
share would have not differed 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-free interest rate of 5.0%,
4.5% and 5.0%; a weighted-average expected life of the option of five years; and
F-15
<PAGE> 86
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
no dividends. The weighted-average fair value of stock options granted in 1997,
1998 and 1999 was $0.02, $0.02 and $0.02. 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 in June 1998
and 1,538,178 shares of restricted common stock in January 1998 to certain
executives and a member of the Board of Directors in exchange for promissory
notes equal to the fair market value of the common stock on the grant date
($0.098 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 cost.
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> 87
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) $ (378,029) $ (172,420) $(1,093,627) $(378,029) $(1,093,771)
Dividends on preferred 1,643,492(1)
stock.................... 1,010,557 1,220,000 1,965,921 393,234 551,134 455,779(1)_
----------- ----------- ----------- ----------- ----------- ---------- -----------
Numerator for basic and (2,021,521)
diluted earnings per
share-income available to
common stockholders...... $(1,241,207) $(2,333,183) $(2,343,950) $ (565,654) $(1,644,761) (1,549,550)
=========== =========== =========== =========== =========== ========== ===========
Denominator:
Denominator for basic and 8,132,866(2)
diluted earnings per
share -- weighted-average
shares................... 3,188,152 3,476,282 3,881,526 3,657,058 4,304,187 8,674,492(2)
=========== =========== =========== =========== =========== ========== ===========
Basic and diluted earnings $ (0.25)
(loss) per share........... $ (0.39) $ (0.67) $ (0.60) $ (0.15) $ (0.38) $ (0.18)
=========== =========== =========== =========== =========== ========== ===========
</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> 88
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
The Company is contemplating completing a 1.53 to 1 stock split prior to
the effective date of its initial public offering. Share numbers for all periods
presented have been adjusted to give effect to this stock split.
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, we granted 15,300 nonqualified stock options to one of our
Directors, Paul Severino, with an exercise price of $1.63 per share, 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 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 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.
F-18
<PAGE> 89
EDGAR DESCRIPTIONS FOR INSIDE BACK COVER:
[MCK LOGO]
CAPTION: AWARD WINNING PRODUCT LINE
1. Diagram showing logos of awards with the following text: (1) Best of
CTI Expo Spring 1999, Branch Office EXTender 6000; (2) 1998 Product of the Year,
Call Center Magazine, EXTender 3000; (3) 1998 Product of the Year, Computer
Telephony Magazine, EXTender 3000; (4) 1998 Product of the Year, CTI
Magazine, EXTender 3000; (5) 1998 Product of the Year, Call Center Solutions
Magazine, EXTender 3000; (6) Best of Show, CT Expo 98, Computer Telephony
PBXtender; (7) 1998 Judges' Pick Computer Telephony, EXTender 6000; (8) 1998
Editor's Choice, CTI Magazine, EXTender 3000; (9) Best of CT Expo Fall 1998, CTI
Magazine, MCK EXTender 3000; (10) 1998 Editor's Choice, Telemarketing and Call
Center Solutions, PBXtender/IP EXTender 4000; (11) Best of Show, Demo 97, Fall
Expo, Computer Telephony/Teleconnect Magazine, EXTender.
<PAGE> 90
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> 91
[LOGO]
<PAGE> 92
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>
- ---------------
* To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our amended and restated certificate of incorporation provides
that no director of MCK Communications be personally liable to MCK
Communications, its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to MCK Communications or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or repurchases, or (4) for any transaction from which the director
derived an improper personal benefit. In addition, the first amended and
restated certificate of incorporation provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by MCK Communications of its officers and certain non-officer employees under
certain circumstances against expenses, including attorneys fees, judgments,
fines and amounts paid in settlement, reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal proceeding
in which any such person is involved by reason of the fact that such person is
or was an officer or employee of the registrant if such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of MCK Communications, and, with respect to criminal actions
or proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
Under Section 7 of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions, MCK
Communications, its directors, certain officers and persons who control MCK
Communications within the meaning of the Securities Act against certain
liabilities.
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> 93
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> 94
<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>
- ---------------
* To be filed by amendment to this Registration Statement.
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
(b) Consolidated Financial Statement Schedules
II-3
<PAGE> 95
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 September 23, 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. 2 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 September 23, 1999
- --------------------------------------------------- Officer and Director
Steven J. Benson (Principal Executive Officer)
* Chief Financial Officer September 23, 1999
- --------------------------------------------------- (Principal Financial Officer
Paul K. Zurlo and Principal Accounting
Officer)
* Director September 23, 1999
- ---------------------------------------------------
Calvin K. Manz
* Director September 23, 1999
- ---------------------------------------------------
John B. Landry
* Director September 23, 1999
- ---------------------------------------------------
Gregory M. Avis
* Director September 23, 1999
- ---------------------------------------------------
Michael H. Balmuth
* Director September 23, 1999
- ---------------------------------------------------
Paul Severino
* By: /s/ STEVEN J. BENSON
--------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 97
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> 98
<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>
- ---------------
* To be filed by amendment to this Registration Statement.
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
<PAGE> 1
Exhibit 1.1
UNDERWRITING AGREEMENT
__________________, 1999
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated
Hambrecht & Quist, LLC
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. MCK Communications, Inc., a Delaware corporation
(the "Company), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
of its Common Stock, par value $.001 per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares the stockholders of the Company named in
SCHEDULE B (collectively the "Selling Stockholders", which Selling Stockholders
include Summit Ventures IV, L.P., Summit Subordinated Debt Fund, L.P. and Summit
Investors III, L.P., each a "Summit Entity" and collectively the "Summit
Entities") have severally granted to the Underwriters an option to purchase up
to an additional [___] Common Shares in the aggregate, each Selling Stockholder
agreeing to sell up to the amount set forth opposite such Selling Stockholder's
name in SCHEDULE B, all as provided in Section 2. The additional [___] Common
Shares to be sold by the Company and the additional [___] Common Shares to be
sold by the Selling Stockholders pursuant to such option are collectively called
the "Option Shares". The Firm Shares and, if and to the extent such option is
exercised, the Option Shares are collectively called the "Shares". BancBoston
Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated and Hambrecht & Quist, LLC agreed to act as representatives of the
several Underwriters (in such capacity, the "Representatives") in connection
with the offering and sale of the Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-[___]), which contains a form of prospectus to be used in
connection with the public offering and sale of the Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement". Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement",
<PAGE> 2
and from and after the date and time of filing of the Rule 462(b) Registration
Statement the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. Such prospectus, in the form first used by the
Underwriters to confirm sales of the Shares, is called the "Prospectus";
provided, however, if the Company has, with the consent of BancBoston Robertson
Stephens Inc., elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated [___] (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All references
in this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company and each of the Selling Stockholders hereby
confirm their respective agreement with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows.
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale of
the Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or
2
<PAGE> 3
any post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by the
Representative expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representative one complete conformed copy of the Registration
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without exhibits)
and preliminary prospectuses and the Prospectus, as amended or supplemented, in
such quantities and at such places as the Representative has reasonably
requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends
3
<PAGE> 4
paid to the Company or other subsidiaries, any of its subsidiaries on any class
of capital stock or repurchase or redemption by the Company or any of its
subsidiaries of any class of capital stock.
(h) Independent Accountants. Each of Ernst & Young LLP and
PricewaterhouseCoopers LLP, who have expressed their opinion with respect to the
financial statements (which term as used in this Agreement includes the related
notes thereto) and supporting schedules filed with the Commission as a part of
the Registration Statement and included in the Prospectus, are independent
public or certified public accountants as required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary Selected
Financial Data", "Selected Financial Data" and "Capitalization" fairly present
the information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(j) Company's Accounting System. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21 to the Registration Statement.
(l) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or limited liability company, as the
case may be, in good standing under the laws of the jurisdiction in which it is
organized with full corporate power and authority to own its properties and
conduct its business as described in the prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
4
<PAGE> 5
(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making
Other Distributions. No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the Prospectus).
The Common Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(p) Stock Exchange Listing. The Shares have been approved for inclusion
on the Nasdaq National Market, subject only to official notice of issuance.
(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(r) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a
5
<PAGE> 6
breach or violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to, (i)
the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which the Company or any of its subsidiaries is a party or bound or to which its
or their property is subject or (iii) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company or any of its subsidiaries
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties.
(s) No Defaults or Violations. Neither the Company nor any subsidiary
is in violation or default of (i) any provision of its charter or by-laws, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(v) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in Section 1(A)(i) above (or elsewhere in
the Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such property
by the Company or such subsidiary. The real property, improvements, equipment
and personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made
6
<PAGE> 7
of such real property, improvements, equipment or personal property by the
Company or such subsidiary.
(w) Tax Law Compliance. The Company and its subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(A)(i) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(x) Intellectual Property Rights. Each of the Company and its
subsidiaries owns or possesses adequate rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(y) Year 2000 Preparedness. There are no issues related to the
Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i)
are of a character required to be described or referred to in the Registration
Statement or Prospectus by the Securities Act which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any Material Adverse Change or that might materially
affect their properties, assets or rights. All internal computer systems and
each Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below) of
those products of the Company and each of its subsidiaries fully comply with
Year 2000 Qualification Requirements. "Year 2000 Qualifications Requirements"
means that the internal computer systems and each Constituent
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<PAGE> 8
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its Subsidiaries (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designated to ensure date
and time entry recognition and calculations, and date data interface values that
reflect the century, (iii) accurately manage and manipulate data involving dates
and times, including single century formulas and multi-century formulas, and
will not cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates, (iv) accurately
process any date rollover, and (v) accept and respond to two-digit year date
input in a manner that resolves any ambiguities as to the century. "Constituent
Component" means all software (including operating systems, programs, packages
and utilities), firmware, hardware, networking components, and peripherals
provided as part of the configuration. The Company has inquired of material
vendors as to their preparedness for the Year 2000 and has disclosed in the
Registration Statement or Prospectus any issues that might reasonably be
expected to result in any Material Adverse Change.
(z) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance
8
<PAGE> 9
by the employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a Material
Adverse Change.
(dd) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Each officer and director of the company and
each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(ff) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
Any certificate signed by an officer of the Company and delivered
to the Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
(gg) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any of its subsidiaries, has made any
contribution or other payment to any official of, or candidate for, any federal,
state or foreign office in violation of any law or of the character required to
be disclosed in the Prospectus.
(hh) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, any of its subsidiaries or their "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA. "ERISA Affiliate"
means, with respect to the Company or a subsidiary of the Company, any member of
any group of organizations described in Sections 414(b),(c),(m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such subsidiary
is a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates. No "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates, if such "employee benefit
9
<PAGE> 10
plan" were terminated, would have any "amount of unfounded benefit liabilities"
(as defined under ERISA). Neither the Company, its subsidiaries nor any of their
ERISA Affiliates has incurred or reasonably expects to incur any liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be qualified
under Section 401(a) of the Code is so qualified and nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification.
Any certificate signed by an officer of the Company and delivered
to the Representatives or to counsel for the Underwriters shall be deemed to be
a representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and MCK Communications,
Inc., as custodian (the "Custodian"), relating to the deposit of the Shares to
be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of
Attorney appointing certain individuals named therein as such Selling
Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set
forth therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles. Each Selling Stockholder agrees that the Shares to be sold
by such Selling Stockholder on deposit with the Custodian is subject to the
interests of the Underwriters, that the arrangements made for such custody are
to that extent irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Custody Agreement, by any act of the Selling Stockholder, by operation of
law, by death or incapacity of such Selling Stockholder or by the occurrence of
any other event. If such Selling Stockholder should die or become incapacitated,
or if any other event should occur, before the delivery of the Shares to be sold
by such Selling Stockholder hereunder, the documents evidencing the Shares to be
sold by such Selling Stockholder then on deposit with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if
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such death, incapacity or other event had not occurred, regardless of whether or
not the Custodian shall have received notice thereof.
(c) Title to Shares to be Sold. Such Selling Stockholder is the lawful
owner of the Shares to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Shares, as provided herein, such
Selling Stockholder will convey good and marketable title to such Shares, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(d) All Authorizations Obtained. Such Selling Stockholder has, and on
the Second Closing Date (as defined below) will have, good and valid title to
all of the Company Shares which may be sold by such Selling Stockholder pursuant
to this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its charter or by-laws,
partnership agreement, or other organizational documents to enter into this
Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and
deliver all of the Shares which may be sold by such Selling Stockholder pursuant
to this Agreement and to comply with its other obligations hereunder and
thereunder.
(e) No Further Consents, Authorization or Approvals. No consent,
approval, authorization or order of any court or governmental agency or body is
required for the consummation by such Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the Securities
Act and such as may be required under the federal and provincial securities laws
of Canada or the blue sky laws or any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters and such other
approvals as have been obtained.
(f) Non-Contravention. Neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach or
violation of, or constitute a default under any law or the terms of any
indenture or other agreement or instrument to which such Selling Stockholder is
party or bound, any judgment, order or decree applicable to such Selling
Stockholder or any order of any court or regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.
(g) No Registration or Other Similar Rights. Such Selling Stockholder
does not have any registration or other similar rights to have any equity or
debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
(h) No Preemptive, Co-sale or other Rights. Such Selling Stockholder
does not have, or has waived prior to the date hereof, any preemptive right,
co-sale right or right of first refusal or other similar right to purchase any
of the Shares that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to acquire, and
does not have any right or arrangement to
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acquire, any capital stock, right, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(i) Disclosure Made by Such Selling Stockholder in the Prospectus. All
information furnished by or on behalf of such Selling Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
Second Closing Date (as defined below) will be, true, correct, and complete in
all material respects, and does not, and on the Second Closing Date will not,
contain any untrue statement of a material fact or omit to state any material
fact necessary to make such information not misleading. Such Selling Stockholder
confirms as accurate the number of shares of Company Shares set forth opposite
such Selling Stockholder's on SCHEDULE B hereto (both prior to and after giving
effect to the sale of the Shares).
(j) No Price Stabilization or Manipulation. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(k) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the sale by the Selling Stockholders
of the Shares.
(l) Distribution of Offering Materials by the Selling Stockholders. The
Selling Stockholders have not distributed and will not distribute, prior to the
later of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares by such Selling Stockholder other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(m) Confirmation of Company Representations and Warranties. Without
having undertaken to determine independently the accuracy or completeness of
either the representations and warranties of the Company contained herein or the
information contained in the Registration Statement, to the knowledge of such
Selling Stockholder, the representations and warranties of the Company contained
in Section 1A are true and correct, and such Selling Stockholder is familiar
with the Registration Statement and has no knowledge of any material fact,
condition or information not disclosed in the Registration Statement which has
had or may have a Material Adverse Effect. The information pertaining to such
Selling Stockholder under the caption "Principal Stockholders" in the Prospectus
is complete and accurate in all material respects.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the
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representations, warranties and agreements herein contained, and upon the terms
but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on SCHEDULE A. The purchase price per
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representative at 6:00 a.m. San Francisco time, at the offices of McDermott,
Will & Emery, Boston, Massachusetts (or at such other place as may be agreed
upon among the Representatives and the Company), (i) on the third (3rd) full
business day following the first day that Shares are traded, (ii) if this
Agreement is executed and delivered after 1:30 P.M., San Francisco time, the
fourth (4th) full business day following the day that this Agreement is executed
and delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representative and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
2(g) hereof, the Representative may, in its sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representative.
(c) The Option Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company and
the Selling Stockholders hereby grant an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of [___] Option Shares
from the Company and the Selling Stockholders at the purchase price per share to
be paid by the Underwriters for the Firm Shares. The option granted hereunder is
for use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Shares. The option granted hereunder
may be exercised at any time upon notice by the Representative to the Company
and the Custodian, which notice may be given at any time within thirty (30) days
from the date of this Agreement. The time and date of delivery of the Option
Shares, if subsequent to the First Closing Date, is called the "Second Closing
Date" and shall be determined by the Representative and shall not be earlier
than three (3) nor later than five (5) full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representative may determine) that bears the same proportion to the total number
of Option Shares to be purchased as the number of Firm Shares set forth on
SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares and (ii) the Company and each Selling Stockholder agree, severally
and not jointly, to sell the number of Option Shares (subject to such
adjustments to eliminate fractional shares as the Representative may determine)
that bears the same proportion to the total number of Option Shares to be sold
as the number of Option Shares set forth in SCHEDULE B opposite the name of such
Selling Stockholder (or, in the case of the Company, as the number of Option
Shares to be sold by the Company as set forth in the paragraph "Introductory" of
this Agreement) bears to the total number of Option Shares. The Representative
may cancel the option
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at any time prior to its expiration by giving written notice of such
cancellation to the Company and the Custodian.
(d) Public Offering of the Shares. The Representative hereby advises
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representative, in its sole judgment, has determined
is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company. Payment for
the Shares to be sold by the Selling Stockholders shall be made at the Second
Closing Date by wire transfer of immediately available funds to the order of the
Custodian.
It is understood that the Representative has been authorized, for
its own account and the accounts of the several Underwriters, to accept delivery
of and receipt for, and make payment of the purchase price for, the Firm Shares
and any Option Shares the Underwriters have agreed to purchase. BancBoston
Robertson Stephens Inc., individually and not as the Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Shares to
be purchased by any Underwriter whose funds shall not have been received by the
Representative by the First Closing Date or the Second Closing Date, as the case
may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable upon
the sale or delivery of the Shares to be sold by such Selling Stockholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder hereunder and to hold such amounts for the account of such Selling
Stockholder with the Custodian under the Custody Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representative for the
accounts of the Representative and the several Underwriters at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company and
the Selling Stockholders shall also deliver, or cause to be delivered a credit
representing the Option Shares the Underwriters have agreed to purchase at the
Second Closing Date, to an account or accounts at The Depository Trust Company
as designated by the Representatives for the accounts of the Representative and
the several Underwriters, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
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(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon Eastern Standard Time on the second business day following the date the
Shares are released by the Underwriters for sale to the public, the Company
shall deliver or cause to be delivered copies of the Prospectus in such
quantities and at such places as the Representative shall request.
SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representative
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representative shall not previously have been advised
and furnished with a copy or to which the Representative shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the
Representative promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt of
any comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representative may reasonably have designated in writing and
will make such applications, file such documents and furnish such information as
may be reasonably required for that purpose, provided the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports and other documents, as
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are or may be required to continue such qualifications in effect for so long a
period as the Representative may reasonably request for distribution of the
Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. The Company will comply with the Securities Act and the Exchange
Act, and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representative or counsel for the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading, or, if it is necessary at any time
to amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission, and furnish at its own
expense to the Underwriters and to dealers, an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representative, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representative may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
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(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending October 31, 2000 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representative. During the period of five
years hereafter the Company will furnish to the Representative (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Stockholder will not, during the Lock-Up Period, make a disposition of
Securities (as defined in Exhibit A hereto), or exercise any rights to cause the
registration of any Securities, now owned or hereafter acquired directly by such
person or with respect to
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which such person has or hereafter acquires the power of disposition, otherwise
than (i) as a bona fide gift or gifts, provided the donee or donees thereof
agree in writing to be bound by this restriction, (ii) as a distribution to
partners or shareholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, (iii) with
respect to dispositions of Common Shares acquired on the open market or (iv)
with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a disposition of Securities
during the Lock-Up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by such person except in compliance with this restriction.
(b) Delivery of Forms W-8 and W-9. To deliver to the Representative
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States Person).
(c) Notification of Untrue Statements, etc. If, at any time prior to
the date on which the distribution of the Common Shares as contemplated herein
and in the Prospectus has been completed, as determined by the Representative,
such Selling Stockholder has knowledge of the occurrence of any event as a
result of which the Prospectus or the Registration Statement, in each case as
then amended or supplemented, would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, such Selling Stockholder will promptly notify the Company and the
Representative.
(d) Such Selling Stockholder shall not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company, the Selling
Stockholders and Summit Entities set forth in Sections 1(A) and 1(B) hereof as
of the date hereof and as of the First Closing Date as though then made and,
with respect to the Option Shares, as of the Second Closing Date as though then
made, to the timely performance by the Company and the Selling Stockholders of
their respective covenants and other obligations hereunder, and to each of the
following additional conditions:
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(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the National Association of Securities Dealers, LLC The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling Stockholder or any Underwriter, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the satisfaction of Underwriters' Counsel; and
the National Association of Securities Dealers, LLC shall have raised no
objection to the fairness and reasonableness of the underwriting terms and
arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, there shall not have been any Material Adverse Change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of McDermott Will & Emery LLP counsel for the Company substantially in the form
of EXHIBIT B attached hereto, dated the First Closing Date, or the Second
Closing Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in EXHIBIT B may rely as to
questions of law not involving the laws of the United States, The Commonwealth
of Massachusetts or the State of Delaware upon opinions of local counsel
satisfactory to the Representative, and as to questions of fact upon
representations or certificates of officers of the Company, and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Testa, Hurwitz & Thibeault, LLP, substantially in the form of EXHIBIT
C hereto. The Company
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shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
each of Ernst & Young LLP and PricewaterhouseCoopers LLP addressed to the
Underwriters, dated the First Closing Date or the Second Closing Date, as the
case may be, confirming that each are, or in the case of PricewaterhouseCoopers
LLP have been, independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations and based upon the procedures described in such letter delivered to
you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4) business
days prior to the First Closing Date or the Second Closing Date, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the First Closing Date or the
Second Closing Date, as the case may be, and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from each of Ernst & Young LLP and PricewaterhouseCoopers LLP
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are, or in the case of PricewaterhouseCoopers LLP have been,
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) in
the case of Ernst & Young LLP set forth their opinion with respect to their
examination of the consolidated balance sheets of the Company as of April 30,
1999 and April 30, 1998 and related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two (2) years ended April
30, 1999 and, (iii) in the case of PricewaterhouseCoopers LLP set forth their
opinion with respect to their examination of the consolidated statements of
operations, shareholders' equity, and cash flows for the year ended April 30,
1997, (iv) state that Ernst & Young LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Ernst & Young LLP as described
in SAS 71 on the financial statements for each of the quarters in the
nine-quarter period ended July 31, 1999 (the "Quarterly Financial Statements"),
(v) state that in the course of such review, nothing came to the attention of
Ernst & Young LLP that leads them to believe that any material modifications
need to be made to any of the Quarterly Financial Statements in order for them
to be in compliance with generally accepted accounting principles consistently
applied across the periods presented, and address other matters agreed upon by
Ernst & Young LLP and you. In addition, you shall have received from each of
Ernst & Young LLP and PricewaterhouseCoopers LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's consolidated financial statements as
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<PAGE> 21
indicated above did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(g) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the First Closing Date
or the Second Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto contained all material information required to be
included therein by the Securities Act and in all material respects
conformed to the requirements of the Securities Act, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
did not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and, since the effective
date of the Registration Statement, there has occurred no event required
to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and
its subsidiaries considered as one enterprise, (b) any transaction that
is material to the Company and its subsidiaries considered as one
enterprise, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to
the Company and its subsidiaries considered as one enterprise, incurred
by the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one
enterprise, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or any of its subsidiaries,
or (f) any loss or damage (whether or not insured) to the property of
the Company or any of its subsidiaries which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
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<PAGE> 22
(h) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of EXHIBIT A attached hereto from each officer and director of the
Company, each Selling Stockholder and each beneficial owner of one or more
percent of the outstanding issued share capital of the Company.
(j) Opinion of Counsel for the Selling Stockholders. You shall have
received on the Second Closing Date the opinion of ________________________,
counsel for the Selling Stockholders, which counsel shall be satisfactory to the
Representatives substantially in the form of EXHIBIT E attached hereto, dated as
of such Closing Date, addressed to the Underwriters and with reproduced copies
or signed counterparts thereof for each of the Underwriters.
In rendering such opinion, such counsel may rely as to questions of law
not involving the laws of the United States, the Commonwealth of Massachusetts
or the State of Delaware upon opinions of local counsel satisfactory to the
Representatives and as to questions of fact upon representations or certificates
of the Selling Stockholders or officers of the Selling Stockholders (when the
Selling Stockholder is not a natural person), and of governmental officials, in
which case their opinion is to state that they are so relying and that they have
no knowledge of any material misstatement or inaccuracy of any material
misstatement or inaccuracy in any such opinion, representation or certificate so
relied upon shall be delivered to you, as Representatives of the Underwriters,
and to Underwriters' Counsel.
(k) Selling Stockholders' Certificate. On the Second Closing Date, the
Representative shall received a written certificate executed by the
Attorney-in-Fact of each Selling Stockholder, dated as of such Closing Date, to
the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(l) Selling Stockholders' Documents. At least three weeks prior to the
date hereof, the Company and the Selling Stockholders shall have furnished for
review by the Representative copies of the Power of Attorney and Custody
Agreement executed by each of the Selling Stockholders and such further
information, certificates and documents as the Representative may reasonably
request.
(m) Stock Exchange Listing. The Shares shall have been approved for
inclusion listing on the Nasdaq National Market, subject only to official notice
of issuance.
(n) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
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<PAGE> 23
(o) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representative and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representative by notice to the Company and the Custodian at any time on or
prior to the First Closing Date and, with respect to the Option Shares, at any
time prior to the Second Closing Date, which termination shall be without
liability on the part of any party to any other party, except that Section 5
(Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses),
Section 7 (Indemnification and Contribution) and Section 10 (Representations and
Indemnities to Survive Delivery) shall at all times be effective and shall
survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company and the Selling
Stockholders, jointly and severally, agree to pay all costs, fees and expenses
incurred in connection with the performance of their obligations hereunder and
in connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under the
state securities or blue sky laws or the provincial securities laws of Canada or
any other country, and, if requested by the Representative, preparing and
printing a "Blue Sky Survey", an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the National Association of Securities Dealers, LLC review and
approval of the Underwriters' participation in the offering and distribution of
the Common Shares (viii) the fees and expenses associated with listing the
Common Shares on the Nasdaq National Market, (ix) all costs and expenses
incident to the preparation and undertaking of "road show" preparations to be
made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
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<PAGE> 24
The Selling Stockholders further agree with each Underwriter
to pay (directly or by reimbursement) all fees and expenses incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Stockholders, (ii) fees
and expenses of the Custodian and (iii) expenses and taxes incident to the sale
and delivery of the Common Shares to be sold by such Selling Stockholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).
This Section 5 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Stockholders, on the other hand.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representative pursuant to Section 4, Section 7, Section 8,
Section 9 or Section 15, or if the sale to the Underwriters of the Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company or the Selling Stockholders to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representative and the other Underwriters (or such Underwriters as
have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representative and the Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters.
(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
24
<PAGE> 25
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i), (ii), (iii) or (iv) above, provided that the Company shall not be liable
under this clause (v) to the extent that a court of competent jurisdiction shall
have determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the fees and disbursements of counsel chosen
by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred
by such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representative expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(2) Each of the Selling Stockholders, jointly and severally,
agrees to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company, which consent shall not be
unreasonably withheld), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary
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<PAGE> 26
prospectus or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, in the case of subparagraphs (i) and (ii) of this
Section 7(a)(2) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company or such Underwriter by such Selling Stockholder, directly or through
such Selling Stockholder's representatives, specifically for use in the
preparation thereof; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Selling Stockholders contained herein; or
(iv) in whole or in part upon any failure of the Selling Stockholders to perform
their respective obligations hereunder or under law; or (v) any act or failure
to act or any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered by
clause (i), (ii), (iii) or (iv) above, provided that such Selling Stockholder
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to such Selling Stockholder by the Representative
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Shares, or any
person controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. Notwithstanding
the foregoing, the liability under this Section 7(a) (excluding any liability
based on any statutory or common law claim, including without limitation, fraud)
of the Summit Entities shall not exceed, at any time, the sum of (i) the
aggregate amount of proceeds from the offering used or to be used to redeem the
Series A Redeemable Preferred Stock held by the Summit Entities as of the date
hereof and (ii) the amount equal to the initial public offering price of the
Shares sold by the Summit Entities, less the underwriting discount, as set forth
on the cover page of the Prospectus (the "Summit Proceeds"), and the liability
under this Section 7(a) for each other Selling Stockholder shall not exceed the
amount equal to the initial public offering
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<PAGE> 27
price of the Shares sold by such Selling Stockholder, less the underwriting
discount, as set forth on the cover page of the Prospectus. The indemnity
agreement set forth in this Section 7(a) shall be in addition to any liabilities
that the other Selling Stockholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers and the
Selling Stockholders . Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Stockholders and
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company or any such
director, officer, Selling Stockholder or controlling person may become subject,
under the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by the Representative
expressly for use therein; and to reimburse the Company or any such director,
officer, Selling Stockholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The indemnity agreement set forth in this Section
7(b) shall be in addition to any liabilities that each Underwriter may otherwise
have.
(c) Information Provided by the Underwriters. The Company and each of
the Selling Stockholders hereby acknowledges that the only information that the
Underwriters have furnished to the Company and the Selling Stockholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth in the table in the first paragraph and the second paragraph under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or
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<PAGE> 28
otherwise than under the indemnity agreement contained in this Section 7 or to
the extent it is not prejudiced as a proximate result of such failure. In case
any such action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to the extent that
it shall elect, jointly with all other indemnifying parties similarly notified,
by written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that a conflict may arise between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc.
in the case of Section 7(b) and Section 8), representing the indemnified parties
who are parties to such action), (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by
28
<PAGE> 29
such indemnified party, unless such settlement, compromise or consent includes
(i) an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding and (ii)
does not include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriter on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders (such
amount with respect to the Summit Entities being the Summit Proceeds) bears to
the total underwriting discounts and commissions received by the Underwriters,
as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Selling Stockholders on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
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(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on SCHEDULE A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representative with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representative or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required
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<PAGE> 31
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date, this Agreement may be terminated by the Representative by written notice
given to the Company and the Custodian if at any time (i) trading or quotation
in any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the National
Association of Securities Dealers, LLC; (ii) a general banking moratorium shall
have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any change
in the United States or international financial markets, or any substantial
change or development involving a prospective change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representative is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representative there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representative may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company or the Selling Stockholders to
any Underwriter, except that the Company and the Selling Stockholders shall be
obligated to reimburse the expenses of the Representative and the Underwriters
pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company or the
Selling Stockholders, or (c) of any party hereto to any other party except that
the provisions of Section 7 shall at all times be effective and shall survive
such termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company, the Selling Stockholders, or any of its
or their partners, officers or directors or any controlling person, as the case
may be, and will survive delivery of and payment for the Shares sold hereunder
and any termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
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<PAGE> 32
If to the Representative:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company or the Principal Subsidiary:
MCK COMMUNICATIONS, INC.
313 Washington Street
Newton, MA 02458
Facsimile: (617) 454-6101
Attention: Woody Benson, President and CEO
If to the Selling Stockholders:
If to the Summit Entities:
Summit Ventures IV, L.P.
Summit Investors III, L.P.
Summit Subordinated Debt Fund, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
With a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 021101
Attention: James Westra, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, [and personal representatives], and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section,
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<PAGE> 33
paragraph or provision of this Agreement is for any reason determined to be
invalid or unenforceable, there shall be deemed to be made such minor changes
(and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) Governing Law. This agreement shall be governed by and construed
in accordance with the internal laws of the State of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 15. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL
AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail
to sell and deliver to the Underwriters the Shares to be sold and delivered by
such Selling Stockholders at the First Closing Date pursuant to this Agreement,
then the Underwriters may at their option, by written notice from the
Representative to the Company and the Selling Stockholders, either (i) terminate
this Agreement without any liability on the part of any Underwriter or, except
as provided in Sections 5, 6, and 7 hereof, the Company or the Selling
Stockholders, or (ii) purchase the shares which the
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<PAGE> 34
Company and other Selling Stockholders have agreed to sell and deliver in
accordance with the terms hereof. If one or more of the Selling Stockholders
shall fail to sell and deliver to the Underwriters the Shares to be sold and
delivered by such Selling Stockholders pursuant to this Agreement at the Second
Closing Date, then the Underwriters shall have the right, by written notice from
the Representative to the Company and the Selling Stockholders, to postpone the
Second Closing Date, as the case may be, but in no event for longer than seven
days in order that the required changes, if any, to the Registration Statement
and the Prospectus or any other documents or arrangements may be effected.
SECTION 16. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 35
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
MCK COMMUNICATIONS, INC.
By:__________________________
[Title]
With Respect to Sections 1(B), 2(B) and 7:
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
Its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
By:__________________________
Its:__________________________
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners IV, L.P.,
Its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
By:__________________________
Its:__________________________
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<PAGE> 36
SUMMIT INVESTORS III, L.P.
By:__________________________
[SELLING STOCKHOLDERS]
By:__________________________
Attorney-in-fact for the Selling Stockholders
named in SCHEDULE B hereto
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<PAGE> 37
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
DAIN RAUSCHER WESSELS, A DIVISION OF
DAIN RAUSCHER INCORPORATED
HAMBRECHT & QUIST, LLC
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
37
<PAGE> 38
SCHEDULE A
Number of
Firm Common Shares
Underwriters To be Purchased
BANCBOSTON ROBERTSON STEPHENS INC....................... [___]
DAIN RAUSCHER WESSELS, A Division of Dain Rauscher [___]
Incorporated............................................
HAMBRECHT & QUIST, LLC.................................. [___]
[___] .................................................. [___]
[___] .................................................. [___]
Total.......................................... [___]
S-A
<PAGE> 39
SCHEDULE B
Number of Maximum Number of
Selling Stockholder Firm Shares Option Shares
to be Sold to be Sold
Selling Stockholder #1
[address]
Attention: [___] ................. [___] [___]
Selling Stockholder #2
[address]
Attention: [___] ................. [___] [___]
Total:................... [___] [___]
============ ================
S-B
<PAGE> 40
EXHIBIT A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
[ Co-Managers]
[As Representatives of the Several Underwriters]
[c/o BancBoston Robertson Stephens Inc.]
555 California Street, Suite 2600
San Francisco, California 94104
RE: ____________________ (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act as
the representative[s] (the "Representative[s]") of the underwriters. The
undersigned recognizes that the Offering will be of benefit to the undersigned
and will benefit the Company by, among other things, raising additional capital
for its operations. The undersigned acknowledges that you and the other
underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to Dispositions or purchases
of Common Shares acquired on the open market or (iv) with the prior written
consent of BancBoston Robertson Stephens Inc., for a period commencing on the
date hereof and continuing to a date 180 days after the Registration Statement
is declared effective by the Securities and Exchange Commission (the "Lock-up
Period"). The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such
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prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held by
the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
Dated: ______________________________________
_____________________________________________
Printed Name of Holder
By: _________________________________________
Signature
_____________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
A-2
<PAGE> 42
EXHIBIT B
MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL
(i) The Company and each Significant Subsidiary (as that term is defined
in Regulation S-X of the Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a Material Adverse Effect. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than MCK
Telecommunications, Inc.;
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the issued and outstanding shares of
capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor
in accordance with the terms hereof, will be duly and validly issued and
fully paid and nonassessable, and will not have been issued in violation
of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right.
(vii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
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<PAGE> 43
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(ix) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened under the
Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm
Shares or the Option Shares have been validly registered under the
Securities Act and the Rules and Regulations of the Exchange Act and the
applicable rules and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which
such counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and
Regulations;
(xii) The information in the Prospectus under the caption "Description
of Capital Stock," to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is a fair
summary of such matters and conclusions; and the forms of certificates
evidencing the Common Stock and filed as exhibits to the Registration
Statement comply with Delaware law;
(xiii) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the
Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which are not described or referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's charter or bylaws or (b) to such counsel's
B-2
<PAGE> 44
knowledge, result in a material breach or violation of any of the
terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to
which the Company is a party or by which its properties are bound, or
any applicable statute, rule or regulation known to such counsel or,
to such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their properties or
operations;
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except (i) such as have been obtained under the Securities Act, (ii)
such as may be required under state or other securities or Blue Sky laws
in connection with the purchase and the distribution of the Shares by
the Underwriters, (iii) such as may be required by the National
Association of Securities Dealers, LLC and (iv) such as may be required
under the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act, other than those
described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries,
or over any of their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus [and any Incorporated Document],
no holders of Company Shares or other securities of the Company have
registration rights with respect to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights known to such counsel
to registration of such shares of Company Shares or other securities,
because of the filing of the Registration Statement by the Company have,
with respect to the offering contemplated thereby, waived such rights or
such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement
or have included securities in the Registration Statement pursuant to
the exercise of and in full satisfaction of such rights.
(xx) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.
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(xxi) To such counsel's knowledge, the Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their
business as now conducted; and the expected expiration of any such
Intellectual Property Rights would not result in a Material Adverse
Effect. The Company has not received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision,
would result in a Material Adverse Effect. To such counsel's knowledge,
the Company's discoveries, inventions, products, or processes referred to
in the Registration Statement or Prospectus do not infringe or conflict
with any right or patent which is the subject of a patent application
known to the Company.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
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EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The Firm Shares and the Option Shares have been duly authorized and,
upon issuance and delivery and payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid
and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement
has become effective under the Act and, to such counsel's knowledge, no
stop order proceedings with respect thereto have been instituted or
threatened or are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm
Shares or the Option Shares have been validly registered under the
Securities Act and the Rules and Regulations of the Exchange Act and the
applicable rules and regulations of the Commission thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from McDermott, Will & Emery LLP, each dated
the date hereof, and furnished to you in accordance with the provisions of the
Underwriting Agreement. Such opinions appear on their face to be appropriately
responsive to the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated
in conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state
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a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
C-2
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MCK COMMUNICATIONS, INC.
MCK Communications, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is MCK Communications, Inc. The
date of the filing of its original Certificate of Incorporation (the "Original
Certificate") with the Secretary of State of the State of Delaware was August
19, 1999.
2. This Amended and Restated Certificate of Incorporation
amends, restates and integrates the provisions of the Original Certificate, as
heretofore amended, and (i) was duly adopted by the Board of Directors in
accordance with the provisions of Section 245 of the Delaware General
Corporation Law (the "DGCL"), (ii) was declared by the Board of Directors to be
advisable and in the best interests of the Corporation and was directed by the
Board of Directors to be submitted to and be considered by the stockholders of
the Corporation entitled to vote thereon for approval by the affirmative vote of
such stockholders in accordance with Section 242 of the DGCL and (iii) was duly
adopted by a consent in lieu of a meeting of the holders of the Corporation's
common stock, par value $.001 per share (the "Common Stock"), in accordance with
the provisions of Sections 228 and 242 of the DGCL and the terms of the Original
Certificate of Incorporation, as amended, such holders being all of the holders
of the Corporation's capital stock entitled to vote thereon.
3. The text of the Original Certificate, as amended, is hereby
amended and restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is MCK Communications, Inc.
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street in
the City of Wilmington, County of New Castle. The name of its registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the DGCL.
<PAGE> 2
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is Sixty-one Million (61,000,000)
shares, of which (i) Forty Million (40,000,000) shares shall be common
stock, par value $.001 per share (the "Common Stock"), and (ii) Twenty-One
Million (21,000,000) shares shall be preferred stock, par value $.001 per share
(the "Preferred Stock"). The designated series of Preferred Stock shall be
designated Series A Redeemable Preferred Stock ("Series A Preferred"),
consisting of Fourteen Million Nine Hundred Eighty-Five Thousand Seven Hundred
Thirty-Three (14,985,733) shares; Series B Convertible Preferred Stock ("Series
B Preferred"), consisting of Three Million Nine Hundred Sixty-Eight Thousand
Three Hundred Eighty-Four (3,968,384) shares; Series C Redeemable Preferred
Stock ("Series C Preferred"), consisting of Twenty-Eight Thousand Five Hundred
Five (28,505) shares; and Series D Convertible Preferred Stock ("Series D
Preferred"), consisting of One Million Six Hundred Seventy-Two Thousand Three
Hundred Fifty-Four (1,672,354) shares; and Three Hundred Forty-Five Thousand
Twenty-Four (345,024) shares of Preferred Stock shall be undesignated Preferred
Stock ("Undesignated Preferred Stock"). The Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred are sometimes referred to
herein collectively as the "Preferred Stock."
Except as otherwise restricted by this Amended and Restated
Certificate of Incorporation, the Corporation is authorized to issue, from time
to time, all or any portion of the capital stock of the Corporation which may
have been authorized but not issued, to such person or persons and for such
lawful consideration as it may deem appropriate, and generally in its absolute
discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
Any and all such shares issued for which the full
consideration has been paid or delivered shall be deemed fully paid shares of
capital stock, and the holder of such shares shall not be liable for any further
call or assessment or any other payment thereon.
The number of authorized shares of the class of Undesignated
Preferred Stock may from time to time be increased or decreased (but not below
the number of shares outstanding) by the affirmative vote of the holders of a
majority of the shares of Common Stock entitled to vote, without a vote of the
holders of the Undesignated Preferred Stock.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, this Article
IV.
A. COMMON STOCK
Subject to all the rights, powers and preferences of the
Undesignated Preferred Stock, and except as provided by law or in this Article
IV (or in any certificate of designation of any series of Preferred Stock);
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<PAGE> 3
(a) the holders of the Common Stock shall have the
exclusive right to vote for the election of directors and on
all other matters requiring stockholder action, each share
being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of
the Corporation legally available for the payment of
dividends, but only when and as declared by the Board of
Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets
of the Corporation shall be distributed pro rata to the
holders of the Common Stock in accordance with their
respective rights and interests.
B. PREFERRED STOCK
1. DIVIDENDS.
1.1 GENERAL OBLIGATION. When and as declared by the
Corporation's Board of Directors, the Corporation shall pay preferential
dividends in cash to the holders of the Preferred Stock as provided in this
Section 1.
(a) Dividends on each share of the Series A Preferred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series A Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series A Original Issue Date to and including
the first to occur of the date on which the Series A
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the Corporation or the redemption of
such share by the Corporation or the date on which such share
is otherwise acquired by the Corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Series A Junior Securities.
(b) Dividends on each share of the Series B referred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series B Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series B Original Issue Date to and including
the first to occur of the date on which the Series B
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the Corporation or the redemption of
such share by the Corporation or the date on which such share
is otherwise acquired by the corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not
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there are profits, surplus or other funds of the corporation
legally available for the payment of dividends, and such
dividends shall be cumulative such that all accrued and unpaid
dividends shall be fully paid or declared with funds
irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Common Stock.
(c) Dividends on each share of the Series C Preferred
shall accrue on a daily basis at the rate of eight percent (8
%) per annum of the sum of the Series C Liquidation Value plus
all accumulated and unpaid dividends thereon, from and
including the Series C Original Issue Date to and including
the first to occur of the date on which the Series C
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the corporation or the redemption of
such share by the corporation or the date on which such share
is otherwise acquired by the corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Series C Junior Securities.
(d) Dividends on each share of the Series D Preferred
shall accrue on a daily basis at the rate of eight percent
(8%) per annum of the sum of the Series D Liquidation Value
plus all accumulated and unpaid dividends thereon, from and
including the Series D original Issue Date to and including
the first to occur of the date on which the Series D
Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with the liquidation of the corporation or the redemption of
such share by the corporation or the date on which such share
is otherwise acquired by the corporation. Such dividends shall
accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the
corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with
funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Common Stock.
(e) No dividends or other distributions shall be made
with respect to the Common Stock in any fiscal year, other
than dividends payable solely in Common Stock, until the
dividends set forth in Sections 1.1 (a), (b), (c) and (d)
above have been declared and paid.
1.2 DIVIDEND REFERENCE DATES. To the extent not paid on June
28 of each year, beginning June 28, 1997 with respect to the Series A Preferred
and Series B Preferred, and June 28, 1999 with respect to the Series C Preferred
and Series D Preferred (the "Dividend Reference Dates"), all dividends which
have accrued on each share of Preferred Stock outstanding during the
twelve-month period ending upon each
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<PAGE> 5
such Dividend Reference Date shall be accumulated and shall remain accumulated
dividends with respect to such share of Preferred Stock until paid to the holder
thereof.
1.3 DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as
otherwise provided herein, if at any time the corporation pays less than the
total amount of dividends then accrued with respect to any one series of the
Preferred Stock, such payment shall be distributed pro rata among the holders of
such series based upon the aggregate Liquidation Value (plus all accrued and
unpaid dividends) of the shares of such series held by each such holder.
2. LIQUIDATION.
2.1 Upon any liquidation, dissolution or winding up of the
corporation (whether voluntary or involuntary), each holder of Series C
Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Series C Junior Securities, an amount in cash equal to the
aggregate Series C Liquidation Value of all shares of Series C Preferred held by
such holder (plus all accrued and unpaid dividends thereon), and the holders of
Series C Preferred shall not be entitled to any further payment. If upon any
such liquidation, dissolution or winding up of the corporation, the
corporation's assets to be distributed among the holders of the Series C
Preferred are insufficient to permit payment to such holders of the aggregate
amount which they are entitled to be paid under this Section 2, then the entire
assets available to be distributed to the corporation's stockholders shall be
distributed pro rata among the holders of Series C Preferred based upon the
aggregate Series C Liquidation Value (plus all accrued and unpaid dividends) of
the shares of Series C Preferred held by each such holder. Not less than thirty
(30) days prior to the payment date stated therein, the corporation shall mail
written notice of any such liquidation, dissolution or winding up to each record
holder of Series C Preferred, setting forth in reasonable detail the amount of
assets to be paid with respect to each share of Series C Preferred in connection
with such liquidation, dissolution or winding up.
2.2 After payment has been made to the holders of the Series C
Preferred of the full amounts to which they shall be entitled as set forth in
Section 2.1, each holder of Series A Preferred shall be paid, prior and in
preference to any distribution of any of the assets of the corporation to the
holders of Series A Junior Securities, an amount in cash equal to the Series A
Liquidation Value (plus all accrued and unpaid dividends thereon) of all shares
of Series A Preferred held by such holder. If upon any such liquidation,
dissolution or winding up of the corporation, the corporation's assets to be
distributed among the holders of the Series A Preferred are insufficient to
permit payment to such holders of the aggregate amount which they are entitled
to be paid under this Section 2.2, then the entire assets available to be
distributed to the corporation's stockholders (after payment to the holders of
Series C Preferred) shall be distributed pro rata among the holders of Series A
Preferred based upon the aggregate Series A Liquidation Value (plus all accrued
and unpaid dividends) of the shares of Series A Preferred held by each such
holder. Not less than thirty (30) days prior to the payment date stated therein,
the corporation shall mail written notice of any such liquidation, dissolution
or winding up to
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<PAGE> 6
each record holder of Series A Preferred, setting forth in reasonable detail the
amount of assets to be paid with respect to each share of Series A Preferred in
connection with such liquidation, dissolution or winding up.
2.3 After payment has been made to the holders of the Series C
Preferred and Series A Preferred of the full amounts to which they shall be
entitled as set forth in Sections 2.1 and 2.2, each holder of Series B Preferred
and Series D Preferred shall be paid, prior and in preference to any
distribution of any of the assets of the corporation to the holders of the
Common Stock, an amount in cash equal to the Series B Liquidation Value (plus
all accrued and unpaid dividends thereon) of all shares of Series B Preferred
held by such holder or the Series D Liquidation Value (plus all accrued and
unpaid dividends thereon) of all shares of Series D Preferred held by such
holder, as the case may be. If upon any such liquidation, dissolution or winding
up of the corporation, the corporation's assets to be distributed among the
holders of the Series B Preferred and Series D Preferred are insufficient to
permit payment to such holders of the aggregate amount which they are entitled
to be paid under this Section 2.3, then the entire assets available to be
distributed to the corporation's stockholders (after payment on the Series A
Preferred and Series C Preferred) shall be distributed pro rata among the
holders of Series B Preferred and Series D Preferred based upon the aggregate
Series B Liquidation Value or Series D Liquidation Value (plus all accrued and
unpaid dividends) of the shares of Series B Preferred or Series D Preferred held
by each such holder. Not less than thirty (30) days prior to the payment date
stated therein, the corporation shall mail written notice of any such
liquidation, dissolution or winding up to each record holder of Series B
Preferred and Series D Preferred, setting forth in reasonable detail the amount
of assets to be paid with respect to each share of Series B Preferred and Series
D Preferred in connection with such liquidation, dissolution or winding up.
2.4 After payment has been made to the holders of Preferred
Stock of the full amounts to which they shall be entitled as set forth in
Sections 2.1, 2.2 and 2.3 above, then the entire remaining assets and funds of
the corporation legally available for distribution, if any, shall be distributed
ratably among the holders of Common Stock in a manner such that the amount
distributed to each such holder shall equal the amount obtained by multiplying
the entire remaining assets and funds of the corporation legally available for
distribution hereunder by a fraction, the numerator of which shall be the number
of shares of Common Stock then held by such holder and the denominator of which
shall be the total number of shares of Common Stock then outstanding.
2.5 Neither the consolidation or merger of the corporation
into or with any other Person (whether or not the corporation is the surviving
entity), nor the sale or transfer by the corporation of all or any part of its
assets, nor the reduction of the capital stock of the corporation nor any other
form of recapitalization or reorganization affecting the corporation shall be
deemed to be a liquidation, dissolution or winding up of the corporation within
the meaning of this Section 2.
3. PRIORITY OF PREFERRED ON DIVIDENDS AND REDEMPTION.
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<PAGE> 7
3.1 So long as any shares of Series C Preferred remain
outstanding, without the prior written consent of the holders of a majority of
the outstanding shares of Series C Preferred, the corporation shall not, nor
shall it permit any Subsidiary to, redeem, purchase or otherwise acquire,
directly or indirectly, any Series C Junior Securities, nor shall the
corporation directly or indirectly pay or declare any dividend or make any
distribution upon any Series C Junior Securities, except, in each case, as
otherwise expressly permitted pursuant to the terms of the Stockholders
Agreement.
3.2 So long as any shares of Series A Preferred remain
outstanding, without the prior written consent of the holders of a majority of
the outstanding shares of Series A Preferred, the corporation shall not, nor
shall it permit any Subsidiary to, redeem, purchase or otherwise acquire,
directly or indirectly, any Series A Junior Securities, nor shall the
corporation directly or indirectly pay or declare any dividend or make any
distribution upon any Series A Junior Securities, except, in each case, as
otherwise expressly permitted pursuant to the terms of the Stockholders
Agreement.
3.3 So long as any share of Series B Preferred or Series D
Preferred remains outstanding, without the prior written consent of the holders
of a majority of the outstanding shares of Convertible Preferred, the
corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase
or otherwise acquire, directly or indirectly, any Common Stock, nor shall the
corporation directly or indirectly pay or declare any dividend or make any
distribution upon the Common Stock, except, in each case, as otherwise expressly
permitted pursuant to the terms of the Stockholders Agreement.
4. REDEMPTIONS.
4.1 SCHEDULED REDEMPTIONS.
(a) Scheduled Redemption of Series A Preferred and
Series C Preferred. The corporation shall redeem the
corresponding percentage specified below of the outstanding
shares of Series A Preferred and Series C Preferred on June 28
of each year, commencing in 2001 and ending in 2003 (the
"Scheduled Redemption Dates"), at a price per share equal to
the Liquidation Value of such share plus all accrued and
unpaid dividends thereon:
- --------------------------------------- ----------------------------------------
Scheduled Redemption Date Specified Percentage
- --------------------------------------- ----------------------------------------
June 28, 2001 33 1/3%
- --------------------------------------- ----------------------------------------
June 28, 2002 50%
- --------------------------------------- ----------------------------------------
June 28, 2003 100%
- --------------------------------------- ----------------------------------------
(b) OPTIONAL REDEMPTION OF SERIES B PREFERRED AND
SERIES D
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<PAGE> 8
PREFERRED. At any time on or after the seventh anniversary of
the Series B Original Issue Date the corporation shall, at the
request of holders of at least a majority of the then
outstanding shares of Convertible Preferred, redeem all
outstanding shares of Convertible Preferred at a price per
share equal to the Liquidation Value of such share plus all
accrued and unpaid dividends thereon. Holders of Convertible
Preferred requesting redemption hereunder shall notify the
corporation at least thirty (30) days prior to the date on
which such redemption shall take place. Such notice (the
"Convertible Redemption Notice") shall specify the date of the
requested redemption. The corporation shall reply to the
Convertible Redemption Notice within fifteen (15) days by
notifying the holder or holders of Convertible Preferred
requesting redemption hereunder the number of shares which the
corporation may lawfully redeem on the date specified for
redemption.
4.2 SPECIAL REDEMPTIONS. In the event of a Change in Ownership
or a Fundamental Change, the corporation shall, upon the consummation of such
transaction, redeem the outstanding shares of Series C Preferred at a price per
share equal to the Series C Liquidation Value plus all accrued and unpaid
dividends thereon. Immediately following such redemption of the outstanding
shares of Series C Preferred, the corporation shall redeem the outstanding
shares of Series A Preferred at a price per share equal to the Series A
Liquidation Value plus all declared but unpaid dividends thereon. Immediately
following the redemption of the outstanding shares of Series C Preferred and
Series A Preferred in connection with such Change in Control or Fundamental
Change, the corporation shall redeem the outstanding shares of Convertible
Preferred at a price per share equal to the Liquidation Value of such share plus
all declared but unpaid dividends thereon; provide however, that the holders of
Convertible Preferred may elect to convert such shares into shares of Common
Stock in accordance with Section 5 hereof at any time prior to the closing of
such Change in Control or Fundamental Change.
4.3 REDEMPTION WITH PROCEEDS OF PUBLIC OFFERING. Upon the
election of the holders of a majority of the outstanding shares of Series C
Preferred, the corporation shall apply the net cash proceeds from any Public
Offering (after deduction of all discounts, underwriters, commissions and other
reasonable expenses) to redeem shares of Series C Preferred at a price per share
equal to the Series C Liquidation Value thereof plus all accrued and unpaid
dividends thereon. Such redemption shall take place on a date fixed by the
holders of a majority of the outstanding shares of Series C Preferred, which
date shall be not more than ten (10) days after the corporation's receipt of
such proceeds. Redemptions of shares of Series C Preferred pursuant to this
paragraph shall not relieve the corporation of its obligation to redeem
outstanding shares of Series C Preferred on the Scheduled Redemption Dates or
pursuant to Section 4.2 above. Immediately following such redemption of the
outstanding shares of Series C Preferred in connection with such Public
Offering, upon the election of the holders of a majority of the outstanding
shares of Series A Preferred, the corporation shall apply the remaining net cash
proceeds from any Public Offering (after deduction of all discounts,
underwriters, commissions, other reasonable expenses and the redemption of
Series C Preferred, if any) to redeem shares of Series A Preferred at a price
per share equal to the Series A Liquidation Value thereof
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<PAGE> 9
plus all accrued and unpaid dividends thereon. Such redemption shall take place
on a date fixed by the holders of a majority of the outstanding shares of Series
A Preferred, which date shall be not more than ten (10) days after the
redemption of the Series C Preferred above. Redemptions of shares of Series A
Preferred pursuant to this paragraph shall not relieve the corporation of its
obligation to redeem outstanding shares of Series A Preferred on the Scheduled
Redemption Dates or pursuant to Section 4.2 above.
4.4 REDEMPTION PAYMENTS. For each share of Preferred Stock
which is to be redeemed hereunder, the corporation shall be obligated on the
Redemption Date to pay to the holder thereof (upon surrender by such holder at
the corporation's principal office of the certificate representing such share)
an amount in immediately available funds equal to the Liquidation Value of such
share (plus all accrued and unpaid dividends thereon). If the funds of the
corporation legally available for redemption of shares of Series C Preferred on
any Redemption Date are insufficient to redeem the total number of shares of
Series C Preferred to be redeemed on such date, those funds which are legally
available shall be used to redeem the maximum possible number of shares of
Series C Preferred pro rata among the holders of Series C Preferred to be
redeemed based upon the aggregate number of shares of Series C Preferred held by
each such holder in accordance with Section 4.7 below. At any time thereafter
when additional funds of the corporation are legally available for the
redemption of shares of Series C Preferred, such funds shall immediately be used
to redeem the balance of the shares of Series C Preferred which the corporation
has become obligated to redeem on any Redemption Date but which it has not so
redeemed. Provided that the corporation has fully satisfied its obligation to
redeem shares of Series C Preferred hereunder, at any time thereafter, when
additional funds of the corporation are legally available for the redemption of
shares of Series A Preferred, such funds shall immediately be used to redeem
shares of Series A Preferred which the corporation has become obligated to
redeem on any Redemption Date but which it has not so redeemed. If the funds of
the corporation legally available for redemption of shares of Series A Preferred
are insufficient to redeem the total number of shares of Series A Preferred to
be redeemed on any date, those funds which are legally available shall be used
to redeem the maximum possible number of shares of Series A Preferred pro rata
among the holders of Series A Preferred to be redeemed based upon the aggregate
number of shares of Series A Preferred held by each such holder in accordance
with Section 4.7 below. Provided that the corporation has fully satisfied its
obligation to redeem shares of Series C Preferred and Series A Preferred
hereunder, at any time thereafter, when additional funds of the corporation are
legally available for redemption of shares of Series B Preferred and Series D
Preferred, such funds shall immediately be used to redeem shares of Series B
Preferred and Series D Preferred which the corporation has become obligated to
redeem on any Redemption Date but which it has not redeemed. If the funds of the
corporation legally available for redemption of shares of Series B Preferred and
Series D Preferred are insufficient to redeem the total number of shares of
Series B Preferred and Series D Preferred to be redeemed on any date, then,
subject to the foregoing, those funds which are legally available shall be used
to redeem the maximum possible number of shares of Series B Preferred and Series
D Preferred pro rata among the holders of Series B Preferred and Series D
Preferred based on the number of shares of Series B Preferred and Series D
Preferred held by each such
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<PAGE> 10
holder.
4.5 REDEMPTION OF SERIES C PREFERRED AND SERIES A PREFERRED BY
THE CORPORATION. Notwithstanding the foregoing, the corporation may at any time
elect to redeem outstanding shares of Series C Preferred by paying to the
holders of such shares the Series C Liquidation value plus all accrued but
unpaid dividends, provided that the corporation complies with the notice
requirement set forth in Section 4.6 hereof. Provided that all of the
outstanding Series C Preferred have been redeemed, the corporation may also at
any time elect to redeem outstanding shares of Series A Preferred by paying to
the holders of such shares the Series A Liquidation value plus all accrued but
unpaid dividends, provided that the corporation complies with the notice
requirement set forth in Section 4.6 hereof.
4.6 NOTICE. Except as otherwise provided herein, the
corporation shall mail written notice of (a) a potential Change in Ownership,
Fundamental Change or Public Offering and (b) each redemption of any Preferred
Stock to each record holder of Preferred Stock, not more than sixty (60) nor
less than thirty (30) days prior to (x) in the case of an event referred to in
(a) above, the date of closing of such event and (y) in the case of a redemption
referred to in (b) above, the date on which such redemption is to be made. In
case fewer than the total number of shares represented by any certificate are
redeemed, a new certificate representing the number of unredeemed shares shall
be issued to the holder thereof without cost to such holder within five (5)
business days after surrender of the certificate representing the redeemed
shares.
4.7 DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. The number of shares of any series of Preferred Stock to be redeemed
from each holder thereof in redemptions hereunder shall be the number of shares
determined by multiplying the total number of shares of such series of Preferred
Stock to be redeemed by a fraction, the numerator of which shall be the total
number of shares of such series of Preferred Stock then held by such holder and
the denominator of which shall be the total number of shares of such series of
Preferred Stock then outstanding.
4.8 DIVIDENDS AFTER REDEMPTION DATE. No share of Preferred
Stock shall be entitled to any dividends accruing after the date on which the
respective Liquidation Value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder of such share. On such date, all rights
of the holder of such share shall cease, and such share shall no longer be
deemed to be issued or outstanding.
4.9 REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares of
Preferred Stock which are redeemed or otherwise acquired by the corporation
shall be canceled and retired to authorized but unissued shares and shall not be
reissued, sold or transferred.
4.10 OTHER REDEMPTIONS OR ACQUISITION. The corporation shall
not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any
shares of Preferred Stock, except as expressly authorized herein.
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<PAGE> 11
5. CONVERSION OF SERIES B PREFERRED AND SERIES D PREFERRED.
The holders of Series B Preferred and Series D Preferred shall have conversion
rights as follows (the "Conversion Rights"). The Conversion Rights shall be the
same in all respects for both the Series B Preferred and the Series D Preferred
except with respect to the Issue Date, Conversion Price and liquidation value of
such shares. The Series B Preferred and Series D Preferred are sometimes
referred to herein collectively as the "Convertible Preferred".
(a) RIGHT TO CONVERT. Each share of Series B Preferred
and Series D Preferred shall be convertible, at the option of
the holder thereof, at any time after the date of issuance of
such share, at the office of the corporation or any transfer
agent for the Convertible Preferred, into such number of fully
paid and nonassessable shares of Common Stock as is determined
by dividing (i) in the case of the Series B Preferred,
$0.419986 per share and, in the case of the Series D
Preferred, the Series D Liquidation Value by (ii) the
Conversion Price of such Convertible Preferred, each
determined as hereinafter provided, in effect at the time of
conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series B Preferred
(the "Series B Conversion Price") shall initially be $0.419986
per share of Common Stock and shall be subject to adjustment
as hereinafter provided. The price at which shares of Common
Stock shall be deliverable upon conversion of shares of Series
D Preferred (the "Series D Conversion Price") shall initially
be $1.494899 per share of Common Stock and shall be subject to
adjustment as hereinafter provided.
Upon conversion, all accrued and unpaid dividends on
the shares of Convertible Preferred so converted shall be paid
either in cash or in shares of Common Stock of the
corporation, at the election of the corporation, wherein the
shares of Common Stock shall be valued at the fair market
value at the time of such conversion, as determined in good
faith by the Board of Directors of the corporation.
(b) AUTOMATIC CONVERSION. Each share of Convertible
Preferred shall automatically be converted into shares of
Common Stock at the then effective Conversion Price of such
share, upon the earlier to occur of (i) the closing of an
underwritten Public Offering at an offering price to the
public of at least $10.00 per share (as adjusted for stock
splits, stock dividends, reclassifications and like events)
and in which the corporation receives aggregate gross proceeds
of not less than $15,000,000 (a "Qualifying IPO"), or (ii)
upon the receipt by the corporation of the affirmative vote at
a duly noticed shareholders meeting or pursuant to a duly
solicited written consent of the holders of more than
sixty-six and two-thirds percent (66 2/3%) of the then
outstanding shares of Convertible Preferred in favor of the
conversion of all of the shares of Convertible Preferred into
Common Stock.. In the event of the automatic conversion of the
Convertible Preferred upon a public offering as set forth in
subsection (i) hereof, the Person(s) entitled to receive the
Common Stock issuable upon such conversion of Convertible
Preferred shall not be deemed to have converted such
Convertible Preferred until immediately prior to the closing
of such transaction.
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<PAGE> 12
(c) MECHANICS OF CONVERSION. No fractional shares of
Common Stock shall be issued upon conversion of Convertible
Preferred. In lieu of any fractional shares to which the
holder would otherwise be entitled, the corporation shall pay
cash equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Convertible Preferred
shall be entitled to convert the same into full shares of
Common Stock and to receive certificates therefor, he shall
surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer
agent for the Convertible Preferred, and shall give written
notice to the corporation at such office that he elects to
convert the same; PROVIDED, HOWEVER, that in the event of an
automatic conversion pursuant to Section 5(b), the outstanding
shares of Convertible Preferred shall be converted
automatically without any further action by the holders of
such shares and whether or not the certificates representing
such shares are surrendered to the corporation or its transfer
agent; PROVIDED, FURTHER, that the corporation shall not be
obligated to issue certificates evidencing the shares of
Common Stock issuable upon such automatic conversion unless
the certificates evidencing such shares of Convertible
Preferred are either delivered to the corporation or its
transfer agent as provided above, or the holder notifies the
corporation or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement
satisfactory to the corporation to indemnify the corporation
from any loss incurred by it in connection with such
certificates. The corporation shall, as soon as practicable
after such delivery, or such agreement and indemnification in
the case of a lost certificate, issue and deliver at such
office to such holder of Convertible Preferred, a certificate
or certificates for the number of shares of Common Stock to
which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock.
Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender
of the shares of Convertible Preferred to be converted, or in
the case of automatic conversion on the date of closing of the
offering or the effective date of such written consent, and
the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of
Common Stock on such date.
(d) Adjustments to Conversion Price for Dilutive
Issues.
(i) SPECIAL DEFINITIONS. For purposes of this
Section 5(d), the following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or
warrants to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible
Securities.
(2) "CONVERTIBLE SECURITIES" shall mean any
evidences of indebtedness, Preferred Stock or
other securities convertible into or exchangeable
for Common Stock, other than Series B Preferred
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or Series D Preferred.
(3) "ADDITIONAL SHARES OF COMMON" shall mean
all shares of Common Stock issued (or, pursuant
to Section 5(d)(3), deemed to be issued) by the
corporation after the Series B Original Issue
Date, or Series D Original Issue Date, as the
case may be, other than shares of Common Stock
issued, issuable or, pursuant to Section 5(d)(3),
deemed to be issued: (i) upon conversion of
shares of the Convertible Preferred; (ii) to
officers, directors or employees of, or
consultants to, the corporation pursuant to a
stock grant, option plan or purchase plan or
other employee stock incentive program or
arrangement approved by the Board of Directors,
but not exceeding an aggregate of 1,978,290
shares of Common Stock (net of any repurchases at
cost of such shares or any other shares of Common
Stock originally issued to officers, directors,
employees or consultants to the corporation, and
net of cancellation or expiration of options),
subject to appropriate adjustment for all stock
splits, stock dividends, subdivisions,
combinations, recapitalizations and the like;
(iii) as a dividend or distribution on the
Convertible Preferred; (iv) in connection with
any transaction for which adjustment is made
pursuant to Section 5(e)(1), (2) and (3) hereof;
(v) any shares of Common Stock issued or
issuable, if the holders of sixty-six and
two-thirds percent (66 2/3%) of the Convertible
Preferred, then outstanding agree in writing that
such shares shall not constitute Additional
Shares of Common Stock; or (vi) in connection
with an acquisition by the corporation of another
Person.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No
adjustment in the Conversion Price of the Convertible
Preferred shall be made in respect of the issuance of
Additional Shares of Common unless the consideration
per share for an Additional Share of Common issued or
deemed to be issued by the corporation is less than the
Series B Conversion Price or Series D Conversion Price,
respectively, in effect on the date of, and immediately
prior to such issue.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. In the
event that the corporation at any time or from time to
time after the Series B Original Issue Date or Series D
Original Issue Date, respectively, shall issue any
options or Convertible Securities or shall fix a record
date for the determination of holders of any class of
securities entitled to receive any such options or
Convertible Securities, then the maximum number of
shares of Common Stock issuable upon the exercise of
such options or, in the case of Convertible Securities
and options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be
Additional Shares of Common issued as of the time of
such issue or, in case such a
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<PAGE> 14
record date shall have been fixed, as of the close of
business an such record date; PROVIDED, HOWEVER, that
Additional Shares of Common shall not be deemed to have
been issued unless the consideration per share
(determined pursuant to Section 5(d)(5) hereof) of such
Additional Shares of Common would be less than the
Series B Conversion Price or Series D Conversion Price,
respectively, in effect on the date of and immediately
prior to such issue, or such record date, as the case
may be, and provided further that in any such case in
which Additional Shares of Common are deemed to be
issued:
(1) no further adjustment in the Series B
Conversion Price or Series D Conversion Price
shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock
upon the exercise of such Options or conversion
or exchange of such Convertible Securities, in
each case, pursuant to their respective terms;
(2) if such Options or Convertible
Securities by their terms provide, with the
passage of time or otherwise, for any increase in
the consideration payable to the corporation, or
decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or
exchange thereof, the Series B Conversion Price
and Series D Conversion Price computed upon the
original issue thereof (or upon the occurrence of
a record date with respect thereto) and any
subsequent adjustments based thereon, shall, upon
any such increase or decrease becoming effective,
be recomputed to reflect such increase or
decrease insofar as it affects such Options or
the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such options
or any rights of conversion or exchange under
such Convertible Securities which shall not have
been exercised, the Series B Conversion Price and
Series D Conversion Price computed upon the
original issue thereof (or upon the occurrence of
a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if:
(4) in the case of Convertible securities or
options for Common Stock, the only Additional
Shares of Common issued were shares of Common
Stock, if any, actually issued upon the exercise
of such Options or the conversion or exchange of
such Convertible Securities and the consideration
received therefor was the consideration actually
received by the corporation for the issue of all
such Options, whether or not exercised, plus the
consideration actually received by the
corporation upon such
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<PAGE> 15
exercise, or for the issue of all such
Convertible Securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the
corporation upon such conversion or exchange, and
(5) in the case of Options for Convertible
Securities, only the Convertible Securities, if
any, actually issued upon the exercise thereof
were issued at the time of issue of such Options,
and the consideration received by the corporation
for the Additional Shares of Common deemed to
have been then issued was the consideration
actually received by the corporation for the
issue of all such Options, whether or not
exercised, plus the consideration deemed to have
been received by the corporation upon the issue
of the Convertible Securities with respect to
which such Options were actually exercised;
(6) no readjustment pursuant to clauses (b)
or (c) above shall have the effect of increasing
the Conversion Price of a share of Convertible
Preferred to an amount which exceeds the lower of
(1) the Conversion Price of such share on the
original adjustment date, or (2) the Conversion
Price of such share that would have resulted from
any issuance of Additional Shares of Common
between the original adjustment date and such
readjustment date; and
(7) in the case of an Option which expires
by its terms not more than thirty (30) days after
the date of issue thereof, no adjustment of the
Conversion Price shall be made until the
expiration or exercise of such option, whereupon
such adjustment shall be made in the same manner
provided in clause (c) above.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON. In the event that this
corporation shall issue Additional Shares of Common
(including Additional Shares of Common deemed to be
issued pursuant to Section 5(d)(3)) without
consideration or for a consideration per share less
than the Series B Conversion Price or Series D
Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event
such Series B Conversion Price or Series D Conversion
Price, as the case may be, shall be reduced,
concurrently with such issue, to a price (calculated to
the nearest cent) determined by multiplying such
Conversion Price theretofore in effect by a fraction,
the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such
issue plus the number of shares of Common Stock which
the aggregate consideration received by the corporation
for the total number of Additional Shares of Common so
issued would purchase at such Conversion Price in
effect
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<PAGE> 16
immediately prior to such issue, and the denominator of
which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the
number of such Additional Shares of Common so issued;
PROVIDED HOWEVER, that, for the purposes of this
Section 5(d)(4), all shares of Common Stock issuable
upon exercise, conversion or exchange of outstanding
Options or Convertible Securities, as the case may be,
shall be deemed to be outstanding, and immediately
after any Additional Shares of Common are deemed issued
pursuant to Section 5(d)(iii), such Additional Shares
of Common shall be deemed to be outstanding.
(v) DETERMINATION OF CONSIDERATION. For purposes
of this Section 5(d), the consideration received by the
corporation for the issue of any Additional Shares of
Common shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration
shall: (i) insofar as it consists of cash, be
computed at the aggregate amount of cash received
by the corporation excluding amounts paid or
payable for accrued interest or accrued
dividends; (ii) insofar as it consists of
property other than cash, be computed at the fair
value thereof at the time of such issue, as
determined in good faith by the Board; and (iii)
in the event Additional Shares of common are
issued together with other shares or securities
or other assets of the corporation for
consideration which covers both, be the
proportion of such consideration so received,
computed as provided in clauses (i) and (ii)
above, as determined in good faith by the Board.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the
corporation for Additional Shares of Common
deemed to have been issued pursuant to Section
5(d)(3), relating to Options and Convertible
Securities, shall be determined by dividing
(x) the total amount, if
any, received or receivable by the
corporation as consideration for the
issue of such options or Convertible
Securities, plus the minimum
aggregate amount of additional
consideration payable to the
corporation upon the exercise of
such Options or the conversion or
exchange of such Convertible
Securities, or in the case of
Options for Convertible Securities,
the exercise of such Options for
Convertible Securities and the
conversion or exchange of such
Convertible Securities by
(y) the maximum number of
shares of Common Stock issuable upon
the exercise of such Options or the
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<PAGE> 17
conversion or exchange of such
Convertible Securities, as
determined in Section 5(d)(3)
hereof.
(e) Adjustments to Conversion Price for other Dilutive
Events.
(i) ADJUSTMENTS FOR SUBDIVISIONS, STOCK
DIVIDENDS, COMBINATIONS OR CONSOLIDATIONS OF COMMON
STOCK. In the event that the corporation at any time or
from time to time shall declare or pay, without
consideration, any dividend on Common Stock payable in
Common Stock or in any right to acquire Common Stock
for no consideration, or effects a subdivision or
combination of its outstanding shares of Common Stock
into a greater or smaller number of shares without a
proportionate and corresponding subdivision or
combination of its outstanding shares of Convertible
Preferred, then and in each such event the Conversion
Prices shall be appropriately increased or decreased
proportionally.
(ii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE
AND SUBSTITUTION. If the Common Stock issuable upon
conversion of the Convertible Preferred shall be
changed into the same or a different number of shares
of any other class or classes of stock, whether by
capital reorganization, reclassification or otherwise
(other than in an event provided for in Section 5(e)(1)
above), the Conversion Prices then in effect shall,
concurrently with the effectiveness of such
reorganization or reclassification, be proportionately
adjusted such that the shares of Convertible Preferred
shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would
otherwise have been entitled to receive, a number of
shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon
conversion of shares of such Convertible Preferred
immediately before that change.
(iii) ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS. In the event that the corporation shall
declare a distribution payable in securities of other
issuers, evidences of indebtedness issued by this
corporation or other issuers, assets (excluding cash
dividends) or options or rights not referred to in
subsection 5(d)(3) and for which no adjustment is made
pursuant to Section 5(e)(1) or Section 5(e)(2), the
holders of Convertible Preferred shall be entitled to a
proportionate share of any such distribution as though
they were the holders of the number of shares of Common
Stock of the corporation into which their shares of
Convertible Preferred are convertible as of the record
date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive
such distribution.
(f) INTENTIONALLY OMITTED.
(g) NO IMPAIRMENT. Except as provided in section 6
hereof, the
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<PAGE> 18
corporation will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be
observed or performed hereunder by the corporation but will at
all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such
action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Convertible Preferred
against impairment.
(h) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence
of each adjustment or readjustment of the Conversion Price of
any Series B Preferred or Series D Preferred pursuant to this
Section 5, the corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of Convertible
Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The corporation shall,
upon the written request at any time of any holder of such
Convertible Preferred, furnish or cause to be furnished to
such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at
the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the
time would be received upon the conversion of such holder's
shares of Convertible Preferred.
(i) NOTICES OF RECORD DATE. In the event that this
corporation shall propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or
other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any
additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or
substantially all of its property or business, or to
liquidate, dissolve or wind up; then, in connection
with each such event, this corporation shall send to
the holders of Convertible Preferred:
(1) at least 20 days' prior written notice
of the date on which a record shall be taken for
such dividend, distribution or subscription
rights (and specifying the date on which the
holders of
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Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the
matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to
in (iii) and (iv) above, at least 20 days' prior
written notice of the date when the same shall
take place (and specifying the date on which the
holders of Common Stock shall be entitled to
exchange their Common Stock for securities or
other property deliverable upon the occurrence of
such event).
Each such written notice shall be delivered
personally or given by first class mail, postage
prepaid, addressed to the holders of Convertible
Preferred at the address for each such holder as shown
on the books of this corporation.
(j) The corporation shall at all times reserve and keep
available, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the
Convertible Preferred, the full number of shares of Common
Stock deliverable upon the conversion of all Convertible
Preferred from time to time outstanding. The corporation shall
from time to time (subject to obtaining necessary director and
shareholder consent), in accordance with the laws of the state
of Delaware, increase the number of authorized shares of
Common Stock if at any time the authorized number of shares of
its Common Stock remaining unissued shall not be sufficient to
permit the conversion of all of the shares of Convertible
Preferred at the time outstanding.
(k) The corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of
Convertible Preferred pursuant to this Section 5.
6. VOTING RIGHTS.
6.1 GENERAL. Except as otherwise provided herein and as
otherwise required by applicable law, the Series A Preferred and Series C
Preferred shall have no voting rights; provide that each holder of Series A
Preferred and Series C Preferred shall be entitled to notice of all meetings of
stockholders at the same time and in the same manner as notice is given to all
stockholders entitled to vote at such meetings.
6.2 BOARD OF DIRECTORS.
(a) At each election of directors of the corporation,
so long as any share of Series B Preferred is outstanding, the
holders of Series B Preferred shall be entitled, voting as a
single series, to elect three (3) directors of the
corporation. In the case of any vacancy in the office of a
director elected by the holders of Series B Preferred, a
successor shall be elected to hold office for the unexpired
term of such director by the affirmative vote of the holders
of a majority of the
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Series B Preferred, voting as a single class, given at a
special meeting of such stockholders called for that purpose
or by the written consent of a majority of such stockholders.
Prior to an annual or special meeting of the holders of the
Series B Preferred convened for the purpose of electing a
director to fill a vacancy on the Board of Directors as
provided above, the acting and incumbent director previously
elected by the holders of the Series B Preferred may appoint a
director to serve as such until the holders of the Series B
Preferred duly elect a successor director.
(b) At each election of directors of the corporation,
so long as any share of Series D Preferred is outstanding, the
holders of Series D Preferred shall be entitled, voting as a
single series, to elect one (1) director of the corporation.
In the case of any vacancy in the office of a director elected
by the holders of Series D Preferred, a successor shall be
elected to hold office for the unexpired term of such director
by the affirmative vote of the holders of a majority of the
Series D Preferred, voting as a single class, given at a
special meeting of such stockholders called for that purpose
or by the written consent of a majority of such stockholders.
Prior to an annual or special meeting of the holders of the
Series D Preferred convened for the purpose of electing a
director to fill a vacancy on the Board of Directors as
provided above, the acting and incumbent director previously
elected by the holders of the Series D Preferred may appoint a
director to serve as such until the holders of the Series D
Preferred duly elect a successor director.
6.3 PROTECTIVE PROVISIONS.
(a) So long as any share of Series A Preferred or
Series C Preferred remains outstanding, the corporation shall
not, without the vote or written consent of the holders of a
majority in interest of the shares of Series A Preferred and
Series C Preferred then outstanding, voting together as a
single series:
(1) sell, lease or otherwise dispose of, or
permit any Subsidiary to sell, lease or otherwise
dispose of, more than twenty percent (20%) of the
consolidated assets of the corporation and its
Subsidiaries (computed on the basis of book
value, determined in accordance with generally
accepted accounting principles consistently
applied, or fair market value, determined by the
corporation's Board of Directors in its
reasonable good faith judgment) in any
transaction or series of related transactions
(other than sales of inventory in the ordinary
course of business), unless prior to or
contemporaneously with the consummation of such
transaction the corporation redeems all of the
outstanding shares of Series C Preferred and
Series A Preferred pursuant to the terms of
Section 4.2 hereof;
(2) merge or consolidate with any Person or
permit any
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Subsidiary to merge or consolidate with any
Person (other than a merger or consolidation
between or among Wholly-owned Subsidiaries),
unless prior to or contemporaneously with the
consummation of such transaction the corporation
redeems all of the outstanding shares of Series C
Preferred and Series A Preferred pursuant to the
terms of Section 4.2 hereof (regardless of
whether such transaction would otherwise
constitute a Change in Ownership or a Fundamental
Change);
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent
or otherwise) of, (A) any notes or debt
securities containing equity features (including,
without limitation, any notes or debt securities
convertible into or exchangeable for capital
stock or other equity securities issued in
connection with the issuance of capital stock or
other equity securities or containing profit
participation features); provided, that any such
authorization, issuance or entering into of any
such agreement for any such notes or debt
securities which are senior to the Series C
Preferred with respect to payment of dividends,
redemptions or distributions upon liquidation or
otherwise shall require the consent of a majority
in interest of the Series C Preferred, or (B) any
capital stock or other equity securities (or any
securities convertible into or exchangeable for
any capital stock or other equity securities)
which are senior to Common Stock with respect to
the payment of dividends, redemptions or
distributions upon liquidation or otherwise;
(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction (including, without limitation, any
reorganization into a limited liability company,
a partnership or any other non-corporate entity
which is treated as a partnership for Canadian or
United States income tax purposes);
(5) increase the number of authorized shares
of Series C Preferred or alter, change or
otherwise impair or adversely affect the rights
or the relative preferences and priorities of the
holders of the Series C Preferred (which such
action shall also require the approval of a
majority in interest of the Series C Preferred);
or
(6) increase the number of authorized shares
of Series A Preferred or alter, change or
otherwise impair or adversely affect the rights
or the relative preferences and priorities of the
holders of the Series A Preferred (which such
action shall also require the approval of a
majority in interest of the Series A Preferred).
(b) So long as any share of Series B Preferred or
Series D Preferred
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<PAGE> 22
remains outstanding, the corporation shall not, without the
vote or written consent of the holders of a majority of the
shares of Convertible Preferred then outstanding, voting as a
single series:
(1) sell, lease or otherwise dispose of, or
permit any subsidiary to sell, lease or otherwise
dispose of, more than 20% of the consolidated
assets of the corporation and its Subsidiaries
(computed on the basis of book value, determined
in accordance with generally accepted accounting
principles consistently applied, or fair market
value, determined by the corporation's Board of
Directors in its reasonable good faith judgment)
in any transaction or series of related
transactions (other than sales of inventory in
the ordinary course of business), unless prior to
or contemporaneously with the consummation of
such transaction the corporation redeems all of
the outstanding shares of Convertible Preferred
pursuant to the terms of Section 4.2 hereof;
(2) merge or consolidate with any Person or
permit any Subsidiary to merge or consolidate
with any Person (other than a merger or
consolidation between or among Wholly-Owned
Subsidiaries), unless prior to or
contemporaneously with the consummation of such
transaction the corporation redeems all of the
outstanding shares of Convertible Preferred
pursuant to the terms of Section 4.2 hereof
(regardless of whether such transaction would
otherwise constitute a Change in Ownership or a
Fundamental Change);
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent
or otherwise) of, (A) any notes or debt
securities containing equity features (including,
without limitation, any notes or debt securities
convertible into or exchangeable for capital
stock or other equity securities issued in
connection with the issuance of capital stock or
other equity securities or containing profit
participation features) or (B) any capital stock
or other equity securities (or any securities
convertible into or exchangeable for any capital
stock or other equity securities) which are
senior to Common Stock with respect to the
payment of dividends, redemptions or
distributions upon liquidation or otherwise;
(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of
transaction (including, without limitation, any
reorganization into a limited liability company,
a partnership or any other non-corporate entity
which is treated as a partnership for Canadian or
United States income tax purposes); or
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<PAGE> 23
(5) increase the number of authorized shares
of Convertible Preferred or alter, change or
otherwise impair or adversely affect the rights
or the relative preferences and priorities of the
holders of Convertible Preferred.
7. EVENTS OF NONCOMPLIANCE.
7.1 DEFINITION. An Event of Noncompliance shall have occurred
if:
(a) the corporation fails to make any redemption
payment with respect to the Preferred Stock which it is
required to make hereunder, whether or not such payment is
legally permissible or is prohibited by any agreement to which
the corporation is subject;
(b) the corporation breaches or otherwise fails to
perform or observe any covenant or agreement set forth herein
or in the Stockholders Agreement; provided that no Event of
Noncompliance shall have occurred under this subparagraph (b)
if the corporation establishes (to the reasonable satisfaction
of the holders of a majority of the shares of Preferred Stock
then outstanding) that (i) the particular Event of
Noncompliance has not been caused by knowing or purposeful
conduct by the corporation or any Subsidiary, (ii) the Event
of Noncompliance is not material to the financial condition,
operating results, operations, assets or business prospects of
the corporation and its Subsidiaries, taken as a whole, and
(iii) the Event of Noncompliance is not material to any
holder's investment in the Preferred Stock;
(c) any representation or warranty contained in the New
Purchase Agreement or the Initial Purchase Agreement or
required to be furnished to any holder of Preferred Stock
pursuant to such purchase agreement, or any information
contained in writing required to be furnished by the
corporation or any Subsidiary to any holder of Preferred Stock
pursuant to such purchase agreement, is false or misleading in
any material respect on the date made or furnished;
(d) the corporation or any Subsidiary makes an
assignment for the benefit of creditors or admits in writing
its inability to pay its debts generally as they become due;
or an order, judgment or decree is entered adjudicating the
corporation or any Subsidiary bankrupt or insolvent; or any
order for relief with respect to the corporation or any
subsidiary is entered under the United States Bankruptcy Code;
or the corporation or any Subsidiary petitions or applies to
any tribunal for the appointment of a custodian, trustee,
receiver or liquidator of the corporation or any Subsidiary or
of any substantial part of the assets of the corporation or
any Subsidiary, or commences any proceeding (other than a
proceeding for the voluntary liquidation and dissolution of a
Subsidiary) relating to the corporation or any Subsidiary
under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of
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<PAGE> 24
any jurisdiction; or any such petition or application is
filed, or any such proceeding is commenced, against the
corporation or any Subsidiary and either (i) the corporation
or any such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein or (ii) such
petition, application or proceeding is not dismissed within
sixty (60) days;
(e) a judgment in excess of $100,000 is rendered
against the corporation or any Subsidiary and, within sixty
(60) days after entry thereof, such judgment is not discharged
or execution thereof stayed pending appeal, or within sixty
(60) days after the expiration of any such stay, such judgment
is not discharged; or
(f) the corporation or any Subsidiary defaults in the
performance of any obligation or agreement if the effect of
such default is to cause an amount exceeding $100,000 to
become due prior to its stated maturity or to permit the
holder or holders of any obligation to cause an amount
exceeding $100,000 to become due prior to its stated maturity.
7.2 CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
(a) If an Event of Noncompliance of the type described
in Section 7.1(b) has occurred and continued for a period of
thirty (30) days or any other Event of Noncompliance (other
than an Event of Noncompliance of the type described in
Section 7.1(d)) has occurred, the holder or holders of a
majority of the shares of each series of Preferred Stock then
outstanding may demand (by written notice delivered to the
corporation) immediate redemption of all or any portion of
such series of Preferred Stock owned by such holder or holders
at a price per share equal to the Liquidation Value thereof
(plus all accrued and unpaid dividends thereon). The
corporation shall give prompt written notice of such election
to the other holders of Preferred Stock (but in any event
within five days after receipt of the initial demand for
redemption), and each such other holder may demand immediate
redemption of all or any portion of such holder's Preferred
Stock by giving written notice thereof to the corporation
within seven days after receipt of the corporation's notice.
The corporation shall redeem all Preferred Stock as to which
rights under this Section 7.2(a) have been exercised within
fifteen (15) days after receipt of the initial demand for
redemption.
(b) If an Event of Noncompliance of the type described
in Section 7.1(d) has occurred, all of the Preferred Stock
then outstanding shall be subject to immediate redemption by
the corporation (without any action on the part of the holders
of the Preferred Stock) at a price per share equal to the
Liquidation Value thereof (plus all accrued and unpaid
dividends thereon). The corporation shall immediately redeem
all outstanding shares of Preferred Stock upon the occurrence
of such Event of Noncompliance.
(c) If any Event of Noncompliance exists, each holder
of Preferred
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Stock shall also have any other rights which such holder is
entitled to under any contract or agreement at any time and
any other rights which such holder may have pursuant to
applicable law.
8. REGISTRATION OF TRANSFER. The corporation shall keep at its
principal office a register for the registration of Preferred Stock. Upon the
surrender of any certificate representing Preferred Stock at such place, the
corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and, in the case
of the Series A Preferred and Series C Preferred, dividends shall accrue on such
Series A Preferred or Series C Preferred represented by such new certificate
from the date to which dividends have been fully paid on such Series A Preferred
or Series C Preferred represented by the surrendered certificate.
9. REPLACEMENT. Upon receipt of evidence reasonably
satisfactory to the corporation (provided that an affidavit of the registered
holder shall be deemed to be reasonably satisfactory) of the ownership and the
loss, theft, destruction or mutilation of any certificate evidencing shares of
Preferred Stock, and in the case of any such loss, theft or destruction, upon
receipt of indemnity reasonably satisfactory to the corporation (provided that
if the holder is a financial institution or other institutional investor its own
agreement shall be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the corporation shall (at its expense) execute
and deliver in lieu of such certificate a new certificate of like kind
representing the number of shares of Preferred Stock represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate, and, in the case of the Series A
Preferred and Series C Preferred, dividends shall accrue on the Series A
Preferred or Series C Preferred represented by such new certificate from the
date to which dividends have been fully paid on such lost, stolen, destroyed or
mutilated certificate.
10. DEFINITIONS.
"Change in Ownership" means any sale, transfer or issuance or
series of sales, transfers and/or issuance of shares of the
corporation's capital stock by the corporation or any holders thereof
which results in the Controlling Stockholders ceasing to be the record
and beneficial owners of capital stock of the corporation possessing
the voting power (under ordinary circumstances) to elect a majority of
the corporation's Board of Directors or ceasing to be the record and
beneficial owners of at least fifty-one percent (51%) of the
corporation's issued and outstanding Common Stock.
"Common Stock" means the corporation's common Stock, par value
$0.001 per share, and any capital stock of any class of the corporation
hereafter authorized which is not limited to a fixed sum or percentage
of par or stated value in respect to the rights of the holders thereof
to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the corporation.
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"Controlling Stockholders" means MANZ DEVELOPMENTS INC.,
SUMMIT VENTURES IV, L.P., SUMMIT INVESTORS III, L.P., LAZARD TECHNOLOGY
PARTNERS LP, LAZARD TECHNOLOGY PARTNERS LLC, LAZARD TECHNOLOGY
INVESTORS (1998) LLC and FSC CORP. and their respective affiliates.
"Conversion Price" means the Series B Conversion Price or the
Series D Conversion Price, as the context so requires.
"Convertible Preferred" means, collectively, the Series B
Preferred and Series D Preferred.
"Fundamental Change" means (a) any sale or transfer of more
than twenty percent (20%) of the assets of the corporation and its
Subsidiaries on a consolidated basis (measured either by book value in
accordance with generally accepted accounting principles consistently
applied or by fair market value determined in the reasonable good faith
judgment of the corporation's Board of Directors) in any transaction or
series of transactions (other than sales of inventory in the ordinary
course of business) and (b) any merger or consolidation to which the
corporation is a party, except for a merger in which the corporation is
the surviving corporation, the terms of the Preferred Stock are not
changed and the Preferred Stock are not exchanged for cash, securities
or other property, and after giving effect to such merger the
Controlling Stockholders continue to be the record and beneficial
owners of capital stock of the corporation possessing the voting power
(under ordinary circumstances) to elect a majority of the corporation's
Board of Directors and continue to be the record and beneficial owners
of at least fifty-one percent (51%) of the corporation's issued and
outstanding Common Stock.
"Initial Purchase Agreement" means the Stock and Note Purchase
Agreement, dated on or about June 27, 1996, by and among the
corporation and certain Persons, as such agreement may from time to
time be amended in accordance with its terms.
"Liquidation Value" means the Series A Liquidation Value, the
Series B Liquidation Value, the Series C Liquidation Value or the
Series D Liquidation Value, as the context requires.
"New Purchase Agreement" means the Stock Purchase Agreement
dated on or about July 16, 1998 by and between the corporation or the
other parties thereto, as such agreement may be amended in accordance
with its terms.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision
thereof.
"Preferred Stock" means the Series A Preferred, the Series B
Preferred, the Series C Preferred and the Series D Preferred.
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"Public Offering" means any offering by the corporation of its
capital stock or equity securities to the public pursuant to an
effective registration statement under the United States Securities Act
of 1933, as then in effect, or any comparable statement under any
similar federal statute then in force.
"Redemption Date" as to any share means the applicable date
specified herein with respect to such redemption; PROVIDED no such date
shall be a Redemption Date unless the Liquidation Value of such Share
(plus, in the case of Series A Preferred and Series C Preferred, all
accrued and unpaid dividends thereon or, in the case of the Series B
Preferred and Series C Preferred, all declared but unpaid dividends) is
actually paid in full on such date, and if not so paid in full, the
Redemption Date shall be the date on which such amount is fully paid.
"Series A Junior Securities" means any capital stock or other
equity securities of the corporation, except for the Series C Preferred
and the Series A Preferred.
"Series A Liquidation Value" shall be equal to $1.00.
"Series A Original Issue Date" shall be, with respect to each
share of Series A Preferred, the date on which the corporation issues
such share, regardless of the number of times a transfer of such share
is made on the stock records maintained by or for the corporation and
regardless of the number of certificates which may be issued to
evidence such share. As of July 16, 1998, the two Series A Original
Issue Dates are June 27, 1996 and July 16, 1998.
"Series A Preferred" means the corporation's Series A
Redeemable Preferred Stock, par value $0.001 per share.
"Series B Liquidation Value" shall be equal to $0.0630116.
"Series B Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series B Preferred,
regardless of the number of times a transfer of such share is made on
the stock records maintained by or for the corporation and regardless
of the number of certificates which may be issued to evidence such
share.
"Series B Preferred" means the corporation's Series B
Convertible Preferred Stock, par value $0.001 per share.
"Series C Junior Securities" means any capital stock or other
equity securities of the corporation, except for the Series C
Preferred.
"Series C Liquidation Value" shall be equal to $100.
"Series C Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series C Preferred,
regardless of the number of times a transfer of such share is made on
the stock records maintained by or for the corporation and regardless
of the number of certificates which may be issued to evidence such
share.
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"Series C Preferred" means the corporation's Series C
Redeemable Preferred Stock, par value $0.001 per share.
"Series D Liquidation Value" shall be equal to $1.494899.
"Series D Original Issue Date" shall be the date on which the
corporation initially issues any shares of Series D Preferred,
regardless of the number of times a transfer of such share is made on
the stock records maintained by or for the corporation and regardless
of the number of certificates which may be issued to evidence such
share.
"Series D Preferred" means the corporation's Series D
Convertible Preferred Stock, par value $0.001 per share.
"Stockholders Agreement" means the Amended and Restated
Stockholders Agreement dated on or about July 16, 1998 by and between
the corporation and the other parties thereto, as such agreement may be
amended in accordance with its terms.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or
other business entity of which (a) if a corporation, a majority of the
total voting power of shares of stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (b) if a
limited liability company, partnership, association or other business
entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more Subsidiaries of that person or
a combination thereof. For purposes hereof, a Person or Persons shall
be deemed to have a majority ownership interest in a limited liability
company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or
losses or shall be or control the managing general partner of such
limited liability company, partnership, association or other business
entity.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the issued and outstanding capital stock or
other ownership interests are owned by such Person or another
Wholly-owned Subsidiary of such Person.
11. AMENDMENT AND WAIVER. No amendment, modification or waiver
shall be binding or effective with respect to any provision of Sections 1 to 12
hereof without the prior written consent of the holders of a majority of the
shares of each series of Preferred Stock outstanding at the time at which such
action is taken; PROVIDED that no such action shall change (a) the rate at which
or the manner in which dividends on the Series A Preferred or Series C Preferred
accrue or the times at which such dividends become payable on the amount payable
on redemption of the Series A Preferred and Series C Preferred or upon
liquidation of the corporation or the times at which redemption of Series A
Preferred and Series C Preferred is to occur, without the prior written consent
of the holders of at least 66 2/3% of the Series A
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Preferred and at least 66 2/3% of the Series C Preferred then outstanding; (b)
the percentage required to approve any change described in clause (a) above,
without the prior written consent of the holders of at least 66 2/3% of the
Series A Preferred and at least 66 2/3% of the Series C Preferred then
outstanding; (c) the amounts payable on redemption of the Series B Preferred or
upon liquidation of the corporation or at the times at which redemption of the
Series B Preferred is to occur, without the prior written consent of the holders
of at least 66 2/3% of the Series B Preferred then outstanding; or (d) the
amounts payable on redemption of the Series D Preferred or upon liquidation of
the corporation or at the times at which redemption of the Series D Preferred is
to occur, without the prior written consent of the holders of at least 66 2/3%
of the Series D Preferred then outstanding; and provide further, that no change
in the terms hereof may be accomplished by merger or consolidation of the
corporation with another corporation or entity unless the corporation has
obtained the prior written consent of the holders of the applicable percentage
of each series of Preferred Stock, voting separately, then outstanding.
12. NOTICES. Except as otherwise expressly provided hereunder,
all notices referred to herein shall be in writing and shall be delivered by
registered or certified mail, return receipt requested and postage prepaid, or
by reputable overnight courier service, charges prepaid, and shall be deemed to
have been given when so mailed or sent (a) to the corporation, at its principal
executive offices and (b) to any stockholder, at such holder's address as it
appears in the stock records of the corporation (unless otherwise indicated by
any such holder).
13. UNDESIGNATED PREFERRED STOCK.
(a) AUTHORITY TO ISSUE. The total number of shares of
Undesignated Preferred Stock which the Corporation shall have
authority to issue is Three-Hundred Forty-Five Thousand
Twenty-Four (345,024) shares. Subject to any limitations
prescribed by law, the Board of Directors or any authorized
committee thereof is expressly authorized to provide for the
issuance of the shares of Undesignated Preferred Stock in one
or more series of such stock, and by filing a certificate
pursuant to applicable law of the State of Delaware, to
establish or change from time to time the number of shares to
be included in each such series, and to fix the designations,
powers, preferences and the relative, participating, optional
or other special rights of the shares of each series and any
qualifications, limitations and restrictions thereof. Any
action by the Board of Directors or any authorized committee
thereof under this Article IV.B.13 shall require the
affirmative vote of a majority of the directors then in office
or a majority of the members of such committee.
(b) POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTION OF EACH SERIES OF UNDESIGNATED
PREFERRED STOCK. The Board of Directors or any authorized
committee thereof shall have the right to determine or fix one
or more of the following with respect to each series of
Undesignated Preferred Stock to the fullest extent permitted
by law:
(i) The distinctive serial designation and the
number of shares constituting such series;
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(ii) The dividend rates or the amount of
dividends to be paid on the shares of such series,
whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for
dividends, and the participating and other rights, if
any, with respect to dividends;
(iii) The voting rights and powers, full or
limited, if any, of the shares of such series;
(iv) Whether the shares of such series shall be
redeemable and, if so, the price or prices at which,
and the terms and conditions on which, such shares may
be redeemed;
(v) The amount or amounts payable upon the shares
of such series and any preferences applicable thereto
in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
(vi) Whether the shares of such series shall be
entitled to the benefit of a sinking or retirement fund
to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and
the manner of its application, including the price or
prices at which such shares may be redeemed or
purchased through the application of such fund;
(vii) Whether the shares of such series shall be
convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the
same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the
conversion price or prices, or the rate or rates of
exchange, and the adjustments thereof, if any, at which
such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(viii) The consideration for which the shares of
such series shall be issued;
(ix) Whether the shares of such series which are
redeemed or converted shall have the status of
authorized but unissued shares of Undesignated
Preferred Stock (or series thereof) and whether such
shares may be reissued as shares of the same or any
other class or series of stock; and
(x) Such other powers, preferences, rights,
qualifications, limitations and restrictions thereof as
the Board of Directors or any authorized committee
thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
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Any action required or permitted to be taken by the
stockholders of the Corporation at any annual or special meeting of stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VI
DIRECTORS
1. GENERAL. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors except as
otherwise provided herein or required by law.
2. ELECTION OF DIRECTORS. Election of Directors need not be by
written ballot unless the By-laws of the Corporation shall so provide.
3. TERMS OF DIRECTORS. The number of Directors of the
Corporation shall be fixed by resolution duly adopted from time to time by the
Board of Directors. The Directors, other than those who may be elected by the
holders of any series of Undesignated Preferred Stock of the Corporation, shall
be classified, with respect to the term for which they severally hold office,
into three classes, as nearly equal in number as possible. The initial Class I
Directors of the Corporation shall be Steven J. Benson and Calvin K. Manz; the
initial Class II Directors of the Corporation shall be Michael H. Balmuth and
John Landry; and the initial Class III Directors of the Corporation shall be
Gregory M. Avis and Paul Severino. The initial Class I Directors shall serve for
a term expiring at the annual meeting of stockholders to be held in 2000, the
initial Class II Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 2001, and the initial Class III Directors shall
serve for a term expiring at the annual meeting of stockholders to be held in
2002. At each annual meeting of stockholders, the successor or successors of the
class of Directors whose term expires at that meeting shall be elected by a
plurality of the votes cast at such meeting and shall hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. The Directors elected to each class shall hold
office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the
provisions of Article IV of this Amended and Restated Certificate of
Incorporation, the holders of any one or more series of Undesignated Preferred
Stock shall have the right, voting separately as a series or together with
holders of other such series, to elect Directors at an annual or special meeting
of stockholders, the election, term of office, filling of vacancies and other
features of such directorships shall be governed by the terms of this Amended
and Restated Certificate of Incorporation and any certificate of designations
applicable thereto, and such Directors so elected shall not be divided into
classes pursuant to this Article VI.3.
During any period when the holders of any series of
Undesignated Preferred Stock have the right to elect additional Directors as
provided for or fixed pursuant to the provisions of Article IV hereof, then upon
commencement and for the duration of the period
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during which such right continues: (i) the then otherwise total authorized
number of Directors of the Corporation shall automatically be increased by such
specified number of Directors, and the holders of such Undesignated Preferred
Stock shall be entitled to elect the additional Directors so provided for or
fixed pursuant to said provisions, and (ii) each such additional Director shall
serve until such Director's successor shall have been duly elected and
qualified, or until such Director's right to hold such office terminates
pursuant to said provisions, whichever occurs earlier, subject to such
Director's earlier death, disqualification, resignation or removal. Except as
otherwise provided by the Board of Directors in the resolution or resolutions
establishing such series, whenever the holders of any series of Undesignated
Preferred Stock having such right to elect additional Directors are divested of
such right pursuant to the provisions of such stock, the terms of office of all
such additional Directors elected by the holders of such stock, or elected to
fill any vacancies resulting from the death, resignation, disqualification or
removal of such additional Directors, shall automatically terminate and the
total and authorized number of Directors of the Corporation shall be reduced
accordingly.
4. VACANCIES. Subject to the rights, if any, of the holders of
any series of Undesignated Preferred Stock to elect Directors and to fill
vacancies in the Board of Directors relating thereto, any and all vacancies in
the Board of Directors, however occurring, including, without limitation, by
reason of an increase in size of the Board of Directors, or the death,
resignation, disqualification or removal of a Director, shall be filled solely
by the affirmative vote of a majority of the remaining Directors then in office,
even if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
5. REMOVAL. Subject to the rights, if any, of any series of
Undesignated Preferred Stock to elect Directors and to remove any Director whom
the holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of two-thirds of the shares then entitled to vote at an election of
directors. At least 30 days prior to any meeting of stockholders at which it is
proposed that any Director be removed from office, written notice of such
proposed removal shall be sent to the Director whose removal will be considered
at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
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A Director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL or (d) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of a
Director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of this Article VII by either of
(i) the stockholders of the Corporation or (ii) an amendment to the DGCL, shall
not adversely affect any right or protection existing at the time of such repeal
or modification with respect to any acts or omissions occurring before such
repeal or modification of a person serving as a Director at the time of such
repeal or modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. AMENDMENT BY DIRECTORS. Except as otherwise provided by
law, the By-laws of the Corporation may be amended or repealed by the Board of
Directors by the affirmative vote of a majority of the Directors then in office.
2. AMENDMENT BY STOCKHOLDERS. The By-laws of the Corporation
may be amended or repealed at any annual meeting of stockholders, or special
meeting of stockholders called for such purpose as provided in the By-laws, by
the affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; PROVIDED, HOWEVER, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal by
holders of voting stock, voting together as a single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this
Amended and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. No amendment or repeal of this Amended and Restated
Certificate of Incorporation shall be made unless the same is first approved by
the Board of Directors pursuant to a resolution adopted by the Board of
Directors in accordance with Section 242 of the DGCL, and, except as otherwise
provided by law, thereafter approved by the
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stockholders. Whenever any vote of the holders of voting stock is required, and
in addition to any other vote of holders of voting stock that is required by
this Amended and Restated Certificate of Incorporation or by law, the
affirmative vote of the majority of the outstanding shares entitled to vote on
such amendment or repeal, and the affirmative vote of the majority of the
outstanding shares of each class entitled to vote therein as a class, at a duly
constituted meeting of stockholders called expressly for such purpose shall be
required to amend or repeal any provisions of this Amended and Restated
Certificate of Incorporation; PROVIDED, HOWEVER, that the affirmative vote of
not less than two-thirds of the outstanding shares entitled to vote on such
amendment or repeal and the affirmative vote of not less than two-thirds of the
outstanding shares of each class entitled to vote thereon as a class, shall be
required to amend or repeal any of the provisions of Article V, Article VI,
Article VII or Article IX of this Amended and Restated Certificate of
Incorporation.
* * *
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<PAGE> 35
THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is
executed as of this _____ day of September, 1999.
MCK COMMUNICATIONS, INC.
By:_________________________
Name:
Title:
-35-
<PAGE> 1
EXHIBIT 3.3
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MCK COMMUNICATIONS, INC.
MCK Communications, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is MCK Communications, Inc. The
date of the filing of its original Certificate of Incorporation (the "Original
Certificate") with the Secretary of State of the State of Delaware was August
19, 1999. The Original Certificate was amended and restated on ___________ __,
1999 (the "Amended and Restated Certificate").
2. This Second Amended and Restated Certificate of
Incorporation amends, restates and integrates the provisions of the Amended and
Restated Certificate and (i) was duly adopted by the Board of Directors in
accordance with the provisions of Section 245 of the General Corporation Law of
the State of Delaware (the "DGCL"), (ii) was declared by the Board of Directors
to be advisable and in the best interests of the Corporation and was directed by
the Board of Directors to be submitted to and be considered by the stockholders
of the Corporation entitled to vote thereon for approval by the affirmative vote
of such stockholders in accordance with Section 242 of the DGCL and (iii) was
duly adopted by a consent in lieu of a meeting of the holders of the
Corporation's common stock, par value $.001 per share (the "Common Stock"), in
accordance with the provisions of Sections 228 and 242 of the DGCL and the terms
of the Amended and Restated Certificate, such holders being a majority of the
holders of the Corporation's capital stock entitled to vote thereon.
3. The text of the Amended and Restated Certificate is hereby
amended and restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is MCK Communications, Inc.
<PAGE> 2
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street in
the City of Wilmington, County of New Castle. The name of its registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is Forty-Two Million (42,000,000)
shares, of which (i) Forty Million (40,000,000) shares shall be common stock,
par value $.001 per share (the "Common Stock"), and (ii) Two Million (2,000,000)
shares shall be preferred stock, par value $.001 per share (the "Preferred
Stock"), of which Two Million (2,000,000) shares shall be undesignated preferred
stock, par value $.001 per share (the "Undesignated Preferred Stock"). Except as
otherwise restricted by this Second Amended and Restated Certificate of
Incorporation, the Corporation is authorized to issue, from time to time, all or
any portion of the capital stock of the Corporation which may have been
authorized but not issued, to such person or persons and for such lawful
consideration as it may deem appropriate, and generally in its absolute
discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
Any and all such shares issued for which the full
consideration has been paid or delivered shall be deemed fully paid shares of
capital stock, and the holder of such shares shall not be liable for any further
call or assessment or any other payment thereon.
The number of authorized shares of the class of Undesignated
Preferred Stock may from time to time be increased or decreased (but not below
the number of shares outstanding) by the affirmative vote of the holders of a
majority of the shares of Common Stock entitled to vote, without a vote of the
holders of the Undesignated Preferred Stock.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, this Article
IV.
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<PAGE> 3
A. COMMON STOCK
Subject to all the rights, powers and preferences of the
Undesignated Preferred Stock, and except as provided by law or in this Article
IV (or in any certificate of designation of any series of Preferred Stock);
(a) the holders of the Common Stock shall have the
exclusive right to vote for the election of directors and on all other matters
requiring stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared by
the Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
shall be distributed pro rata to the holders of the Common Stock in accordance
with their respective rights and interests.
B. PREFERRED STOCK
1. UNDESIGNATED PREFERRED STOCK.
(a) AUTHORITY TO ISSUE. The total number of shares of
Undesignated Preferred Stock which the Corporation shall have authority to issue
is Two Million (2,000,000) shares. Subject to any limitations prescribed by law,
the Board of Directors or any authorized committee thereof is expressly
authorized to provide for the issuance of the shares of Undesignated Preferred
Stock in one or more series of such stock, and by filing a certificate pursuant
to applicable law of the State of Delaware, to establish or change from time to
time the number of shares to be included in each such series, and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereof. Any action by the Board of Directors or
any authorized committee thereof under this Article IV.B shall require the
affirmative vote of a majority of the directors then in office or a majority of
the members of such committee.
(b) POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTION OF EACH SERIES OF UNDESIGNATED PREFERRED STOCK. The
Board of Directors or any authorized committee thereof shall have the right to
determine or fix one or more of the following with respect to each series of
Undesignated Preferred Stock to the fullest extent permitted by law:
(i) The distinctive serial designation and the
number of shares constituting such series;
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<PAGE> 4
(ii) The dividend rates or the amount of
dividends to be paid on the shares of such series, whether dividends
shall be cumulative and, if so, from which date or dates, the payment
date or dates for dividends, and the participating and other rights, if
any, with respect to dividends;
(iii) The voting rights and powers, full or
limited, if any, of the shares of such series;
(iv) Whether the shares of such series shall be
redeemable and, if so, the price or prices at which, and the terms and
conditions on which, such shares may be redeemed;
(v) The amount or amounts payable upon the shares
of such series and any preferences applicable thereto in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
(vi) Whether the shares of such series shall be
entitled to the benefit of a sinking or retirement fund to be applied
to the purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including the
price or prices at which such shares may be redeemed or purchased
through the application of such fund;
(vii) Whether the shares of such series shall be
convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or
classes of stock of the Corporation and, if so convertible or
exchangeable, the conversion price or prices, or the rate or rates of
exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such
conversion or exchange;
(viii) The consideration for which the shares of
such series shall be issued;
(ix) Whether the shares of such series which are
redeemed or converted shall have the status of authorized but unissued
shares of Undesignated Preferred Stock (or series thereof) and whether
such shares may be reissued as shares of the same or any other class or
series of stock; and
(x) Such other powers, preferences, rights,
qualifications, limitations and restrictions thereof as the Board of
Directors or any authorized committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
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<PAGE> 5
Any action required or permitted to be taken by the
stockholders of the Corporation at any annual or special meeting of stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VI
DIRECTORS
1. GENERAL. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors except as
otherwise provided herein or required by law.
2. ELECTION OF DIRECTORS. Election of Directors need not be by
written ballot unless the By-laws of the Corporation shall so provide.
3. TERMS OF DIRECTORS. The number of Directors of the
Corporation shall be fixed by resolution duly adopted from time to time by the
Board of Directors. The Directors, other than those who may be elected by the
holders of any series of Undesignated Preferred Stock of the Corporation, shall
be classified, with respect to the term for which they severally hold office,
into three classes, as nearly equal in number as possible. The initial Class I
Directors of the Corporation shall be Steven J. Benson and Calvin K. Manz; the
initial Class II Directors of the Corporation shall be Michael H. Balmuth and
John Landry; and the initial Class III Directors of the Corporation shall be
Gregory M. Avis and Paul Severino. The initial Class I Directors shall serve for
a term expiring at the annual meeting of stockholders to be held in 2000, the
initial Class II Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 2001, and the initial Class III Directors shall
serve for a term expiring at the annual meeting of stockholders to be held in
2002. At each annual meeting of stockholders, the successor or successors of the
class of Directors whose term expires at that meeting shall be elected by a
plurality of the votes cast at such meeting and shall hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. The Directors elected to each class shall hold
office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the
provisions of Article IV of this Second Amended and Restated Certificate of
Incorporation, the holders of any one or more series of Undesignated Preferred
Stock shall have the right, voting separately as a series or together with
holders of other such series, to elect Directors at an annual or special meeting
of stockholders, the election, term of office, filling of vacancies and other
features of such directorships shall be governed by the terms of this Second
Amended and Restated Certificate of Incorporation and any certificate of
designations applicable thereto, and such Directors so elected shall not be
divided into classes pursuant to this Article VI.3.
-5-
<PAGE> 6
During any period when the holders of any series of
Undesignated Preferred Stock have the right to elect additional Directors as
provided for or fixed pursuant to the provisions of Article IV hereof, then upon
commencement and for the duration of the period during which such right
continues: (i) the then otherwise total authorized number of Directors of the
Corporation shall automatically be increased by such specified number of
Directors, and the holders of such Undesignated Preferred Stock shall be
entitled to elect the additional Directors so provided for or fixed pursuant to
said provisions, and (ii) each such additional Director shall serve until such
Director's successor shall have been duly elected and qualified, or until such
Director's right to hold such office terminates pursuant to said provisions,
whichever occurs earlier, subject to such Director's earlier death,
disqualification, resignation or removal. Except as otherwise provided by the
Board of Directors in the resolution or resolutions establishing such series,
whenever the holders of any series of Undesignated Preferred Stock having such
right to elect additional Directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional Directors
elected by the holders of such stock, or elected to fill any vacancies resulting
from the death, resignation, disqualification or removal of such additional
Directors, shall automatically terminate and the total and authorized number of
Directors of the Corporation shall be reduced accordingly.
4. VACANCIES. Subject to the rights, if any, of the holders of
any series of Undesignated Preferred Stock to elect Directors and to fill
vacancies in the Board of Directors relating thereto, any and all vacancies in
the Board of Directors, however occurring, including, without limitation, by
reason of an increase in size of the Board of Directors, or the death,
resignation, disqualification or removal of a Director, shall be filled solely
by the affirmative vote of a majority of the remaining Directors then in office,
even if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors is
increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, may exercise the powers of the full Board of Directors until the vacancy is
filled.
5. REMOVAL. Subject to the rights, if any, of any series of
Undesignated Preferred Stock to elect Directors and to remove any Director whom
the holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of two-thirds of the shares then entitled to vote at an election of
directors. At least 30 days prior to any meeting of stockholders at which it is
proposed that any Director be removed from office, written notice of such
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<PAGE> 7
proposed removal shall be sent to the Director whose removal will be considered
at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL or (d) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Second Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of a
Director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of this Article VII by either of
(i) the stockholders of the Corporation or (ii) an amendment to the DGCL, shall
not adversely affect any right or protection existing at the time of such repeal
or modification with respect to any acts or omissions occurring before such
repeal or modification of a person serving as a Director at the time of such
repeal or modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. AMENDMENT BY DIRECTORS. Except as otherwise provided by
law, the By-laws of the Corporation may be amended or repealed by the Board of
Directors by the affirmative vote of a majority of the Directors then in office.
2. AMENDMENT BY STOCKHOLDERS. The By-laws of the Corporation
may be amended or repealed at any annual meeting of stockholders, or special
meeting of stockholders called for such purpose as provided in the By-laws, by
the affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; PROVIDED, HOWEVER, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal by
holders of voting stock, voting together as a single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
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<PAGE> 8
The Corporation reserves the right to amend or repeal this Second
Amended and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Second Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. No amendment or repeal of this Second Amended and
Restated Certificate of Incorporation shall be made unless the same is first
approved by the Board of Directors pursuant to a resolution adopted by the Board
of Directors in accordance with Section 242 of the DGCL, and, except as
otherwise provided by law, thereafter approved by the stockholders. Whenever any
vote of the holders of voting stock is required, and in addition to any other
vote of holders of voting stock that is required by this Second Amended and
Restated Certificate of Incorporation or By-law, the affirmative vote of the
majority of the outstanding shares entitled to vote on such amendment or repeal,
and the affirmative vote of the majority of the outstanding shares of each class
entitled to vote therein as a class, at a duly constituted meeting of
stockholders called expressly for such purpose shall be required to amend or
repeal any provisions of this Second Amended and Restated Certificate of
Incorporation; PROVIDED, HOWEVER, that the affirmative vote of not less than
two-thirds of the outstanding shares entitled to vote on such amendment or
repeal and the affirmative vote of not less than two-thirds of the outstanding
shares of each class entitled to vote thereon as a class, shall be required to
amend or repeal any of the provisions of Article V, Article VI, Article VII or
Article IX of this Second Amended and Restated Certificate of Incorporation.
* * *
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<PAGE> 9
THIS SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is
executed as of this _____ day of October, 1999.
MCK COMMUNICATIONS, INC.
By:_________________________
Name:
Title:
-9-
<PAGE> 1
EXHIBIT 3.5
AMENDED AND RESTATED
BY-LAWS
OF
MCK COMMUNICATIONS, INC.
(the "Corporation")
ARTICLE I
STOCKHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of stockholders (any such
meeting being referred to in these By-laws as an "Annual Meeting") shall be held
at the hour, date and place within or without the United States which is fixed
by the majority of the Board of Directors, the Chairman of the Board, if one is
elected, or the President, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no Annual Meeting has
been held for a period of thirteen months after the Corporation's last Annual
Meeting, a special meeting in lieu thereof may be held, and such special meeting
shall have, for the purposes of these By-laws or otherwise, all the force and
effect of an Annual Meeting. Any and all references hereafter in these By-laws
to an Annual Meeting or Annual Meetings also shall be deemed to refer to any
special meeting(s) in lieu thereof.
Section 2. SPECIAL MEETINGS. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of preferred stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the directors then in office.
Section 3. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(a) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board
of Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an Annual Meeting (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this By-law, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this By-law.
(2) For nominations or other business to be properly
brought before an Annual Meeting by a stockholder pursuant to clause (c) of
paragraph (a)(1) of this By-law, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other business
must be a proper matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on
<PAGE> 2
the 90th day nor earlier than the close of business on the 120th day prior to
the first anniversary of the preceding year's Annual Meeting; PROVIDED, however,
that in the event that the date of the Annual Meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 120th day prior to such Annual Meeting and not later than the
close of business on the later of the 90th day prior to such Annual Meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. In no event shall the public announcement of an
adjournment of an Annual Meeting commence a new time period for the giving of a
stockholder's notice as described above. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, and (ii) the class and number of shares of the Corporation which are
owned beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence
of paragraph (a)(2) of this By-law to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 100 days prior to the first anniversary of the preceding
year's Annual Meeting, a stockholder's notice required by this By-law shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this By-law, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this By-law. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such
2
<PAGE> 3
stockholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (a)(2) of this By-law shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 120th day prior to such special
meeting and not later than the close of business on the later of the 90th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting. In no
event shall the public announcement of an adjournment of a special meeting
commence a new time period for the giving of a stockholder's notice as described
above.
(c) GENERAL.
(1) Only such persons who are nominated in accordance
with the procedures set forth in this By-law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this By-law. If the Board of Directors or a designated committee
thereof determines that any stockholder proposal or nomination was not made in a
timely fashion in accordance with the provisions of this By-law or that the
information provided in a stockholder's notice does not satisfy the information
requirements of this By-law in any material respect, such proposal or nomination
shall not be presented for action at the Annual Meeting in question. If neither
the Board of Directors nor such committee makes a determination as to the
validity of any stockholder proposal or nomination in the manner set forth
above, the presiding officer of the Annual Meeting shall determine whether the
stockholder proposal or nomination was made in accordance with the terms of this
By-law. If the presiding officer determines that any stockholder proposal or
nomination was not made in a timely fashion in accordance with the provisions of
this By-law or that the information provided in a stockholder's notice does not
satisfy the information requirements of this By-law in any material respect,
such proposal or nomination shall not be presented for action at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a stockholder proposal or nomination
was made in accordance with the requirements of this By-law, the presiding
officer shall so declare at the Annual Meeting and ballots shall be provided for
use at the meeting with respect to such proposal or nomination.
(2) For purposes of this By-law, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission (including, without limitation, a Form 8-K) pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
By-law, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-law. Nothing in this By-law shall be deemed to
affect any rights of (i) stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under
3
<PAGE> 4
the Exchange Act or (ii) the holders of any series of preferred stock to elect
directors under specified circumstances.
Section 4. MATTERS TO BE CONSIDERED AT SPECIAL MEETING. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
Section 5. NOTICE OF MEETINGS: ADJOURNMENTS. A written notice of each
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Certificate of Incorporation of the
Corporation (as the same may hereafter be amended and/or restated, the
"Certificate") or under these By-laws, is entitled to such notice, by delivering
such notice to him or by mailing it, postage prepaid, addressed to such
stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be given when
hand delivered to such address or deposited in the mail so addressed, with
postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for Annual Meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
Notice of an Annual Meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any Annual Meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 3 of this
Article I of these By-laws or otherwise. In no event shall the public
announcement of an adjournment, postponement or rescheduling of any previously
scheduled meeting of stockholders commence a new time period for the giving of a
stockholder's notice under Section 3 of this Article I of these By-laws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be
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given of the adjourned meeting other than an announcement at the meeting at
which the adjournment is taken of the hour, date and place to which the meeting
is adjourned; PROVIDED, HOWEVER, that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat and each stockholder who, by law or under the
Certificate or these By-laws, is entitled to such notice.
Section 6. QUORUM. A majority of the shares entitled to vote, present
in person or represented by proxy, shall constitute a quorum at any meeting of
stockholders. If less than a quorum is present at a meeting, the holders of
voting stock representing a majority of the voting power present at the meeting
or the presiding officer may adjourn the meeting from time to time, and the
meeting may be held as adjourned without further notice, except as provided in
Section 5 of this Article I. At such adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. The stockholders present at a duly constituted
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 7. VOTING AND PROXIES. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either in person or by written proxy, but no
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. Proxies shall be filed with the Secretary of
the meeting before being voted. Except as otherwise limited therein or as
otherwise provided by law, proxies shall entitle the persons authorized thereby
to vote at any adjournment of such meeting, but they shall not be valid after
final adjournment of such meeting. A proxy with respect to stock held in the
name of two or more persons shall be valid if executed by or on behalf of any
one of them unless at or prior to the exercise of the proxy the Corporation
receives a specific written notice to the contrary from any one of them.
Section 8. ACTION AT MEETING. When a quorum is present, any matter
before any meeting of stockholders shall be decided by the affirmative vote of
the majority of shares present in person or represented by proxy at such meeting
and entitled to vote on such matter, except where a larger vote is required by
law, by the Certificate or by these By-laws. Any election by stockholders shall
be determined by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors, except where a larger vote is required by law, by the Certificate or
by these By-laws. The Corporation shall not directly or indirectly vote any
shares of its own stock; provided, however, that the Corporation may vote shares
which it holds in a fiduciary capacity to the extent permitted by law.
Section 9. STOCKHOLDER LISTS. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these By-laws
or by law) shall prepare and make, at least 10 days before every Annual Meeting
or special meeting of stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in
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alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the hour, date and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 10. PRESIDING OFFICER. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and from
time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
Section 11. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the presiding officer shall appoint one or more
inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall perform such duties as are
required by the General Corporation Law of the State of Delaware, as amended
from time to time (the "DGCL"), including the counting of all votes and ballots.
The inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors. The presiding
officer may review all determinations made by the inspectors, and in so doing
the presiding officer shall be entitled to exercise his or her sole judgment and
discretion and he or she shall not be bound by any determinations made by the
inspectors. All determinations by the inspectors and, if applicable, the
presiding officer, shall be subject to further review by any court of competent
jurisdiction.
ARTICLE II
DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
Section 2. NUMBER AND TERMS. The number of directors of the Corporation
shall be fixed by resolution duly adopted from time to time by the Board of
Directors. The directors shall hold office in the manner provided in the
Certificate.
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Section 3. QUALIFICATION. No director need be a stockholder of the
Corporation.
Section 4. VACANCIES. Subject to the rights, if any, of the holders of
any series of preferred stock to elect directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a director, shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
if less than a quorum of the Board of Directors. Any director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
preferred stock to elect directors, when the number of directors is increased or
decreased, the Board of Directors shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; PROVIDED,
HOWEVER, that no decrease in the number of directors shall shorten the term of
any incumbent director. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
Section 5. REMOVAL. Directors may be removed from office in the manner
provided in the Certificate.
Section 6. RESIGNATION. A director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
Section 7. REGULAR MEETINGS. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Section 7, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may be
held at such hour, date and place as the Board of Directors may by resolution
from time to time determine without notice other than such resolution.
Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
Section 9. NOTICE OF MEETINGS. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting of
the Board of Directors shall be given to each director in person, by telephone,
or by facsimile, telex, telecopy, telegram, or other written form of electronic
communication, sent to his or her business or home address, at least 24 hours in
advance of
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the meeting, or by written notice mailed to his or her business or home address,
at least 48 hours in advance of the meeting. Such notice shall be deemed to be
delivered when hand delivered to such address, read to such director by
telephone, deposited in the mail so addressed, with postage thereon prepaid if
mailed, dispatched or transmitted if faxed, telexed or telecopied, or when
delivered to the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate or
by these By-laws, neither the business to be transacted at, nor the purpose of,
any meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
Section 10. QUORUM. At any meeting of the Board of Directors, a
majority of the directors then in office shall constitute a quorum for the
transaction of business, but if less than a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 9 of this Article II. Any business which might have been transacted
at the meeting as originally noticed may be transacted at such adjourned meeting
at which a quorum is present.
Section 11. ACTION AT MEETING. At any meeting of the Board of Directors
at which a quorum is present, a majority of the directors present may take any
action on behalf of the Board of Directors, unless otherwise required by law, by
the Certificate or by these By-laws.
Section 12. ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
Section 13. MANNER OF PARTICIPATION. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
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Section 14. COMMITTEES. The Board of Directors, by vote of a majority
of the directors then in office, may elect from its number one or more
committees, including, without limitation, an Executive Committee, a
Compensation Committee, a Stock Option Committee and an Audit Committee, and may
delegate thereto some or all of its powers except those which by law, by the
Certificate or by these By-laws may not be delegated. Except as the Board of
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Board of Directors
or in such rules, its business shall be conducted so far as possible in the same
manner as is provided by these By-laws for the Board of Directors. All members
of such committees shall hold such offices at the pleasure of the Board of
Directors. The Board of Directors may abolish any such committee at any time.
Any committee to which the Board of Directors delegates any of its powers or
duties shall keep records of its meetings and shall report its action to the
Board of Directors. The Board of Directors shall have power to rescind any
action of any committee, to the extent permitted by law, but no such rescission
shall have retroactive effect.
Section 15. COMPENSATION OF DIRECTOR. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as directors of the
Corporation.
ARTICLE III
OFFICERS
Section 1. ENUMERATION. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board of Directors, a Chief Executive
Officer and one or more Vice Presidents (including Executive Vice Presidents or
Senior Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and
Assistant Secretaries, as the Board of Directors may determine.
Section 2. ELECTION. At the regular annual meeting of the Board
following the Annual Meeting, the Board of Directors shall elect the President,
the Treasurer and the Secretary. Other officers may be elected by the Board of
Directors at such regular annual meeting of the Board of Directors or at any
other regular or special meeting.
Section 3. QUALIFICATION. No officer need be a stockholder or a
director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his or her duties in such amount and with such sureties
as the Board of Directors may determine.
Section 4. TENURE. Except as otherwise provided by the Certificate or
by these By-laws, each of the officers of the Corporation shall hold office
until the regular annual meeting of the Board of Directors following the next
Annual Meeting and until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
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Section 5. RESIGNATION. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
Section 6. REMOVAL. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
Section 7. ABSENCE OR DISABILITY. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
Section 8. VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
Section 9. PRESIDENT. The President shall, subject to the direction of
the Board of Directors, have general supervision and control of the
Corporation's business. If there is no Chairman of the Board or if he or she is
absent, the President shall preside, when present, at all meetings of
stockholders and of the Board of Directors. The President shall have such other
powers and perform such other duties as the Board of Directors may from time to
time designate.
Section 10. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
Section 11. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if
one is elected, shall have such powers and shall perform such duties as the
Board of Directors may from time to time designate.
Section 12. VICE PRESIDENTS AND ASSISTANT VICE PRESIDENT. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
Section 13. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
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Section 14. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge of
the stock ledger (which may, however, be kept by any transfer or other agent of
the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer. In the absence
of the Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
Section 15. OTHER POWERS AND DUTIES. Subject to these By-laws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
ARTICLE IV
CAPITAL STOCK
Section 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to
a certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every certificate
for shares of stock which are subject to any restriction on transfer and every
certificate issued when the Corporation is authorized to issue more than one
class or series of stock shall contain such legend with respect thereto as is
required by law.
Section 2. TRANSFERS. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such
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proof of the authenticity of signature as the Corporation or its transfer agent
may reasonably require.
Section 3. RECORD HOLDERS. Except as may otherwise be required by law,
by the Certificate or by these By-laws, the Corporation shall be entitled to
treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to vote
with respect thereto, regardless of any transfer, pledge or other disposition of
such stock, until the shares have been transferred on the books of the
Corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of
his or her post office address and any changes thereto.
Section 4. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than sixty nor less than
ten days before the date of such meeting and (b) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (i) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held and (ii) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
Section 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
INDEMNIFICATION
Section 1. DEFINITIONS. For purposes of this Article:
(a) "Director" means any person who serves or has served the
Corporation as a director on the Board of Directors of the Corporation.
(b) "Officer" means any person who serves or has served the
Corporation as an officer appointed by the Board of Directors of the
Corporation;
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(c) "Non-Officer Employee" means any person who serves or has
served as an employee of the Corporation, but who is not or was not a Director
or Officer;
(d) "Proceeding" means any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism, inquiry,
investigation, administrative hearing or other proceeding, whether civil,
criminal, administrative, arbitrative or investigative;
(e) "Expenses" means all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of expert witnesses, private
investigators and professional advisors (including, without limitation,
accountants and investment bankers), travel expenses, duplicating costs,
printing and binding costs, costs of preparation of demonstrative evidence and
other courtroom presentation aids and devices, costs incurred in connection with
document review, organization, imaging and computerization, telephone charges,
postage, delivery service fees, and all other disbursements, costs or expenses
of the type customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, being or preparing to be a
witness in, settling or otherwise participating in, a Proceeding;
(f) "Corporate Status" describes the status of a person who
(i) in the case of a Director, is or was a director of the Corporation and is or
was acting in such capacity, (ii) in the case of an Officer, is or was an
officer, employee or agent of the Corporation or is or was a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such Officer is or was serving
at the request of the Corporation, and (iii) in the case of a Non-Officer
Employee, is or was an employee of the Corporation or is or was a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such Non-Officer Employee
is or was serving at the request of the Corporation. For purposes of subsection
(ii) of this Section 1(f), an officer or director of the Company who is serving
as a director, partner, trustee, officer, employee or agent of a Subsidiary
shall be deemed to be serving at the request of the Company;
(g) "Disinterested Director" means, with respect to each
Proceeding in respect of which indemnification is sought hereunder, a Director
of the Corporation who is not and was not a party to such Proceeding; and
(h) "Subsidiary" shall mean any corporation, partnership,
limited liability company, joint venture, trust or other entity of which the
Corporation owns (either directly or through or together with another Subsidiary
of the Corporation) either (i) a general partner, managing member or other
similar interest or (ii) (A) 50% or more of the voting power of the voting
capital equity interests of such corporation, partnership, limited liability
company, joint venture or other entity, or (B) 50% or more of the outstanding
voting capital stock or other voting equity interests of such corporation,
partnership, limited liability company, joint venture or other entity.
Section 2. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Subject to the
operation of Section 5.4 of these By-laws, each Director and Officer shall be
indemnified and held
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harmless by the Corporation to the fullest extent authorized by the DGCL, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment) against any and all Expenses, judgments,
penalties, fines and amounts reasonably paid in settlement that are incurred by
such Director or Officer or on such Director's or Officer's behalf in connection
with any threatened, pending or completed Proceeding or any claim, issue or
matter therein, which such Director or Officer is, or is threatened to be made,
a party to or participant in by reason of such Director's or Officer's Corporate
Status, if such Director or Officer acted in good faith and in a manner such
Director or Officer reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The rights of
indemnification provided by this Section 5.2 shall continue as to a Director or
Officer after he or she has ceased to be a Director or Officer and shall inure
to the benefit of his or her heirs, executors, administrators and personal
representatives. Notwithstanding the foregoing, the Corporation shall indemnify
any Director or Officer seeking indemnification in connection with a Proceeding
initiated by such Director or Officer only if such Proceeding was authorized by
the Board of Directors of the Corporation, unless such Proceeding was brought to
enforce an Officer or Director's rights to Indemnification under these By-laws.
Section 3. INDEMNIFICATION OF NON-OFFICER EMPLOYEES. Subject to the
operation of Section 5.4 of these By-laws, each Non-Officer Employee may, in the
discretion of the Board of Directors of the Corporation, be indemnified by the
Corporation to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended, against any or all Expenses, judgments, penalties,
fines and amounts reasonably paid in settlement that are incurred by such
Non-Officer Employee or on such Non-Officer Employee's behalf in connection with
any threatened, pending or completed Proceeding, or any claim, issue or matter
therein, which such Non-Officer Employee is, or is threatened to be made, a
party to or participant in by reason of such Non-Officer Employee's Corporate
Status, if such Non-Officer Employee acted in good faith and in a manner such
Non-Officer Employee reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The rights of
indemnification provided by this Section 5.3 shall exist as to a Non-Officer
Employee after he or she has ceased to be a Non-Officer Employee and shall inure
to the benefit of his or her heirs, personal representatives, executors and
administrators. Notwithstanding the foregoing, the Corporation may indemnify any
Non-Officer Employee seeking indemnification in connection with a Proceeding
initiated by such Non-Officer Employee only if such Proceeding was authorized by
the Board of Directors of the Corporation.
Section 4. GOOD FAITH. Unless ordered by a court, no indemnification
shall be provided pursuant to this Article V to a Director, to an Officer or to
a Non-Officer Employee unless a determination shall have been made that such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect to
any criminal Proceeding, such person had no reasonable cause to believe his or
her conduct was unlawful. Such determination shall
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be made by (a) a majority vote of the Disinterested Directors, even though less
than a quorum of the Board of Directors, (b) a committee comprised of
Disinterested Directors, such committee having been designated by a majority
vote of the Disinterested Directors (even though less than a quorum), (c) if
there are no such Disinterested Directors, or if a majority of Disinterested
Directors so directs, by independent legal counsel in a written opinion, or (d)
by the stockholders of the Corporation.
Section 5. ADVANCEMENT OF EXPENSES TO DIRECTORS PRIOR TO FINAL
DISPOSITION. The Corporation shall advance all Expenses incurred by or on behalf
of any Director in connection with any Proceeding in which such Director is
involved by reason of such Director's Corporate Status within 10 days after the
receipt by the Corporation of a written statement from such Director requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Director and shall be preceded or
accompanied by an undertaking by or on behalf of such Director to repay any
Expenses so advanced if it shall ultimately be determined that such Director is
not entitled to be indemnified against such Expenses.
Section 6. ADVANCEMENT OF EXPENSES TO OFFICERS AND NON-OFFICER
EMPLOYEES PRIOR TO FINAL DISPOSITION.
(a) ADVANCEMENT TO OFFICERS. The Corporation may, at the
discretion of the Board of Directors of the Corporation, advance any or all
Expenses incurred by or on behalf of any Officer in connection with any
Proceeding in which such is involved by reason of such Officer's Corporate
Status upon the receipt by the Corporation of a statement or statements from
such Officer requesting such advance or advances from time to time, whether
prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by such Officer and
shall be preceded or accompanied by an undertaking by or on behalf of such to
repay any Expenses so advanced if it shall ultimately be determined that such
Officer is not entitled to be indemnified against such Expenses.
(b) ADVANCEMENT TO NON-OFFICER EMPLOYEES. The Corporation may,
at the discretion of the Board of Directors or of any Officer who is authorized
to act on behalf of the Corporation, advance any or all Expenses incurred by or
on behalf of any Non-Officer Employee in connection with any Proceeding in which
such Non-Officer Employee is involved by reason of such Non-Officer Employee's
Corporate Status upon the receipt by the Corporation of a statement or
statements from such Non-Officer Employee requesting such advance or advances
from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by such Non-Officer Employee and shall be preceded or accompanied by an
undertaking by or on behalf of such Non-Officer Employee to repay any Expenses
so advanced if it shall ultimately be determined that such Non-Officer Employee
is not entitled to be indemnified against such Expenses.
Section 7. CONTRACTUAL NATURE OF RIGHTS. The foregoing provisions of
this Article V shall be deemed to be a contract between the Corporation and each
Director and
15
<PAGE> 16
Officer entitled to the benefits hereof at any time while this Article V is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any Proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. If a claim for indemnification or
advancement of Expenses hereunder by a Director or Officer is not paid in full
by the Corporation within (a) 60 days after receipt by the Corporation's of a
written claim for indemnification, or (b) in the case of a Director, 10 days
after receipt by the Corporation of documentation of Expenses and the required
undertaking, such Director or Officer may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, such Director or Officer shall also be entitled
to be paid the expenses of prosecuting such claim. The failure of the
Corporation (including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a determination concerning
the permissibility of such indemnification or, in the case of a Director,
advancement of Expenses, under this Article V shall not be a defense to the
action and shall not create a presumption that such indemnification or
advancement is not permissible.
Section 8. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and
advancement of Expenses set forth in this Article V shall not be exclusive of
any other right which any Director, Officer, or Non-Officer Employee may have or
hereafter acquire under any statute, provision of the Certificate or these
By-laws, agreement, vote of stockholders or Disinterested Directors or
otherwise.
Section 9. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer or Non-Officer Employee
against any liability of any character asserted against or incurred by the
Corporation or any such Director, Officer or Non-Officer Employee, or arising
out of any such person's Corporate Status, whether or not the Corporation would
have the power to indemnify such person against such liability under the DGCL or
the provisions of this Article V.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. FISCAL YEAR. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of April
of each year.
Section 2. SEAL. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
Section 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
16
<PAGE> 17
Section 4. VOTING OF SECURITIES. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
Section 5. RESIDENT AGENT. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or proceeding
against the Corporation.
Section 6. CORPORATE RECORDS. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
Section 7. AMENDMENT OF BY-LAWS.
(a) AMENDMENT BY DIRECTORS. Except as provided otherwise by
law, these By-laws may be amended or repealed by the Board of Directors by the
affirmative vote of a majority of the directors then in office.
(b) AMENDMENT BY STOCKHOLDERS. These By-laws may be amended or
repealed at any Annual Meeting, or special meeting of stockholders called for
such purpose, by the affirmative vote of at least two-thirds of the shares
present in person or represented by proxy at such meeting and entitled to vote
on such amendment or repeal, voting together as a single class; PROVIDED,
HOWEVER, that if the Board of Directors recommends that stockholders approve
such amendment or repeal at such meeting of stockholders, such amendment or
repeal shall only require the affirmative vote of the majority of the shares
present in person or represented by proxy at such meeting and entitled to vote
on such amendment or repeal, voting together as a single class. Notwithstanding
the foregoing, stockholder approval shall not be required unless mandated by the
Articles of Organization, these By-laws, or other applicable law.
Adopted August 20, 1999 and effective as of __________ ___, 1999.
17
<PAGE> 1
Exhibit 4.1
COMMON COMMON
- --------------- ----------------
NUMBER [MCK LOGO] SHARES
MCK
- --------------- ----------------
MCK COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 581243 10 2
SEE REVERSE FOR
CERTAIN DEFINITIONS
- -----------------------------------------------------------------------------
THIS CERTIFIES THAT
is the owner of
- -----------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
MCK COMMUNICATIONS, INC. (herein called the "Corporation") transferable upon
the books of the Corporation in person or by attorney upon surrender of this
certificate duly endorsed or assigned. This certificate and the shares
represented hereby are subject to the laws of the State of Delaware, and to the
Certificate of Incorporation and the By-laws of the Corporation, each as amended
from time to time (copies of which are on file with the Transfer Agent).
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, MCK COMMUNICATIONS, INC. has caused its facsimile
corporate seal and the facsimile signatures of its duly authorized officers to
be hereunto affixed.
Dated:
/s/ Paul Zurlo [SEAL] /s/ Woody Benson
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
MCK COMMUNICATIONS, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE
CORPORATION WILL FURNISH TO THE HOLDER UPON REQUEST AND WITHOUT CHARGE THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-__Custodian___
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ______ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-----------
----------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 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 ________ 1999, in the Registration Statement
(333-85821) on Form S-1 and related Prospectus of MCK Communications, Inc. for
the registration of shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
October __, 1999
The foregoing consent is in the form that will be signed upon the completion of
the 1.53 to 1 stock split contemplated in the first paragraph of Note 14 to the
financial statements. The accompanying consolidated statements of operations,
common stockholders' deficit and cash flows have been adjusted to reflect this
stock split.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
September 21, 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 , 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.
PricewaterhouseCoopers LLP
Calgary, Alberta
October __, 1999
The foregoing consent is in the form that will be signed upon the completion of
the 1.53 to 1 stock split contemplated in the first paragraph of Note 14 to the
financial statements. The accompanying consolidated statements of operations,
common stockholders' deficit and cash flows have been adjusted to reflect this
stock split.
/s/ PricewaterhouseCoopers LLP
Calgary, Alberta
September 21, 1999
