<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION STATEMENT NO. 333-32090
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
------------------------
117 KENDRICK STREET
NEEDHAM, MASSACHUSETTS 02494
(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.
117 KENDRICK STREET
NEEDHAM, MASSACHUSETTS 02494
(617) 454-6100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN B. STEELE, ESQ. MICHAEL A. CONZA, ESQ.
GARRISON R. SMITH, ESQ. TESTA, HURWITZ & THIBEAULT LLP
MCDERMOTT, WILL & EMERY 125 HIGH STREET
28 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109-1775 (617) 248-7000
(617) 535-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ] ________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNTS TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per
share........................... 3,450,000 $42.625 $147,056,250 $38,823
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares which the underwriters have an option to purchase
from existing stockholders to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(c) under the Securities Act of 1933.
(3) $61,822 was previously paid by MCK in connection with the initial filing.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 APRIL 4, 2000
[MCK COMMUNICATIONS LOGO]
3,000,000 SHARES
COMMON STOCK
MCK Communications, Inc. is offering 1,500,000 shares of its common stock
and the selling stockholders are selling an additional 1,500,000 shares. MCK's
common stock is traded on the Nasdaq National Market under the symbol "MCKC."
The last reported sale price of the common stock on the Nasdaq National Market
on April 3, 2000 was $42.625 per share.
------------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------- -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to MCK............................................. $ $
Proceeds to the Selling Stockholders........................ $ $
</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.
Certain of our existing stockholders have granted the underwriters a 30-day
option to purchase up to 450,000 additional shares of common stock to cover
over-allotments.
------------------------------
ROBERTSON STEPHENS
CHASE H&Q
DAIN RAUSCHER WESSELS
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 3
Edgar description for Interior Fold-out Page:
(MCK LOGO)
CAPTION: EXTENDING CORPORATE TELEPHONE SYSTEMS TO
REMOTE EMPLOYEES OVER MANY NETWORKS
The page is divided into three sections, labeled "Corporate Office" on the
left, "Branch Office" in the top center and "Telecommuter or Home Office" on the
right and at the bottom center. The diagram shows a large corporate office with
a PBX connected to a PBXgateway and a non-MCK product. The PBXgateway connects
to public and private networks. The non-MCK product independently connects to
public and private networks. At the branch office location, the diagram shows a
network termination device that connects to public and private networks. A
Branch Office EXTender 6000 connects to a network termination device and
multiple telephone sets connect to the Branch Office EXTender 6000. Multiple
telephone sets connect to the Branch Office EXTender 6000s and one telephone set
connects to the EXTender 4000. At the telecommuter or home office locations, the
diagram shows three single-user locations: (i) a telephone set and a personal
computer connected to an EXTender 1000+; (ii) a telephone set and personal
computer connected to an EXTender 3000, and (iii) a telephone set and personal
computer connected to an EXTender 4000 which is connected to a network
termination device; each connected to public and private networks over a
traditional telephone network, ISDN and cable or DSL networks, respectively.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Note on Forward Looking Statements.......................... 15
Use of Proceeds............................................. 15
The Company................................................. 15
Price Range of Common Stock................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 27
Management.................................................. 48
Certain Transactions........................................ 56
Principal and Selling Stockholders.......................... 59
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 65
Underwriting................................................ 67
Legal Matters............................................... 68
Experts..................................................... 68
Change in Independent Accountants........................... 69
Where You Can Find More Information......................... 69
Index to Consolidated Financial Statements.................. F-1
</TABLE>
i
<PAGE> 5
(This page intentionally left blank)
\
<PAGE> 6
PROSPECTUS SUMMARY
This is only a summary and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and our financial
statements and the notes thereto included elsewhere in this prospectus. Unless
otherwise indicated, this prospectus assumes that the underwriters have not
exercised their option to purchase additional shares and that all shares of
convertible preferred stock have been automatically converted into shares of
common stock, and all common stock share information has been adjusted to
reflect a 1.53 for-one stock split of the common stock effected as a dividend on
October 8, 1999 and the filing of our amended and restated certificate of
incorporation. We own or have rights to trademarks that we use in conjunction
with the sale of our products. EXTender, MCK, MCK EXTender, PBXtender,
PBXgateway, RVP and Telebridge are our trademarks. All other trade names and
trademarks used in this prospectus are the property of their respective owners.
MCK COMMUNICATIONS, INC.
MCK Communications is a leading provider of products that provide remote
employees access to corporate voice systems and applications. These products
enable corporations to extend the features and applications of large corporate
telephone systems known as private branch exchanges, or PBXs, from the corporate
office to remote branch offices and telecommuters over public and private
networks. PBX systems are the most commonly used corporate telephone systems and
deliver features such as three- or four-digit internal dialing and call
forwarding and applications such as voicemail. Our EXTender products
cost-effectively deliver a unified, enterprise-wide voice network by enabling
the PBX to function as a corporate voice server that transmits voice and PBX
applications to remote locations over corporations' existing data networks.
Branch office employees benefit from having digital telephone sets that function
as extensions of the corporate telephone systems, providing these employees with
the same features and applications utilized by employees at the corporate
headquarters. In addition, our products reduce the total cost of ownership by
allowing corporations to use their existing voice and data equipment, and
streamline network administration through the utilization of industry standard
network management techniques.
Large corporations are increasingly shifting towards a decentralized
business model. This model of distributed work forces with multiple branch
offices and numerous telecommuters enables corporations to realize the
competitive advantages of being located near key customers, suppliers and
partners and to attract qualified employees. We believe Fortune 5000 businesses
maintain approximately 1.6 million branch offices. According to the Gartner
Group, the number of telecommuters worldwide is expected to grow from 35 million
in 1998 to 140 million in 2003.
As corporations decentralize, they seek to extend their voice and data
networks across multiple locations due to their dependence upon company-wide
communications to facilitate internal collaboration, provide superior customer
service and maintain efficiency and productivity. Advances in data networking
technologies and the deployment of interoperable equipment from multiple vendors
has enabled cost-effective, high-speed remote access and communication over
local and wide area data networks, including virtual private networks. In
contrast, corporate voice systems, which are known for their reliability and
functionality in centralized environments, have not been efficiently extended
from corporate locations to branch offices and telecommuters due to technical
limitations and cost constraints. As a result, corporations have had to deploy
separate telephone systems for each remote location, limiting the effectiveness
of corporate communications and increasing the burden on systems administrators.
Furthermore, in order to lower costs and simplify network administration,
corporations are increasingly demanding that voice and data services be offered
over one centrally-managed corporate communications infrastructure. Technology
which converts voice transmissions into packets of data, and advances in Quality
of Service which enable the transmission of voice over private managed data
networks and public data networks such as the Internet, make this convergence of
voice and data possible. Thus, solutions for the remote voice marketplace must
offer a centrally-managed interface to corporate telephone systems and have the
capability of packetizing and transmitting voice over both traditional
circuit-based data networks and emerging packet networks.
1
<PAGE> 7
Our remote access solutions enable corporations to realize the following
key benefits:
- Full-Featured Remote Voice Access. Our solutions effectively provide the
rich features and applications of PBX systems to branch office employees
and telecommuters over existing data networks.
- Digital Line Extension Technology. Our solutions utilize our proprietary
hardware and software interfaces to: (1) extract voice and the signaling
information necessary to interface with proprietary PBX systems from the
user or line side of the PBX; and (2) access the rich features and
applications of corporate telephone systems for transmission across data
networks.
- Packet Voice Architecture. Utilizing our proprietary Remote Voice
Protocol, or RVP, software platform, we packetize voice transmission and
voice applications extracted from PBXs for transmission over data
networks to remote locations.
- Lower Cost Solution. Our solutions enable corporations to lower costs,
including network transmission, network management, equipment and
infrastructure costs. By transmitting voice over data networks, our
products eliminate the need for corporations to install separate,
parallel wiring architectures for voice and data.
- Compatibility with Leading PBX Manufacturers. Our solutions are
compatible with the proprietary PBX systems of Alcatel, Lucent, NEC,
Nortel Networks and Toshiba, whose products collectively have a market
share of approximately 65% in the U.S. PBX market.
Our objective is to become the leading provider of remote voice access
solutions to Fortune 5000 businesses for their branch offices and telecommuters.
Key components of our strategy include:
- maintaining our technology leadership;
- establishing our PBXgateway products as platforms for new voice
applications;
- enhancing the functionality of our multi-user customer premise equipment;
- 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 117 Kendrick Street, Needham,
Massachusetts 02494 and our telephone number at that address is (617) 454-6100.
2
<PAGE> 8
THE OFFERING
Common stock offered by MCK............. 1,500,000 shares
Common stock offered by the selling
stockholders............................ 1,500,000 shares
Common stock to be outstanding after the
offering................................ 19,567,556 shares(1)
Use of proceeds......................... We expect to use the net proceeds
for working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol........... MCKC
- ---------------
(1) Based on the number of shares outstanding as of February 29, 2000. Excludes:
- 2,061,808 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $7.39 per share; and
- 2,290,344 additional shares of common stock reserved for future issuance
under our 1996 and 1999 Stock Option and Grant Plans. See
"Management -- Executive Compensation," "-- 1996 Stock Option Plan" and
"-- 1999 Stock Option and Grant Plan."
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The as adjusted consolidated balance sheet data summarized below reflects
the completion of this offering and the application of the net proceeds from the
sale of 1,500,000 shares of common stock issued hereby at an assumed offering
price of $42.625 per share and after deducting the underwriting discounts and
commissions and our estimated offering expenses. The number of shares used to
compute basic and diluted earnings per share gives effect to the 1.53 for one
stock split of our common stock effected on October 8, 1999, and such
information for the years ended April 30, 1995 and 1996 gives effect to the
recapitalization that occurred during the year ended April 30, 1997 as if it had
occurred at the beginning of each fiscal year. See Note 11 of Notes to
Consolidated Financial Statements for an explanation of the number of shares
used in computing per share data.
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
--------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------- ---------- -----------
(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 $ 10,166 $ 16,763
Cost of goods sold................. 796 2,423 2,313 2,800 5,390 3,894 6,274
---------- ---------- ---------- ---------- ----------- ---------- -----------
Gross profit....................... 1,014 2,916 3,608 5,076 8,880 6,272 10,489
Operating expenses:
Research and development......... 266 344 815 1,758 3,349 2,401 3,433
Sales and marketing.............. -- 576 1,145 2,191 3,888 2,702 4,994
General and administrative....... 626 319 607 1,485 1,617 1,153 1,778
Amortization of stock based
compensation................... -- -- -- -- 406 248 3,460
Transaction-related charges...... -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total operating expenses..... 892 1,239 3,060 5,434 9,260 6,504 13,665
---------- ---------- ---------- ---------- ----------- ---------- -----------
Income (loss) from operations...... 122 1,677 548 (358) (380) (232) (3,176)
Other income (expense)............. 12 7 (343) (595) (207) (228) 258
---------- ---------- ---------- ---------- ----------- ---------- -----------
Income (loss) before provision for
income taxes and dividends on
redeemable preferred stock of
subsidiary....................... 134 1,684 205 (953) (587) (460) (2,918)
Provision for income taxes......... 13 652 302 -- -- -- --
Dividends on redeemable preferred
stock of subsidiary.............. -- -- 133 160 197 144 97
---------- ---------- ---------- ---------- ----------- ---------- -----------
Net income (loss).................. $ 121 $ 1,032 $ (230) $ (1,113) $ (784) $ (604) $ (3,015)
Dividends on redeemable preferred
stock............................ -- -- 1,011 1,220 1,966 1,458 1,285
---------- ---------- ---------- ---------- ----------- ---------- -----------
Net income (loss) applicable to
common shares.................... $ 121 $ 1,032 $ (1,241) $ (2,333) $ (2,750) $ (2,062) $ (4,300)
========== ========== ========== ========== =========== ========== ===========
Basic and diluted net income (loss)
per common share................. $ .04 $ .33 $ (0.39) $ (0.67) $ (0.71) $ (0.54) $ (0.47)
Shares used in computing basic and
diluted net income (loss) per
common share..................... 3,108,373 3,108,373 3,188,152 3,476,282 3,881,526 3,814,543 9,078,711
Pro forma basic and diluted loss
per share........................ $ (0.20) $ (0.18) $ (0.30)
Shares used in computing pro forma
basic and diluted loss per
share............................ 12,012,167 11,764,572 14,547,220
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents........................................ $ 8,424 $68,382
Working capital............................................. 32,002 91,961
Total assets................................................ 37,994 97,953
Total common stockholders' equity........................... 33,413 93,372
</TABLE>
4
<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 failure
to generate as much revenue as expected from these customers or the failure of
these customers, particularly Lucent, to purchase our products would seriously
harm our business. Furthermore, Lucent announced in March 2000 that it plans to
divest its PBX unit into a standalone business. It is unclear what impact this
may have on our relationship with Lucent or the new entity. For the fiscal year
ended 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. For
the nine months ended January 31, 2000, Lucent accounted for 45.7% of our
revenues, and our 10 largest customers, including Lucent, accounted for 76.8% of
our revenues. None of these large customers is obligated to purchase additional
products or services. Accordingly, present and future customers may terminate
their purchasing arrangements with us or significantly reduce or delay their
orders. Any termination, change, reduction or delay in orders could seriously
harm our business, financial condition and results of operations. Accordingly,
unless and until we diversify and expand our customer base, our future success
will significantly depend upon the timing and size of future purchases by our
largest customers and, in particular:
- the product requirements of these customers;
- the financial and operational success of these customers; and
- the success of the underlying products and services that our products
support.
The loss of any one of our major customers or the delay of significant
orders from such customers, even if only temporary, could reduce or delay our
recognition of revenues, harm our reputation in the industry and reduce our
ability to accurately predict cash flow, and, as a consequence, could seriously
harm our business, financial condition and results of operations.
OUR INABILITY TO DEVELOP AND MAINTAIN RELATIONSHIPS WITH KEY PBX VENDORS WOULD
HARM OUR ABILITY TO SUSTAIN AND GROW OUR BUSINESS
Our success will depend to a significant degree upon our relationships with
leading PBX vendors and their channel distribution partners. The systems sold by
these vendors account for approximately 65% of the U.S. market for corporate PBX
equipment sales, and approximately 99% of our revenues for the nine months ended
January 31, 2000 were attributable to products which interoperate with corporate
telephone systems offered by these vendors. We may not have access in the future
to the proprietary protocols for the major corporate telephone systems marketed
by those vendors, which access may be essential to ensure the continued
interoperability of our products. Moreover, we may not be able to develop
products that interoperate with the corporate telephone systems offered by other
vendors. Additionally, the standards for telephony equipment and data networks
are evolving and our products may not be compatible with any new technology
standards that may emerge. If we are unable to provide our customers with
interoperable solutions, they may make purchases from vendors who provide the
requisite product interoperability. This could seriously harm our business,
financial condition and results of operations.
5
<PAGE> 11
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 their distribution channels. Moreover, it is possible that the PBX vendors
may seek to offer broader product lines and solutions that are competitive with
our products.
UNLESS WE ARE ABLE TO KEEP PACE WITH THE RAPIDLY CHANGING PRODUCT REQUIREMENTS
OF OUR CUSTOMERS, WE WILL NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
The telecommunications market is characterized by rapid technological
advances, evolving industry standards, changes in end-user requirements,
frequent new product introductions and evolving offerings by telecommunications
service providers. We believe our future success will largely depend on our
ability to anticipate or adapt to such changes and to offer, on a timely basis,
products that meet customer demands. Our customers could purchase competitive
products from other suppliers if we fail to produce technologically competitive
products in a cost-effective manner or on a timely basis. This may cause us to
be unable to sustain or grow our business.
INTENSE COMPETITION IN THE MARKET FOR REMOTE VOICE SOLUTIONS COULD PREVENT US
FROM INCREASING OR SUSTAINING REVENUE AND PREVENT US FROM ACHIEVING OR
SUSTAINING PROFITABILITY
The market for remote voice solutions is highly competitive. Our inability
to compete effectively in this market would materially adversely affect our
revenues and future profitability. Many of our current and potential competitors
have significantly greater sales and marketing, technical, manufacturing,
financial and other resources, more established distribution channels and
stronger relationships with service providers. For instance, in June 1999 Nortel
Networks announced its intention to develop new products which will compete
directly with our products. Moreover, our competitors may foresee the course of
market developments more accurately than we do and could in the future develop
new technologies that compete with our products or even render our products
obsolete. Realizing and maintaining technological advantages over our
competitors will require a continued high level of investment in research and
development, sales and marketing and customer support. Due to the opportunities
in and the rapidly evolving nature of the market in which we compete, additional
competitors with significant market presence and financial resources, including
large communications equipment manufacturers, may enter our market, thereby
further intensifying competition. We may not have sufficient resources to
continue to make the investments or achieve the technological advances necessary
to compete successfully with existing competitors or new competitors.
Increased competition is likely to result in price reductions, reduced
gross margins, longer sales cycles and loss of market share, any of which would
seriously harm our business and results of operations. We may not be able to
compete successfully against current or future competitors and these competitive
pressures may seriously harm our business.
FUTURE CONSOLIDATION IN THE COMMUNICATIONS EQUIPMENT INDUSTRY MAY INCREASE
COMPETITION THAT COULD HARM OUR BUSINESS
The markets in which we compete are characterized by increasing
consolidation both within the communications sector and by companies combining
or acquiring communications assets. This consolidation creates uncertainty as to
the nature of our future competition. For instance, a relatively small
competitor which is acquired by a large telecommunications company would likely
have access to greater resources than us and would accordingly be a greater
competitive threat. We may not be able to compete successfully in an
increasingly consolidated industry. Increased competition and consolidation in
our industry could require that we reduce the prices of our products and may
result in our loss of market share, which would materially adversely affect our
business, financial condition and results of operations. Additionally, because
we are now, and may in the future be, dependent on strategic relationships with
third parties in our industry, such as Lucent, any consolidation involving these
parties could reduce the demand for our products and otherwise harm our business
prospects.
6
<PAGE> 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 last eleven fiscal quarters, our net
results of operations have ranged from a net loss of $443,000 to a net loss of
$2.0 million. It is possible that our revenues and operating results may be
below the expectations of securities analysts and investors in future quarters.
If we fail to meet or surpass the expectations of securities analysts or
investors, the market price of our common stock will most likely fall. A number
of factors could cause our quarterly results to fluctuate, including, but not
limited to:
- the timing and amount of, or cancellation or rescheduling of, orders for
our products, particularly large orders from our key customers;
- our ability to develop, introduce, ship and support new products and
product enhancements, and manage product transitions;
- new product introductions and announcements, and reductions in the prices
of products offered by our competitors;
- our ability to sustain our technology relationships, particularly with
the major PBX manufacturers and service providers;
- availability and changes in the prices of components provided by third
parties;
- our ability to attain and maintain production volumes and quality levels
for our products;
- the mix of products sold and the mix of distribution channels through
which they are sold;
- fluctuations in demand for our products;
- costs relating to possible acquisitions and integration of technologies
or businesses;
- telecommunications market conditions and economic conditions generally;
- our ability to hire, train, integrate and retain new personnel; and
- changes in the level of our operating expenses.
Given that any one or more of these or other factors could have an adverse
effect on our business, the prediction of future quarterly results is difficult
and uncertain. In addition, some of our operating expenses are relatively fixed
in advance of any particular quarter. As a result, we may not be able to reduce
our operating costs in response to unanticipated reductions in our revenues or
the demand for our products.
OUR DEPENDENCE ON INDEPENDENT MANUFACTURERS AND SUPPLIERS COULD RESULT IN
PRODUCT DELIVERY DELAYS
We currently use three independent manufacturers, Celestica, Electronic
Manufacturing Group and Mack Technologies, to manufacture all of our products.
Our reliance on independent manufacturers involves a number of risks, including
the absence of adequate capacity, the unavailability of or interruptions in
access to necessary manufacturing processes and reduced control over delivery
schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products and components in required volumes, we will have to
identify acceptable alternative manufacturers, which could take in excess of six
months. Furthermore, the use of a new manufacturer may cause significant
interruptions in supply if the new manufacturer has difficulty manufacturing
products to our specifications. Further, the introduction of a new manufacturer
may increase the variance in the quality of our products. In addition, we rely
upon third-party suppliers of specialty components and intellectual property
used in our products. It is possible that a component needed to complete the
manufacture of our products may not be available to us at acceptable prices or
on a timely basis, if at all. For example, the demand for flash memory chips is
particularly strong and may lead to shortages for these components of our
products. Inadequate supplies of components, or the loss of intellectual
property rights, could affect our ability to deliver products to our customers.
Any significant interruption in the supply of our products would result in the
reduction of product sales to customers, which in turn could permanently harm
our reputation in the industry.
7
<PAGE> 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, develop and maintain our
relationships with large PBX vendors, resellers and distributors,
telecommunications service providers and application 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
8
<PAGE> 14
addition, our operating results will likely fluctuate significantly depending on
the timing and amount of orders from our indirect distribution channels. Our
indirect distribution channels may not market our products effectively or may
cease to devote the resources necessary to provide us with effective sales,
marketing and technical support.
In order to support and develop leads for our indirect distribution
channels, we plan to significantly expand our field sales staff. This internal
expansion may not be successfully completed. In addition, the cost of this
expansion may exceed the revenues generated and our expanded sales and support
staff may not be able to compete successfully against the significantly more
extensive and well-funded sales and marketing operations of many of our current
or potential competitors. Our inability to effectively develop and expand our
distribution channels or manage the expansion of our sales and support staff
would adversely affect our ability to grow and increase revenues.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE AND YOU MAY NOT BE
ABLE TO RESELL SHARES AT OR ABOVE THE OFFERING PRICE
The trading price of our common stock has been, and may continue to be,
subject to wide fluctuations in response to factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- general technology or economic trends;
- revenues and operating results failing to meet or surpass the
expectations of securities analysts or investors in any quarter;
- changes in general market conditions;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
- additions or departures of key personnel;
- the demand for our common stock;
- the number of market makers for our common stock;
- sales of a large number of shares of our common stock in the public
market after this offering or the perception that such sales could occur;
and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market
and technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices are
substantially above historical levels. These trading prices may not be
sustained. These broad market and industry factors may materially adversely
affect the market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would reduce the amount of resources and management time focused on
growing our business and improving operating results.
9
<PAGE> 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 12.2% of our revenues for the nine months ended
January 31, 2000. We expect sales to international markets to increase as a
percentage of revenues in the future. International sales are subject to a
number of risks, including:
- changes in foreign government regulations and communications standards;
- export license requirements;
- currency fluctuations, tariffs and taxes;
- other trade barriers;
- difficulty in collecting accounts receivable;
- difficulty in managing foreign operations; and
- political and economic instability.
If the relative value of the U.S. dollar in comparison to the currency of
our foreign customers should increase, the resulting effective price increase of
our products to these foreign customers could result in decreased sales. In
addition, to the extent that general economic downturns impact our customers,
the ability of these customers to purchase our products could be adversely
affected. Payment cycles for international customers are typically longer than
those for customers in the United States. In addition, the foreign markets for
our products may develop more slowly than currently anticipated.
We anticipate that our non-Canadian, foreign sales will generally be
invoiced in U.S. dollars, and we do not currently plan to engage in foreign
currency hedging transactions. As we expand our international operations,
however, we may allow payment in foreign currencies, and exposure to losses in
foreign currency transactions may increase. We may choose to limit any currency
exposure through the purchase of forward foreign exchange contracts or other
hedging strategies. Our future currency hedging strategies may not be
successful.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR ABILITY TO COMPETE
Our success and ability to compete is dependent in part upon our
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
We rely on a combination of copyright, trademark, trade secret and other
intellectual property laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
no patents. Despite our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Attempts may be
made to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may not be able to
protect our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our products is difficult. Some of
our contractual arrangements provide third parties with access to our source
code and other intellectual property upon the occurrence of specified events.
Such access could enable these third parties to use our intellectual property
and source code to develop and manufacture competing products, which would
adversely affect our performance and ability to compete. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Such litigation could result in substantial costs and
diversion of resources and could seriously harm our future operating results.
10
<PAGE> 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 and we may not prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event a
claim against us is successful and we cannot obtain a license to the relevant
technology on acceptable terms, license a substitute technology or redesign our
products to avoid infringement, our business, financial condition and results of
operations would be materially adversely affected.
IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
Our products have in the past contained, and may in the future contain,
undetected or unresolved errors when first introduced or as new versions are
released. Despite extensive testing, errors, defects or failures may be found in
our current or future products or enhancements after commencement of commercial
shipments. If this happens, we may experience delay in or loss of market
acceptance and sales, certain product returns, diversion of development
resources, injury to our reputation or increased service and warranty costs, any
of which could seriously harm our business, financial condition and results of
operations. For example, minor software defects in our EXTender 3000E product
caused us to cease shipments of that product for approximately six weeks to
enable us to correct the defects. Moreover, because our products are designed to
provide critical communications services, we may receive significant liability
claims. Our agreements with customers typically contain provisions intended to
limit our exposure to liability claims. These limitations may not, however,
preclude all potential claims resulting from a defect in one of our products.
Although we maintain product liability insurance covering damages arising from
the implementation and use of our products, the terms of our insurance limit the
amount and types of damages that are covered and may not cover any claims sought
against us. Liability claims could require us to spend significant time and
money in litigation or to pay significant damages. As a result, any such claims,
whether or not successful, could seriously damage our reputation and our
business.
WE MAY HAVE DIFFICULTY IDENTIFYING THE SOURCE OF THE PROBLEM WHEN THERE IS A
PROBLEM IN A NETWORK WHICH MAY ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
PRODUCTS
Our products must successfully integrate with products from other vendors,
such as traditional telephone systems. As a result, when problems occur in a
network, it may be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by our products or
another vendor's products, may result in the delay or loss of market acceptance
of our products and any necessary revisions may force us to incur significant
expenses. The occurrence of some of these types of problems may seriously harm
our business, financial condition and results of operations.
11
<PAGE> 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 January 31, 2000, we employed 107 employees. During the twelve
months ended January 31, 2000, we hired 44 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, our senior management
team has been with us for less than three 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.
12
<PAGE> 18
IF WE OR OUR KEY SUPPLIERS OR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS MAY BE SEVERELY DISRUPTED AND OUR RESULTS OF OPERATIONS MAY BE
MATERIALLY ADVERSELY AFFECTED
The Year 2000 problem creates a risk for us. Although most of our products
do not incorporate internal clocks, if our remaining products or our internal
computer systems do not correctly recognize date information, 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;
- customers may delay purchasing decisions until the impact of Year 2000 is
more clearly understood, which could negatively impact our revenues; 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 continue to evaluate our exposure in all of these areas.
We have conducted a comprehensive inventory and evaluation of the
information systems used to run our business and have upgraded or replaced
systems which were identified as non-compliant. The cost of remediation for the
Year 2000 non-compliance issues identified to date were not 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 continue to work with our critical suppliers and contract manufacturers
to ensure that 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 11,504,706 shares, or
approximately 59% of the outstanding shares of common stock (56% 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."
13
<PAGE> 19
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate in such a
transaction may not have an opportunity to do so, and the ability of public
stockholders to change our management could be substantially impeded by these
anti-takeover provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred stock without
further stockholder approval, which provisions could adversely affect the
holders of our common stock.
14
<PAGE> 20
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 $59,958,656, assuming an offering price of $42.625 per
share and after deducting the estimated underwriting discounts and commissions
and offering expenses payable by us in connection with the offering.
We expect to use the net proceeds for working capital and other general
corporate purposes. A portion of the net proceeds may be used for possible
future acquisitions of businesses, products and technologies that are
complementary to our own, or for strategic alliances. We currently have no
specific understandings, commitments or agreements with respect to any
acquisitions or investments. We have not allocated any specific portion of the
net proceeds to any particular purpose, and our management will have the ability
to allocate the proceeds at its discretion. The net proceeds of this offering
will be invested in short-term, interest-bearing, investment-grade securities
until allocated for specific use.
THE COMPANY
We are a Delaware corporation and were formed in August 1999. Our indirect
subsidiary, MCK Telecommunications, was incorporated in Canada in 1989. As a
result of our June 1996 recapitalization, MCK Telecommunications became a
wholly-owned subsidiary of MCK Communications, Inc., a Nevada corporation. As a
result of a migratory merger effected in October 1999, the Nevada corporation
became our wholly-owned subsidiary.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on The Nasdaq National Market under the symbol
"MCKC." The following table sets forth, for the periods indicated, the high and
low sales prices per share as reported by Nasdaq:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
-------------------- ------- -------
<S> <C> <C>
October 31, 1999 (from October 22, 1999).................... $24.125 $16.375
January 31, 2000............................................ 37.75 19.125
</TABLE>
The last reported sales price of our common stock on the Nasdaq National
Market on April 3, 2000 was $42.625 per share. As of January 31, 2000, there
were approximately 105 registered holders of our common stock, although we
believe the number of beneficial owners of our common stock is substantially
higher.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock since our
June 1996 recapitalization. We currently intend to retain any future earnings to
fund the development and growth of our business and do not currently anticipate
paying any cash dividends in the foreseeable future. Future dividends, if any,
will be determined by our Board of Directors.
15
<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of January 31, 2000:
- on an actual basis;
- on an as adjusted basis to reflect the sale of the common stock in this
offering at an assumed public offering price of $42.625 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 JANUARY 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Common stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized;
18,061,754 and 19,561,754 shares issued and outstanding,
actual and as adjusted, respectively...................... $ 18 $ 20
Additional paid-in capital.................................. 68,785 128,742
Accumulated deficit......................................... (28,604) (28,604)
Deferred compensation....................................... (5,809) (5,809)
Accumulated other comprehensive income...................... (225) (225)
Notes receivable from officers.............................. (752) (752)
-------- --------
Total common stockholders' equity...................... 33,413 93,372
-------- --------
Total capitalization.............................. 33,413 93,372
======== ========
</TABLE>
The table above excludes as of January 31, 2000, 1,890,611 shares of common
stock issuable upon exercise of outstanding stock options at a weighted average
exercise price of $5.46 per share under our 1996 and 1999 Stock Option Plans and
2,467,344 additional shares of common stock available for future grant under our
1996 and 1999 Stock Option and Grant Plans. See "Management -- Executive
Compensation," "-- 1996 Stock Option Plan" and "-- 1999 Stock Option and Grant
Plan."
16
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The consolidated statements of
operations data for the fiscal years ended April 30, 1998 and 1999, and the
consolidated balance sheets data at April 30, 1998 and 1999, are derived from
our consolidated financial statements which have been audited by Ernst & Young,
LLP, independent auditors, and are included in this prospectus. The consolidated
statement of operations data for the fiscal year ended April 30, 1997 are
derived from our consolidated financial statements which have been audited by
PricewaterhouseCoopers, LLP, independent auditors, and are included in this
prospectus. The consolidated statements of operations data for the fiscal years
ended April 30, 1995 and 1996, and the consolidated balance sheet data at April
30, 1995, 1996 and 1997 are derived from our audited consolidated financial
statements which are not included in this prospectus. The selected consolidated
financial data for the nine months ended January 31, 1999 and 2000 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>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
--------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------- ----------- -----------
(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 $ 10,166 $ 16,763
Cost of goods sold.............. 796 2,423 2,313 2,800 5,390 3,894 6,274
---------- ---------- ---------- ---------- ----------- ----------- -----------
Gross profit.................... 1,014 2,916 3,608 5,076 8,880 6,272 10,489
Operating expenses:
Research and development...... 266 344 815 1,758 3,349 2,401 3,433
Sales and marketing........... -- 576 1,145 2,191 3,888 2,702 4,994
General and administrative.... 626 319 607 1,485 1,617 1,153 1,778
Amortization of stock based
compensation................ -- -- -- -- 406 248 3,460
Transaction-related charges... -- -- 493 -- -- -- --
---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating expenses.... 892 1,239 3,060 5,434 9,260 6,504 13,665
---------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) from operations... 122 1,677 548 (358) (380) (232) (3,176)
Other income (expense).......... 12 7 (343) (595) (207) (228) 258
---------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) before provision
for income taxes and dividends
on redeemable preferred stock
of subsidiary................. 134 1,684 205 (953) (587) (460) (2,918)
Provision for income taxes...... 13 652 302 -- -- -- --
Dividends on redeemable
preferred stock of
subsidiary.................... -- -- 133 160 197 144 97
========== ========== ========== ========== =========== =========== ===========
Net income (loss)............... $ 121 $ 1,032 $ (230) $ (1,113) $ (784) $ (604) $ (3,015)
========== ========== ========== ========== =========== =========== ===========
Dividends on redeemable
preferred stock............... -- -- 1,011 1,220 1,966 1,458 1,285
Net income (loss) applicable to
common shares................. $ 121 $ 1,032 $ (1,241) $ (2,333) $ (2,750) $ (2,062) $ (4,300)
========== ========== ========== ========== =========== =========== ===========
Basic and diluted net income
(loss) per share.............. $ 0.04 $ 0.33 $ (0.39) $ (0.67) $ (0.71) $ (0.54) $ (0.47)
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 3,814,543 9,078,711
Pro forma basic and diluted loss
per share..................... $ (0.20) $ (0.18) $ (0.30)
Shares used in computing pro
forma basic and diluted loss
per share..................... 12,012,167 11,764,572 14,547,220
</TABLE>
17
<PAGE> 23
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999 2000
---- ------ -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents....................... $ 42 $ 1 $ 3,228 $ 1,867 $ 3,285 $ 8,424
Working capital............................ 335 (97) 4,965 3,545 5,578 32,002
Total assets............................... 726 3,148 6,517 5,665 9,428 37,994
Long-term debt............................. 31 57 5,000 5,000 2,500 --
Redeemable preferred stock................. -- 500 16,291 17,538 23,501 --
Redeemable convertible preferred stock..... -- -- 1,778 1,911 4,704 --
Total common stockholders' equity
(deficit)................................ 427 (207) (17,568) (20,050) (24,040) 33,413
</TABLE>
18
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
MCK Communications is a leading provider of products that enable
corporations to distribute the full range of features and applications of
corporate telephone systems to branch offices and telecommuters over data
networks. We market and distribute our products through an international network
of indirect resellers and equipment providers and, to a lesser extent, through
direct sales. We are headquartered in Newton, Massachusetts and have a
development center in Calgary, Canada.
From our inception in 1989 through 1993, we were a small company based in
Calgary, Canada that designed and marketed a number of niche, voice products
targeted at the oil industry. Commencing in 1993, we altered our business focus
and began developing remote voice access products for corporate telephone
systems by using the technology derived from this initial business. These
efforts led to the development of our EXTender product line. During the period
from 1993 through 1995, our operating activities related primarily to
establishing a research and development organization, developing and testing
prototype designs, and developing OEM relationships. We shipped our first remote
voice access product, the EXTender 1000, in February 1995. In June 1996, Summit
Partners acquired a majority of our stock pursuant to a leveraged
recapitalization. In June 1997, we recruited a new chief executive officer and
moved our headquarters to Newton, Massachusetts. Since then we recruited the
rest of our management team, focused our research and development efforts on
developing additional remote voice access products and product enhancements,
created a product validation laboratory, built international indirect sales
channels, developed additional technology relationships, and established our
sales, marketing and customer support organizations. We began shipments of the
EXTender 3000, PBXgateway and Branch Office EXTender 6000, and IP EXTender 4000
in December 1997, April 1999 and December 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. For the fiscal
year ended April 30, 1999 and the nine months ended January 31, 2000, Lucent
accounted for approximately 46.7% and 45.7%, respectively of our revenues. In
April 1999, we released our first multi-user remote voice access product, the
Branch Office EXTender 6000, and the PBXgateway, 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. To date we
have generated immaterial 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.
Our cost of goods sold consists primarily of purchased finished products
from Celestica and Mack Technologies 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
19
<PAGE> 25
users through Vital Network Services, a third-party support provider. We expense
services provided by Vital Network Services as they are performed.
Research and development expenses consist primarily of salaries and related
personnel costs and contract engineering, purchased software and prototype
expenses related to the design, development, enhancement and testing of our
products. As of January 31, 2000, all research and development costs have been
expensed as incurred. We intend to increase our investment in research and
development, which is critical to achieving our product objectives. We will also
increase our expenditures on our product validation laboratory to test the
interoperability of our products with corporate telephone systems and other
products. This competency is becoming increasingly critical to our business as
we develop additional products that function over data networks in conjunction
with third-party data equipment. We expect research and development expenses to
increase significantly in the future as we continue to develop new products and
enhance existing products.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses for those engaged in the sales, marketing and support
of products as well as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect distribution system
that includes the following channels: OEMs and private label partners, ILECs,
systems integrators and distributors, telecom and datacom VARs and broadband
service providers. Our sales force and marketing efforts are primarily directed
at developing brand awareness and supporting our indirect distribution channels.
We intend to pursue sales and marketing campaigns aggressively and increase our
sales force headcount and, therefore, expect these expenses to increase in the
future.
General and administrative expenses consist primarily of salaries and
related personnel expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. As we add
personnel and incur additional costs related to the growth of our business, we
expect that general and administrative expenses will also increase.
Stock based compensation expenses resulted from the granting of restricted
stock and stock options to employees and directors with exercise prices per
share determined to be below the deemed fair values per share for financial
reporting purposes of our common stock at dates of grant. The deferred
compensation is being amortized to expense in accordance with FASB
interpretation No. 28 over the vesting period of the individual options,
generally four years. In the fiscal year ended April 30, 1999, we recorded total
deferred stock compensation of $1.2 million and amortized $406,000. In addition,
we recorded total deferred stock compensation of $8.5 million in the nine months
ended January 31, 2000 and amortized $3.5 million in the same period. At January
31, 2000, deferred compensation to be amortized in future periods amounted to
$5.8 million.
Other (income) expense, net consists 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
inter-company transactions.
20
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of revenues.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
APRIL 30, JANUARY 31,
------------------------- -----------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<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 38.3 37.4
----- ----- ----- ----- -----
Gross margin................................. 60.9 64.4 62.2 61.7 62.6
Operating expenses:
Research and development................... 13.8 22.3 23.5 23.6 20.5
Sales and marketing........................ 19.3 27.8 27.3 26.6 29.8
General and administrative................. 10.3 18.9 11.3 11.3 10.6
Amortization of stock based compensation... -- -- 2.8 2.4 20.6
Transaction-related charges................ 8.3 -- -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 51.7 69.0 64.9 64.0 81.5
----- ----- ----- ----- -----
Income (loss) from operations................ 9.2 (4.5) (2.7) (2.3) (19.0)
Other income (expense), net.................. (5.7) (7.6) (1.5) 2.2 1.5
----- ----- ----- ----- -----
Income (loss) before provision for income
taxes and dividends on redeemable preferred
stock of subsidiary........................ 3.5 (12.1) (4.1) (4.5) (17.4)
Provision for income taxes................... (5.1) -- -- -- --
----- ----- ----- ----- -----
Net loss before dividends on subsidiary
redeemable preferred stock................. (1.6)% (12.1)% (4.1)% (4.5)% (17.4)%
===== ===== ===== ===== =====
</TABLE>
Nine months ended January 31, 1999 and 2000
Revenues. Revenues increased from $10.2 million for the nine months ended
January 31, 1999 to $16.8 million for the nine months ended January 31, 2000, an
increase of $6.6 million or 64.9%. This increase was primarily due to the
release of our first multi-user remote voice access product in April 1999, which
accounted for approximately $7.6 million or 45.2% of revenues.
Cost of goods sold. Our cost of goods sold increased from $3.9 million for
the nine months ended January 31, 1999 to $6.3 million for the nine months ended
January 31, 2000, an increase of $2.4 million or 61.1%. This increase was
primarily related to the increase in volume of units shipped. Gross margin
increased from 61.7% for the nine months ended January 31, 1999 to 62.6% for the
nine months ended January 31, 2000. The increase in gross margin was primarily
attributable to the introduction of our first multi-user remote voice access
product, which has a higher gross margin than our other products.
Research and development. Research and development expenses increased from
$2.4 million for the nine months ended January 31, 1999 to $3.4 million for the
nine months ended January 31, 2000, an increase of $1.0 million or 43.0%. This
increase was due primarily to increases in staffing, the manufacturing of
proto-type units for our EXTender 3200 for IDSL, EXTender 4000, 12 port Branch
Office EXTender and EXTender 6000 product lines. For the nine months ended
January 31, 1999 and 2000, research and development expenses decreased as a
percentage of revenues from 23.6% to 20.5% as a result of increased revenues.
Sales and marketing. Sales and marketing expenses increased from $2.7
million for the nine months ended January 31, 1999 to $5.0 million for the nine
months ended January 31, 2000, an increase of $2.3 million or 84.8%. 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 remote voice access product. For the nine
months ended January 31, 1999 and 2000, sales and
21
<PAGE> 27
marketing expenses increased as a percentage of revenues from 26.6% to 29.8% as
newly hired sales personnel generally do not achieve full productivity during
their first two quarters with us.
General and administrative. General and administrative expenses increased
from $1.2 million for the nine months ended January 31, 1999 to $1.8 million for
the nine months ended January 31, 2000, an increase of $625,000 or 54.2%. This
increase was primarily due to increases in staffing in our accounting and human
resources groups to support our growth and reporting requirements as a public
company, 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 nine months ended January 31, 1999 and 2000,
general and administrative expenses decreased as a percentage of revenues from
11.3% to 10.6% as a result of increased revenues.
Amortization of stock based compensation. Stock-based compensation expense
was $248,000 and $3.5 million in the nine months ended January 31, 1999 and
2000, respectively.
Other (income) expense, net. Other (income) expense, net improved from an
expense of $228,000 for the nine months ended January 31, 1999 to income of
$258,000 for the nine months ended January 31, 2000, an improvement of $486,000.
Interest expense, offset by interest income, improved from an expense of
$219,000 for the nine months ended January 31, 1999 to income of $250,000 for
the nine months ended January 31, 2000. This improvement was due to income
earned on invested cash and the repayment of our subordinated debt. Foreign
exchange losses for the nine months ended January 31, 1999 were $9,000 compared
to a gain of $8,000 for the nine months ended January 31, 2000.
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> 28
Amortization of stock-based compensation. In connection with the grant of
certain stock options to employees in the fiscal year ended April 30, 1999, we
recorded deferred compensation expense of $1.2 million. The amount recorded
represents the difference between the deemed fair value of the common stock for
financial reporting purposes and the exercise price of these options at the date
of grant. Deferred compensation is presented as a reduction of stockholders'
equity and is amortized over the vesting period of the applicable options,
generally four years. We expensed $406,000 and $0 of deferred stock-based
compensation in the years ended April 30, 1999 and 1998, respectively. The
amortization of existing deferred stock-based compensation is expected to impact
our reported results of operations through the quarter ended July 2003.
Other expense, net. Other expense, net decreased from $595,000 for fiscal
1998 to $207,000 for fiscal 1999, a decrease of $388,000 or 65.2%. Interest
expense, offset by interest income, decreased from $518,000 for fiscal 1998 to
$268,000 for fiscal 1999. This decrease was due to a reduction in the
outstanding amount of our subordinated debt from $5.0 million to $2.5 million in
July 1998. Foreign exchange losses were $77,000 in fiscal 1998 versus a gain of
$60,000 in fiscal 1999. The gain during 1999 was due to a weakening of the U.S.
dollar against the Canadian dollar.
Fiscal years ended April 30, 1997 and 1998
Revenues. Revenues increased from $5.9 million for the fiscal year 1997 to
$7.9 million for fiscal 1998, an increase of $2.0 million or 33.0%. This
increase was due to an increased number of units sold relating to development of
our existing distribution channels, the addition of new distribution channels
and the release of our EXTender 3000 product line.
Cost of goods sold. Cost of goods sold increased from $2.3 million for
fiscal 1997 to $2.8 million for fiscal 1998, an increase of $487,000 or 21.1%.
This increase was primarily related to the increase in volume of units shipped.
For fiscal 1997 and 1998, gross margin increased from 60.9% to 64.4%. The
increase in gross margin was primarily due to manufacturing efficiencies, lower
component costs and the inclusion of non-recurring engineering fee revenues.
Research and development. Research and development expenses increased from
$815,000 for fiscal 1997 to $1.8 million for fiscal 1998, an increase of
$943,000 or 115.7%. The increase was due primarily to the hiring of engineers,
the creation of a product validation laboratory and, to a lesser extent, related
overhead and consulting costs. For fiscal 1997 and 1998, research and
development expenses increased as a percentage of revenues from 13.8% to 22.3%
as we developed new products, including the EXTender 3000 which did not generate
significant revenues until the fourth quarter of fiscal 1998, and upgraded
existing products, including switching to a Rockwell modem set on the EXTender
1000+.
Sales and marketing. Sales and marketing expenses increased from $1.1
million for 1997 to $2.2 million for 1998, an increase of $1.0 million or 91.3%.
This increase was primarily due to the hiring of personnel including a vice
president of sales, vice president of marketing, vice president of business
development and sales personnel and, to a lesser extent, increased marketing
activities. For fiscal 1997 and 1998, sales and marketing expenses increased as
a percentage of revenues from 19.3% to 27.8%.
General and administrative. General and administrative expenses increased
by $900,000 from $607,000 for 1997 to $1.5 million for 1998, an increase of
144.6%. This increase was primarily due to recruitment of management personnel
including a new chief executive officer and chief financial officer, the opening
of our offices in Newton, Massachusetts and, to a lesser extent, consulting and
professional services costs. For fiscal 1997 and 1998, general and
administrative expenses increased as a percentage of revenues from 10.3% to
18.9% as we invested in our management team and corporate infrastructure.
Transaction-related expenses. In fiscal 1997, we recorded
transaction-related expenses of $493,000 related to our June 1996
recapitalization pursuant to which employee stock options were either exercised
and redeemed, or exchanged for new options in the U.S. company. In conjunction
with this event, we incurred a one-time compensation charge. See Note 13 of
Notes to Consolidated Financial Statements.
23
<PAGE> 29
Other expense, net. Other expense, net increased from $343,000 for fiscal
1997 to $595,000 for fiscal 1998, an increase of $253,000 or 73.8%. Interest
expense, offset by interest income, increased from $393,000 for fiscal 1997 to
$518,000 for fiscal 1998 due to the issuance of $5.0 million in subordinated
debt as part of our June 1996 recapitalization and an increase in the
outstanding balances on a revolving line of credit. Foreign exchange gains were
$50,000 in fiscal 1997 versus a loss of $77,000 in fiscal 1998. The loss during
fiscal 1998 was due to a strengthening of the U.S. dollar against the Canadian
dollar.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data in dollars and as a percentage of revenues for our ten 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 OPERATIONS OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31,
DATA: 1997 1998 1998 1998 1998 1999 1999 1999
- ------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $1,728 $2,065 $2,652 $3,116 $3,441 $3,609 $4,104 $ 4,523
Cost of goods sold.................. 603 665 989 1,188 1,330 1,376 1,496 1,691
------ ------ ------ ------ ------ ------ ------ -------
Gross profit........................ 1,125 1,400 1,663 1,928 2,111 2,233 2,608 2,832
Operating expenses:
Research and development.......... 405 501 553 751 770 880 948 964
Sales and marketing............... 625 551 655 779 918 1,004 1,186 1,347
General and administrative........ 404 425 457 392 415 347 463 494
Amortization of stock based
compensation.................... -- -- -- 20 83 146 157 1,114
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses........ 1,434 1,477 1,665 1,942 2,186 2,377 2,754 3,919
------ ------ ------ ------ ------ ------ ------ -------
Loss from operations................ (309) (77) (2) (14) (75) (144) (146) (1,087)
------ ------ ------ ------ ------ ------ ------ -------
Other income (expense), net......... (164) (179) (127) (129) (91) (8) 21 (95)
------ ------ ------ ------ ------ ------ ------ -------
Loss before provision for income
taxes and dividends on redeemable
preferred stock of subsidiary..... $ (473) $ (256) $ (129) $ (143) $ (166) $ (152) $ (125) $(1,182)
====== ====== ====== ====== ====== ====== ====== =======
<CAPTION>
THREE MONTHS ENDED
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS OCT. 31, JAN. 31,
DATA: 1999 2000
- ------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................ $ 5,521 $6,719
Cost of goods sold.................. 2,028 2,556
------- ------
Gross profit........................ 3,493 4,163
Operating expenses:
Research and development.......... 1,178 1,292
Sales and marketing............... 1,625 2,021
General and administrative........ 599 685
Amortization of stock based
compensation.................... 1,300 1,046
------- ------
Total operating expenses........ 4,702 5,045
------- ------
Loss from operations................ (1,209) (882)
------- ------
Other income (expense), net......... 3 350
------- ------
Loss before provision for income
taxes and dividends on redeemable
preferred stock of subsidiary..... $(1,206) $ (531)
======= ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
--------------------------------------------------------------------------
OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....... 34.9 32.2 37.3 38.1 38.6 38.1 36.4
------ ------ ------ ------ ------ ------ ------
Gross profit............. 65.1 67.8 62.7 61.9 61.4 61.9 63.6
Operating expenses:
Research and
development.......... 23.5 24.3 20.9 24.1 22.4 24.4 23.1
Sales and marketing.... 36.1 26.7 24.7 25.0 26.7 27.8 28.9
General and
administrative....... 23.4 20.6 17.2 12.6 12.1 9.7 11.3
Amortization of stock
based compensation... -- -- -- 0.6 2.4 4.0 3.8
------ ------ ------ ------ ------ ------ ------
Total operating
expenses........... 83.0 71.6 62.8 62.3 63.5 65.9 67.1
------ ------ ------ ------ ------ ------ ------
Loss from operations..... (17.9) (3.8) (0.1) (0.4) (2.2) (4.0) (3.6)
------ ------ ------ ------ ------ ------ ------
Other income (expense),
net.................... (9.5) (8.7) (4.8) (4.1) (2.7) (0.2) 0.5
------ ------ ------ ------ ------ ------ ------
Loss before provision for
income taxes and
dividends on redeemable
preferred stock of
subsidiary............. (27.4)% (12.5)% (4.9)% (4.6)% (4.8)% (4.2)% (3.0)%
====== ====== ====== ====== ====== ====== ======
<CAPTION>
AS A PERCENTAGE OF REVENUES
------------------------------
JULY 31, OCT. 31, JAN. 31,
1999 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0%
Cost of goods sold....... 37.4 36.7 38.0
------- ------- ------
Gross profit............. 62.6 63.3 62.0
Operating expenses:
Research and
development.......... 21.3 21.3 19.2
Sales and marketing.... 29.8 29.4 30.1
General and
administrative....... 10.9 10.8 10.2
Amortization of stock
based compensation... 24.6 23.5 15.6
------- ------- ------
Total operating
expenses........... 86.6 85.2 75.1
------- ------- ------
Loss from operations..... (24.0) (21.9) (13.1)
------- ------- ------
Other income (expense),
net.................... (2.1) 0.1 5.2
------- ------- ------
Loss before provision for
income taxes and
dividends on redeemable
preferred stock of
subsidiary............. (26.1)% (21.8)% (7.9)%
======= ======= ======
</TABLE>
24
<PAGE> 30
Our revenues have increased each quarter since the three months ended July
31, 1997 due to the introduction of new products, the development of our
existing distribution channels and the addition of new distribution channels.
While we have maintained our gross margins in the low sixty percent range, we
have experienced some variability in specific quarters. For the three months
ended October 31, 1997 and January 31, 1998, our gross margins increased to
65.1% and 67.8%, respectively, due to non-recurring engineering fees received in
these quarters. For the three months ended October 31, 1997, we experienced a
rapid increase in sales and marketing expenses associated with the hiring of a
new sales force. General and administrative expenses increased for the three
months ended October 31, 1997, primarily due to the costs associated with the
opening of our Newton office, and the recruitment of a new chief executive
officer and chief financial officer. General and administrative expenses have
generally decreased as a percentage of revenues, primarily due to increased
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we 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. On October 22, 1999, we completed our initial public offering of
common stock, in which we sold 3,400,000 shares of common stock at a price of
$16.00 per share. Proceeds from the offering, after offering expenses, were
approximately $49.5 million. In November 1999, the underwriters of the initial
public offering exercised their over-allotment option and purchased an
additional 255,000 shares of common stock from us at the offering price of
$16.00. We received an additional $3,794,400, net of underwriting discounts and
commissions, in this transaction. As of January 31, 2000, we had cash and
equivalents and marketable securities of $27.8 million, which included $211,000
borrowed under our credit facilities. This represents an increase of $24.5
million compared to April 30, 1999.
We entered into a revolving credit facility against accounts receivable in
April 1999 which provides borrowings of up to $2.0 million and are currently in
negotiations to increase the line to $5.0 million. Borrowings under this credit
facility bear interest at the prime rate, which was 8.5% as of January 31, 2000.
Borrowings are due upon demand and are secured by substantially all of our
assets. As of January 31, 2000, we had no outstanding balance on this credit
facility. This agreement expires in April 2000. We had an equipment term loan
which provided borrowings of up to $500,000 through September 1999 to finance
the acquisition of computer hardware and furniture. As of January 31, 2000, we
have an outstanding balance of $211,000 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 regularly invest excess funds in short-term money market funds,
commercial paper, and government and non-government debt securities. These
investments are designed to provide current income to the company without
exposing the principal to significant risk.
Net cash used by operations was $981,000 for the nine months ended January
31, 2000. Cash used by operations was primarily related to an increase in
accounts receivable of $1.9 million, an increase in prepaid and other current
assets of $1.0 million, and an increase in inventory of $799,000 and was
partially offset by an increase in accounts payable and accrued expenses of $1.4
million. Net cash provided by financing activities was $26.5 million for the
nine months ended January, 31, 2000. Cash provided by financing activities was
primarily due to the proceeds from the issuance of common stock, including net
proceeds of $49.5 million from the initial public offering and an additional
$3.8 million from the over allotment. This was partially offset by mandatory
redemption payments to the holders of redeemable preferred stock of $24.8
million and a reduction in subordinated debt of $2.5 million.
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
25
<PAGE> 31
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 COMPLIANCE
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."
The majority of our products do not have time keeping capabilities and are
therefore, by default, Year 2000 compliant. Only our Branch Office EXTender 6000
and PBXgateway products have internal clocks, and we believe such product lines
are Year 2000 compliant. However, our products are generally integrated into
networks involving sophisticated hardware and software products provided by
other vendors. Each of our customers' solutions involves different combinations
of third-party products and we cannot evaluate whether all of the third party
products are Year 2000 compliant. We have not experienced nor do we 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 believe that we have identified mission-critical computers, servers,
applications, business systems and related equipment used in connection with our
internal operations and have modified, upgraded or replaced these systems to
minimize the possibility of a material disruption to our business. We believe
that any other systems requiring replacement are not mission-critical and can be
replaced or modified before the occurrence of any material disruption of our
business.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Commission. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We believe
that the impact of SAB 101 will not have a material effect on our financial
position or results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. We have cash equivalents and marketable securities
that primarily consist of commercial paper, corporate bonds and overnight money
market accounts. A 100 basis point shift in interest rates would not result in a
material change in 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 nine months ended January 31, 2000
accounted for 8.0% 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 January 31, 2000, a 10% strengthening of the
U.S. dollar against the Canadian dollar would result in a foreign currency
transaction loss of $193,000.
26
<PAGE> 32
BUSINESS
OVERVIEW
MCK Communications is a leading provider of remote access products for
corporate telephone systems that enable corporations to extend the features and
applications of those systems, which are known as private branch exchanges or
PBXs, from the corporate office to remote branch offices and telecommuters over
geographically dispersed public and private data networks. PBX systems are the
most commonly used corporate telephone systems and deliver features such as
three- or four-digit internal dialing and call forwarding and applications such
as voicemail, automatic call distribution and interactive voice response. Our
EXTender products cost-effectively deliver a unified enterprise-wide voice
network by enabling the PBX to function as a corporate voice server that
transmits voice and PBX applications to remote locations over corporations'
existing data networks. In addition, our products reduce the total cost of
ownership by utilizing corporations' current investment in voice and data
equipment, and streamline network administration through the utilization of
industry standard network management techniques.
INDUSTRY BACKGROUND
Most businesses today have deployed separate networks to support voice and
data communications. As the corporate world shifts from large, centralized
organizations to distributed workforces with multiple branch offices and a large
number of telecommuters, new demands are being placed on the traditionally
localized corporate communications networks. While data networks have evolved to
meet this challenge by offering high-speed remote data access and a high degree
of interoperability among data systems and components, corporate telephone
systems, or voice networks, have remained largely centralized and proprietary.
Consequently, branch offices and telecommuters do not have cost-effective access
to the features and applications of corporate telephone systems.
This shift toward corporate decentralization results from a number of
factors. The competitive advantage of being located near key customers,
suppliers and partners and the competition for qualified employees are driving
corporations to open branch offices in numerous geographic locations. We believe
Fortune 5000 businesses have approximately 1.6 million branch offices. In order
to retain employees and comply with expanding environmental regulation,
corporations are also implementing large-scale telecommuting programs. According
to the Gartner Group, the number of telecommuters worldwide is expected to grow
from 35 million in 1998 to 140 million in 2003.
Because of decentralization, corporations are increasingly challenged by
the need to integrate voice and data networks across multiple locations.
Corporations depend on company-wide communication to ensure critical internal
collaboration, provide suitable levels of customer service and maintain
operational efficiency and productivity by sharing resources across all
locations. As the business environment becomes more competitive, a unified
communications network will become increasingly important. These factors are
driving demand for solutions that deliver an integrated network environment with
all the features and applications found at corporate headquarters to distributed
locations and employees.
Corporate Data Networks
Initially, data networks were built upon mainframe computers that served a
single office location, were accessible by a limited number of users and were
too costly for small organizations. Over the past 20 years, advances in computer
processing and networking technology have altered this centralized model to
deliver cost-effective, high-speed distributed data processing and
communications by using a client-server architecture. Corporations have been
able to deploy equipment from multiple vendors that is interoperable throughout
a local area network, or LAN, using multiple network protocols because of the
adoption of standard communication protocols, internetworking technologies, and
industry-standard system management platforms, as well as the use of open
architectures. These same developments have also facilitated widespread data
access through the deployment of remote access equipment capable of
27
<PAGE> 33
extending the reach of data networks beyond corporate locations over public and
private networks to create wide area networks, or WANs.
Today, branch offices and telecommuters access corporate data networks over
a variety of circuit-based networks that were designed for voice service. These
circuit-based networks are dedicated point-to-point connections that require
corporations to constantly maintain sufficient bandwidth to meet their maximum
communications requirements. The recent development of broadband technologies
has resulted in the deployment of new packet-based networks. These next
generation networks divide all types of data, including voice, into packets that
can be simultaneously transmitted and reassembled into their original form at
their final destination. As a result, these packet-based networks are more
efficient in their use of available bandwidth than traditional circuit-based
networks, thus minimizing network capacity constraints and management
requirements.
As a result of the growing demand for high-bandwidth applications, such as
Internet and intranet access, a new generation of service providers is migrating
from existing circuit-based networks to packet-based networks. The ability of
packet-based networks to increase bandwidth availability and network efficiency,
lower operating costs and simplify network administration has led service
providers to make significant investments in packet-based networks in the public
communications infrastructure. Next generation telecommunications service
providers are creating new service offerings over private managed networks and
public networks, such as the Internet and are using new technologies, such as
Quality of Service, to offer both services over the same network. Widespread
access to corporate data networks, coupled with the deployment of new
packet-based networks, is enabling corporations to realize tremendous
productivity gains due to increased collaboration, internal communication and
sharing of resources. Examples of specific benefits include company-wide e-mail
capabilities, company-wide access to the files and applications that are run
from the corporate server and immediate access for remote workers.
Corporate Voice Networks
Large corporate telephone systems are generally based on circuit-based
networks and corporate telephone equipment known as private branch exchanges, or
PBXs. Given the mission critical nature of voice communications and related
applications, corporate telephone systems have been architected with numerous
built-in fault tolerant and redundancy features and are designed to deliver
99.999% up-time reliability. In addition to delivering reliable voice service,
PBXs have the capability to serve as the platform for more than 500 critical
voice features and applications, including:
- voicemail systems;
- unified messaging systems that create a single interface for accessing
voicemail, e-mail and fax messages;
- automatic call distribution systems;
- auto-attendant systems;
- call accounting software;
- least-cost routing applications; and
- interactive voice response systems.
The PBX is also responsible for delivering features and capabilities such as:
- phone numbering plans;
- three- or four-digit internal dialing;
- call transferring, conferencing and forwarding; and
- receptionist call screening.
The MultiMedia Telecommunications Association, or MMTA, estimates that the
installed base of PBX-based corporate telephone systems in the United States in
1998 exceeded 45 million ports. In addition, the MMTA has reported that the
market for these corporate telephone systems is growing. Since 1991 over
28
<PAGE> 34
44 million lines have been added to both new and existing PBX-based corporate
telephone systems. In 1998 alone, 7.4 million new lines were added to these
corporate telephone systems. Full-featured PBXs typically cost between $100,000
and $1.0 million, and are designed for large, centralized corporate environments
with 50 or more users. In addition, corporations often spend as much on the
applications supported by their corporate telephone systems as they do on the
equipment itself. According to the MMTA, over $25 billion has been spent on
PBX-based corporate telephone systems in the United States since 1991.
Despite the reliability and functionality of centralized circuit-based
voice networks, the features and applications of today's PBX-based corporate
telephone systems cannot be cost-effectively extended to small branch offices
and telecommuters. A number of factors have created this deficiency. Technical
limitations of these systems cause the quality of voice transmission to degrade
beyond a limited distance. In addition, the high cost associated with deploying
a PBX-based telephone system and its supported voice applications typically
makes them prohibitively expensive for small branch offices and telecommuters.
Accordingly, corporations seeking to extend voice applications to small branch
offices have the following voice options, all of which have significant
limitations:
- Key Systems. Key systems have functionality similar to PBXs but have
been cost-effectively architected to service small office environments.
Accordingly, they lack the full feature set and scalability of more
expensive PBX-based corporate telephone systems. Key systems have limited
interoperability with PBX systems, and consequently function as
stand-alone voice systems with separate voice applications that create
inefficiencies and network management complexities in a multi-office
environment.
- Centrex. Centrex is a business telephone service that is offered by
local telephone companies from their central offices. While Centrex
offers many of the same features as PBXs, its effectiveness is
constrained by phone companies' capacity, its lack of interoperability
with PBXs, its geographic limitations and its reliance upon the local
phone company for service and support. In addition, full-featured Centrex
service for a small office can be a prohibitively expensive solution.
- Off-Premises Extension. An Off-Premises Extension is a dedicated
telephone line that originates from a PBX and extends a subset of PBX
features and applications to remote users. These offerings cannot support
digital telephone sets, and require an expensive dedicated leased line or
private network connection.
- LAN and Windows NT PBXs. Recently introduced solutions from data
networking vendors, such as LAN and Windows NT-server based PBXs, lack
the full feature set of traditional PBXs and have limited ability to
network with the corporate PBX, thus also failing to give an enterprise a
unified voice network.
The inability of these voice options to fully network with the PBX has caused
corporations to deploy separate voice networks for their branch offices and
telecommuters, limiting the effectiveness of corporate communications and
increasing the burden on systems administrators. In addition, corporations
seeking to extend voice applications to telecommuters presently have no
cost-effective, full-featured solutions.
The Opportunity for PBX-based Remote Voice Access over Data Networks
As business organizations decentralize, remote access to the corporate
communications network is becoming increasingly important. While data networks
have evolved to meet this critical business requirement, there is a need for a
suitable voice solution that cost-effectively utilizes the PBX and its features
and applications to offer corporate voice applications to small branch offices
and telecommuters. Furthermore, in order to lower costs and simplify network
administration, corporations are increasingly demanding that distributed voice
and data services be offered over the same centrally-managed corporate
communications infrastructure. This convergence of voice and data is made
possible by technology that can convert voice transmissions into packets of data
and advances in Quality of Service which enable the transmission of voice over
private managed data networks and public data networks, such as the Internet.
Accordingly, to deliver remote voice access over data networks, a solution
should be capable of packetizing voice and PBX signaling information,
information that is proprietary to each type of PBX system and is required to
interface with these systems in order to deliver the features and applications
supported by these
29
<PAGE> 35
systems. As a result of its reliability, the wide variety of applications that
it supports and the size of its installed base, PBXs are pervasive in large,
corporate enterprises and are likely to remain entrenched as the central
corporate system on which new voice applications are developed and deployed.
Thus, solutions for the remote voice marketplace must offer a centrally-managed
interface to proprietary PBX-based corporate telephone systems and have the
capability of packetizing and transmitting voice and PBX signaling information
over both traditional circuit-based data networks and emerging packet networks.
THE MCK EXTender SOLUTION
We develop and market products that enable enterprises to effectively
deliver all of the voice features and applications that exist at the corporate
office to branch offices and telecommuters. Our technology allows enterprises to
create a unified, enterprise-wide voice network by enabling the PBX to function
as a corporate voice server that transmits packetized voice and the signaling
information that is proprietary to each PBX to remote locations over existing
data networks. This signaling information is necessary to interface with each
type of PBX system to deliver the features and applications supported by these
systems. In addition, our products reduce the total cost of ownership by
allowing corporations to use their existing investments in voice and data
equipment, and streamline network administration through the utilization of
industry standard network management techniques.
The following are the key attributes of our solution:
Full-Featured Remote Voice Access. Our EXTender solutions provide the
features and applications of corporate telephone systems to branch office
employees, telecommuters and remote call center agents over circuit and packet
networks. Our solutions allow these remote workers to utilize PBX features such
as three- or four-digit internal dialing, call transferring and conferencing,
and PBX applications such as voicemail, unified messaging and automated call
distribution. Extending these corporate voice applications to remote employees
increases productivity, facilitates internal collaboration and delivers to
external callers transparent access to all telephone extensions throughout a
corporation.
Digital Line Extension Technology. The features and applications of the
PBX reside on its digital line or user side. We have developed proprietary
software and hardware interfaces that extract the voice and PBX signaling
information from the user side of the PBX which is also known as the digital
line side. Our products then packetize and transmit this information to our
remote devices over existing data networks. Utilizing this captured information,
our remote products mimic the digital line side of the PBX, thereby
transparently connecting the user's digital telephone set to the corporate PBX.
As a result of this product architecture and our experience in interfacing with
the proprietary digital line or user side of most leading PBX vendors, our
products enable corporations to deploy effective remote voice solutions without
significant reconfigurations or upgrades to their existing PBX-based corporate
telephone systems. Similarly, our products enable branch offices and
telecommuters to use their digital telephone sets and existing user interfaces
to transparently access their corporate PBXs. Using our digital line extension
technology, we are also working with a number of companies to enable digital
telephone sets to interface with next generation corporate voice systems such as
IP-PBXs and network-based PBXs. This digital line extension technology also
enables us to terminate multiple types of telephone sets, including a variety of
third-party digital telephone sets, analog telephone sets and IP-based telephone
sets, off traditional PBX systems using MCK PBXgateway products.
Packet Voice Architecture. Our extensive experience in packetizing voice,
PBX signaling information and voice applications enables us to deliver a
complete remote voice solution over traditional circuit-based networks and
emerging packet-based networks. Utilizing our proprietary Remote Voice Protocol,
or RVP, software platform and our standardized hardware architecture, we
packetize, compress, encode, transmit and decode voice over networks such as
asynchronous transfer mode, or ATM, digital subscriber line, or DSL, fiber,
frame relay, IP, integrated services digital network, or ISDN, leased line, T-1,
fractional T-1 and traditional telephone networks. In addition to supporting
RVP, we are adding support for a number of evolving industry standard voice
protocols, including GR-303, H.323 and MGCP, to enable our products to interface
with next generation voice equipment located in both the enterprise and the
network infrastructure of service providers. Our products enable next generation
service providers such as the
30
<PAGE> 36
emerging digital subscriber line and cable network operators to provide MCK
EXTender functionality as a value-added service offering to corporations for
branch offices and telecommuters over public and private data networks.
Lower Cost Solution. Our products provide a cost-effective solution,
lowering costs in the following areas:
- Transmission. Our products lower transmission costs by consolidating
voice and data traffic over a single network, eliminating local loop
service charges through toll bypass 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
these remote monitoring and diagnostic capabilities to solve problems
on-line, thereby reducing the time and cost associated with dispatching a
technician to a remote site.
- Equipment. Our products enable corporations to utilize their existing
capital investment in PBX-based corporate telephone systems, voice
applications and data networks, thereby eliminating the need to expend
significant additional capital on disparate, incompatible solutions such
as key systems.
- Facilities. Our products allow corporations to reduce physical facility
costs and infrastructure investments by enabling employees to work
effectively outside of corporate locations.
Compatibility with Leading PBX Manufacturers. We have worked with Alcatel,
Lucent, NEC, Nortel Networks and Toshiba to develop interfaces between our RVP
software platform and their primary PBX-based corporate telephone systems. These
manufacturers have tested and validated in their labs that our RVP platform is
interoperable with their primary PBX products, including 4400/4200 (Alcatel),
DEFINITY (Lucent), NEAX 1000/2000/2400 (NEC), Meridian (Nortel Networks),
Norstar (Nortel Networks) and Strata DK (Toshiba) equipment. According to
Dataquest, these five manufacturers represent approximately 65% of the U.S. PBX
market share for large enterprise customers.
STRATEGY
Our strategy is to become the leading provider of solutions that extend
corporate telephone systems to branch offices and telecommuters of Fortune 5000
businesses. The following are the principal elements of our business strategy:
Maintain technology leadership. Our technology enables us to provide
products that distribute the features and applications of corporate telephone
systems to branch offices and telecommuters. Our technology leadership is the
result of our knowledge and experience interfacing with proprietary PBX systems,
our ability to packetize voice and the PBX signaling information required to
interface with each of the PBX systems we support and our understanding of how
to condition packet voice for transmission over circuit and packet networks. We
intend to continue to leverage our existing expertise to develop new products
and applications that target broadband markets. We will also continue to work
with third-party software and hardware manufacturers to ensure the
interoperability between our solutions and a wide range of networking equipment
in order to facilitate ease of deployment and ensure that we can transmit packet
voice within multiple network environments.
Establish our PBXgateway products as platforms for new voice
applications. We intend to establish our PBXgateway products as platforms for
the delivery of new applications and services to branch offices and
telecommuters. Our products are positioned on the line-side of the PBX, which
enables us to extend its full features and applications to remote locations with
minimal impact on the existing corporate telephone system or its resident
software applications. We believe that this non-intrusive implementation, and
our products' positioning as an extension of the corporate PBX, strategically
positions us to develop new software components, as well as incorporate
third-party software applications, to provide new features and applications for
remote users. Using our PBXgateway products, we are also working with a number
of companies to enable corporations to integrate their corporate voice systems
with voice applications, such as
31
<PAGE> 37
voice mail and unified messaging systems, located in the network infrastructure
of application service providers.
Enhance the functionality of our multi-user customer premise equipment. We
intend to continue to enhance the functionality of our multi-user, customer
premise equipment by incorporating additional functionality including increased
local dialing capabilities and support for next generation voice protocols and
applications. This will enable branch offices of large corporations to access
their corporate PBX as well as utilize additional voice services and
applications that are being deployed by network service providers and
application service providers. We will also position our multi-user customer
premise equipment as communication portals for small and medium-sized businesses
to enable those companies to access dial tone and voice applications from
network service providers and application service providers, thereby enabling
small and medium-sized businesses to outsource voice services and applications.
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, NEC and Toshiba
and distribution relationships with Nortel Networks and its major channel
partners such as Ameritech, 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 develop service offerings based
on our technology that can deliver our application over broadband networks. We
jointly developed a broadband product with Copper Mountain and are in the
process of developing other product sets with Copper Mountain and other
broadband equipment vendors. We are also working with leading service providers
such as Rhythms NetConnections to develop service offerings based on our new
broadband product set. We have entered into a distribution agreement with
Rhythms pursuant to which it markets a service called PBXpress that delivers
remote PBX voice to its customers by bundling our equipment into this service
offering. We anticipate entering into new relationships with broadband equipment
vendors and next generation service providers such as competitive local exchange
carriers, or CLECs, Internet service providers, or ISPs, network service
providers, or NSPs, application service providers, or ASPs, and managed service
providers to enhance our leadership position.
Continue to target Fortune 5000 corporations. We intend to continue to
focus our distribution strategies on Fortune 5000 corporations. These
organizations have made substantial capital investments in their existing
PBX-based telephone systems and have significant numbers of branch offices and
telecommuters. Accordingly, these corporations have the most to gain from an
integrated voice network. We are well positioned to target the Fortune 5000
market because our products interface with PBX systems from Alcatel, Lucent,
NEC, Nortel Networks and Toshiba. We will work with our existing and new
partners to increase the market opportunity for, and drive market acceptance of,
our products.
TECHNOLOGY
We have developed expertise in digital line extension and the packetization
of voice for transmission over data networks to address the technology
challenges of extending the features and applications of corporate telephone
systems to remote locations. Another key component of our technological
advantage is the highly flexible software and hardware architecture upon which
we build our remote voice solutions. We will continue to invest significant
resources to maintain and extend our technological advantage.
Digital Line Extension Technology
The rich features and applications of corporate telephone systems are
accessed through the proprietary user or digital line side of the PBX. These
line-side interfaces enable the delivery of the features and
32
<PAGE> 38
applications of PBX-based corporate telephone systems to digital telephone sets.
As a result of our years of experience in working with major PBX manufacturers,
we have gained a significant understanding of these line-side interfaces and
have developed line-side software interfaces to a number of today's PBX-based
corporate telephone systems. In addition to our software interfaces, we have
developed a hardware subsystem capable of duplicating the electrical interfaces
of Alcatel, Lucent, NEC, Nortel Networks and Toshiba PBX systems. These
line-side software and hardware interfaces extract the voice and the PBX
signaling information required to interface with PBX systems and, using our RVP
software platform, packetize this voice and PBX signaling information for
transmission over data networks to our remote voice access products. We have
developed messaging software that transmits this voice and PBX signaling
information from our remote voice access products to the digital telephone sets
of the PBX manufacturers that we support, thereby transparently connecting these
sets to the PBX.
Delivery of Packet Voice with Remote Voice Protocol
To deliver voice over data networks, solutions must convert voice into
packet form and then transmit these voice packets alongside data packets.
Despite the advantages of simultaneous transmission of voice and data, there are
also a number of technological challenges to delivering voice over data networks
because audio quality can be distorted by jitter and latency associated with
congestion on the data network.
Our proprietary software platform, RVP, packetizes, compresses and encodes
circuit voice and PBX signaling information for secure transmission over data
networks. We have implemented both industry standard and proprietary voice
prioritization and voice fragmentation techniques that use bandwidth efficiently
while also ensuring that delay sensitive voice packets are delivered with the
quality expected from voice. Much of this technology revolves around our core
expertise in developing software that runs on standard digital signal
processors, which are required for encoding voice for transmission over
bandwidth constrained networks. In particular, we have designed and implemented
the following software features in our products to improve the quality of packet
voice transmission, minimize system delay and jitter, and utilize bandwidth
efficiently:
- Voice Compression. We integrate a number of industry standard voice
coding algorithms, including G.711, G.726, G.729A and G.723.1, that
compress voice to reduce the total bandwidth required for transmission.
- Echo Cancellation. We deliver echoless voice by integrating industry
standard acoustic echo cancellation technology, known as G.165, to which
we have made proprietary enhancements.
- Silence Detection. Our proprietary silence detection technology
eliminates unnecessary transmission of voice packets during the periods
of silence that occur in normal conversation, freeing bandwidth for other
uses.
- Comfort Noise. We incorporate technology that inserts comfort noise
during periods of silence so that users do not inadvertently think that
the phone call is no longer active.
- Jitter Buffering Techniques. Our products adapt to the real-time
irregularities in network transmission and ensure all traffic reaches its
endpoint at the appropriate time by introducing delay that is
unrecognizable to the user.
- Dual Tone Multi-Frequency Processing Technology. Dual tone
multi-frequency tones are generated by depressing buttons on digital
telephone sets, enabling the digital telephone set to recognize dialed
numbers used for outbound calls and for applications such as voicemail.
Our proprietary technology improves the transmission of these tones over
packet networks.
We have significant experience in transmitting packet voice over both
low-speed, traditional telephone networks and higher speed, broadband networks.
We have developed network interfaces for the delivery of remote voice over
traditional telephone and integrated services digital network, or ISDN,
connections and have incorporated third-party network devices to support T-1,
leased line and frame relay networks. In
33
<PAGE> 39
addition, to deliver data alongside our packet voice transmission, we have
expertise in terminating dial-up networking connections and bridging standard
data traffic.
In addition to supporting our proprietary protocol, RVP, we are adding
support for a number of evolving industry standard protocols, such as GR-303,
H.323 and MGCP. This will enable our products to interface with next generation
enterprise voice systems and applications as well as terminate IP-based
telephone sets. Supporting these standard protocols will also enable our
products to interface with voice equipment and applications located in the
network infrastructure of next generation service providers and application
service providers.
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, Nortel Networks and Toshiba, and require no design modifications or
upgrades to these systems or their respective digital telephone sets.
We have designed a standard hardware architecture that serves as a common
platform for our software modules. We use industry standard digital signal
processors and programmable logic devices to build a standard hardware platform
that can be software modified to support different applications or telephone
systems without requiring a hardware change. We have also architected our
products with a variety of standard telephony and data network interfaces to
ensure that we can transmit packet voice over the multiple network environments
currently available.
All of our products share a common software library of functional modules
that comprise our digital line interface software subsystem and our RVP software
platform. Our digital line interface software subsystem is responsible for the
interface to the proprietary software located on the digital line of the PBX.
This software subsystem has been designed to emulate a majority of the PBX-based
corporate telephone systems on the market today without requiring a change to
our hardware architecture. This flexible software architecture also enables us
to easily add software support for new PBX-based corporate telephone systems.
Our RVP software platform is responsible for packetizing voice and PBX signaling
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 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, Nortel Networks and Toshiba to
develop interfaces between the proprietary software of these leading PBX vendors
and our RVP software platform and standard hardware architecture. We generally
enter into contracts with these PBX vendors which provide us access to their
proprietary software and grant us rights to develop, manufacture and sell
products which interface with each vendor's equipment. As a result of these
relationships, we have developed substantial expertise in understanding and
interfacing with these proprietary corporate telephone systems. These
manufacturers have tested and validated in their own labs that our RVP platform
is interoperable with a variety of their equipment. Currently, our EXTender
series of products is compatible with the following PBX systems: 4400/4200
(Alcatel); DEFINITY (Lucent); NEAX 1000/2000/2400 (NEC); Meridian (Nortel
Networks); Norstar (Nortel Networks) and Strata DK (Toshiba).
34
<PAGE> 40
The EXTender solution consists of the following component parts:
- Customer Premise Equipment. Single- or multi-user remote location client
devices and a PC-based software solution that service branch offices,
remote call centers and telecommuters; and
- Corporate PBX Gateways. Products located at the corporate location that
extend voice traffic and PBX applications to our customer premise
equipment devices.
Our EXTender series of products enables corporations to provide the
functionality of corporate telephone systems and all of their supported
applications to users who traditionally have not had access to the corporate
telephone system and its voice applications because of the limitations of
current systems. Our products enable the PBX to act as a server that distributes
the features and applications of PBX-based corporate telephone systems to remote
locations over networks such as ATM, DSL, fiber, frame relay, IP, ISDN, leased
line, T-1, fractional T-1 and traditional telephone connections. Remote voice
users can utilize digital telephone sets identical to the sets deployed in the
corporate headquarters and access the corporate voice system for applications
such as voicemail, automated call distribution and interactive voice response,
and features such as three- or four-digit internal dialing, conferencing and
call forwarding. By enabling all employees, regardless of location, to have
access to the corporate voice system, our EXTender solutions create a single,
unified voice network.
Customer Premise Equipment
Our single-user product line enables telecommuters and remote call center
agents located in remote locations to connect to the corporate telephone system
and data network over public and private networks.
- EXTender 100 for PC Clients. The EXTender 100 for PC Clients is a
PC-based solution that enables remote call center agents, telecommuters
and mobile workers to access the most common features of corporate PBX
systems without requiring a digital telephone set. To make voice calls
using the corporate PBX, the remote or mobile worker uses a data
connection between the MCK PBXgateway at the corporate PBX site and the
EXTender 100 for PC Clients to send and receive the PBX signaling
information that enables PBX functionality. Simultaneously, the remote or
mobile worker uses an analog, cellular or IP phone as the voice transport
device. This product is currently in customer trials and is expected to
be commercially available by the end of the second quarter of calendar
year 2000.
- EXTender 1000+. The EXTender 1000+ is a single-user device that supports
both voice and data over a single traditional telephone line. The remote
user's personal computer and full-featured digital telephone set plug
into the product, which terminates and multiplexes voice and data over a
single telephone line. The product contains a built-in, industry-standard
56 kilobits per second, or Kbps, modem which enables the user to access
the corporate data network and supports standard Windows-based, dial-up
networking technology. The EXTender 1000+ unit is situated at the remote
location and connects to either another EXTender 1000+ unit or a
PBXtender gateway product located at the corporate PBX site. In the
future, the EXTender 1000+ will also be able to connect to a PBXgateway
product located at the corporate PBX site.
- EXTender 3000. The EXTender 3000 is a single-user device that supports
both voice and data over an integrated services digital network, or ISDN,
connection. An integrated services digital network connection is composed
of two 64 Kbps channels that each can deliver a separate network
connection. With its built-in network interface, the EXTender 3000
enables the remote user to connect a digital telephone set and a personal
computer into the EXTender 3000. The EXTender 3000 unit situated at the
remote location is connected to either another EXTender 3000 unit or a
PBXtender gateway product located at the corporate PBX site. In the
future, the EXTender 3000 will also be able to connect to a PBXgateway
product located at the corporate PBX site. There are three versions of
the EXTender 3000:
- EXTender 3000S and EXTender 3000T. The EXTender 3000S and the
EXTender 3000T utilize a serial data connection and offer simultaneous
voice and data multiplexed over one channel. The second channel is
available for analog devices such as a fax, additional phone or a
modem. The EXTender 3000T uses standard Windows-based, dial-up
networking technology
35
<PAGE> 41
to enable the user to set up a dial-up network connection to a remote
access server at the corporate location.
- EXTender 3000E. The EXTender 3000E offers dedicated voice over one
channel and a 64 Kbps Ethernet data connection on the second channel.
The EXTender 3000E uses an Ethernet port and bridging technology to
enable simultaneous voice and data network access capabilities. In
addition, standard hardware compression technology is utilized to
significantly enhance data throughput. When not used for Ethernet
data, the second channel is available as an analog port, supporting a
fax, additional phone or modem.
CAPTION: SINGLE-USER PRODUCTS
Diagram of single-user product configuration between a corporate location
at which a PBX and data server reside, utilizing PBXtender, and two remote
locations, each with a personal computer and telephone set, utilizing an
EXTender 3000 and EXTender 1000+ via ISDN or a traditional telephone network.
- EXTender 3200 for IDSL. The EXTender 3200 for IDSL is a single-user
device that delivers voice and data over an integrated digital subscriber
line, or IDSL, network connection. IDSL is a digital subscriber
line-enabled integrated services digital network connection that combines
both channels into one digital connection that can simultaneously
transmit packet voice and data. The product was developed in conjunction
with Copper Mountain and interoperates with its equipment located in the
central offices of service providers that transmits voice and data
traffic to and from end users. The EXTender 3200 for IDSL connects to a
PBXgateway product located at the corporate site. This product is
currently in customer trials and is expected to be commercially available
in calendar year 2000.
- IP EXTender 4000. The IP EXTender 4000 is a single-user product that
delivers PBX voice over IP networks. The product requires an external
network termination device and delivers IP-based voice over data
networks. The IP EXTender 4000 connects to a PBXgateway product located
at the corporate site.
Our branch office product connects remote offices to the corporate
telephone system over data networks.
36
<PAGE> 42
- Branch Office EXTender 6000. The Branch Office EXTender 6000 is a
multi-user product that is available in both 8 and 12 port versions. Both
versions are also available with an additional analog port, which
provides local dialing capabilities and emergency 911 access. The product
was constructed with standard 19-inch, rack-mountable hardware so a
number of units can easily be deployed together to service larger remote
offices. In addition, the product has dual external network interfaces
that allow for multiple options and redundancy capability and transmits
voice over a wide variety of data networks including ATM, DSL, fiber,
frame relay, IP, ISDN, leased line, T-1 and fractional T-1 connections.
The Branch Office EXTender 6000 can be centrally administered over a
Telnet connection, an in-band RVP connection, or with SNMP or HTML
interfaces. The product's ability to dynamically allocate bandwidth
between multiple users allows for flexible configurations and bandwidth
conservation. The Branch Office EXTender 6000 located at the remote
office connects to our PBXgateway product located at the corporate PBX
site.
GRAPHIC
CAPTION: MULTI USER PRODUCTS
The diagram is divided into two sections, labeled "Corporate Location" on the
left and "Remote Location" on the right. The diagram shows a corporate PBX-based
telephone system connected to a Branch Office EXTender 6000 connected to a
non-MCK product. The non-MCK product connects independently to public and
private networks. At the remote location, the diagram shows a network
termination device that connects to public and private networks. The network
termination device connects to a Branch Office EXTender 6000 and a local area
network. The Branch Office EXTender 6000 is connected to multiple telephone
sets.
37
<PAGE> 43
Corporate PBX Gateway Products
Our PBX gateway products, located at the corporate PBX site, interface with
the line side of the PBX and create extensions of voice and PBX applications to
our customer premise equipment.
- PBXtender. The PBXtender is a high density PBX gateway product that can
support up to 24 ports per chassis. The PBXtender currently supports our
EXTender 1000+ and EXTender 3000 product lines. The PBXtender can be
configured to support up to 12 line cards that may be mixed and matched
to support up to 12 analog users or 24 integrated services digital
network, or ISDN, users simultaneously. The product also has a
Windows-based graphical user interface to enable remote management and
diagnostics of our customer premise equipment.
- PBXgateway. The PBXgateway supports a range of our products, including
both multi-user and single-user customer premise equipment, and is
available in both 8 and 12 port versions. Depending upon the software
version of the product, the PBXgateway will transmit voice over a wide
variety of data networks including ATM, DSL, fiber, frame relay, IP,
ISDN, leased line, T-1 and fractional T-1 connections.
When the product is running the software version that supports
traditional networks, the PBXgateway located at the corporate PBX site
extends the functionality of the corporate PBX to a Branch Office EXTender
6000 located at the remote office site. This product will transmit voice
over ATM, fiber, frame relay, ISDN, leased line, T-1 or fractional T-1
network connections.
When the product is running the software version that supports IP-based
networks, the PBXgateway extends the functionality of the corporate PBX to
a variety of our multi-user and single-user IP products, including the
Branch Office EXTender 6000, EXTender 3200 for IDSL, IP EXTender 4000 and
the EXTender 100 for PC Clients. The PBXgateway can support up to 12
simultaneous users across any of these products over multiple types of
broadband networks. The PBXgateway can be centrally administered over a
Telnet connection, an in-band RVP connection, or with SNMP and HTML
interfaces. As part of our strategy, we are positioning this product as a
platform to deliver new applications and services to our customer premise
equipment, utilizing both new software components that we intend to
develop and third-party software applications that we intend to
incorporate into the product.
38
<PAGE> 44
Graphic
CAPTION: BROADBAND NETWORK PRODUCTS CURRENTLY IN CUSTOMER TRIALS
The diagram is divided into four sections, labeled "Corporate Office" on the
left, "Remote Locations" on the top right, "Branch Office" on the right center
and "Telecommuter" on the bottom right. The diagram shows a PBXgateway IP
connected to a PBX-based corporate telephone system and a network termination
device. The network termination device independently connects to public and
private packet networks. At the remote location, the diagram shows a network
termination device that connects to public and private packet networks. An IP
EXTender 4000 connects to the network termination device, a personal computer
and a telephone set. At the Branch Office, the diagram shows a network
termination device that connects to public and private pocket networks as well
as personal computers. A Branch Office EXTender 6000 connects to the network
termination device and multiple telephone sets. At the Telecommuter location,
the diagram shows an EXTender 3200 for IDSL. The EXTender 3200 for IDSL is
connected to a personal computer and a telephone set.
Other Products
- Digital-to-Analog Recording Interface. Our Digital-to-Analog Recording
Interface converts digital voice from proprietary PBXs into a standard
analog audio output so that voice calls can be recorded on any voice
logger or recording device. We offer 3 configurations that support from 2
to 48 lines, and are modular in nature, allowing for easy expansion to
accommodate more users. Our Digital-to-Analog Recording Interface is
compatible with the following voice systems: DEFINITY (Lucent); Meridian
(Nortel Networks); Norstar (Nortel Networks); and DMS Centrex (Nortel
Networks).
- Telebridge. The Telebridge series of products emulates digital PBX
telephone sets and terminates calls, allowing computer telephony
integration, or CTI, applications to interface with legacy PBX systems.
39
<PAGE> 45
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 January 31, 2000, our
sales team was composed of a vice president of sales, twelve regional sales
managers, three systems engineers, seven 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, Toshiba
ILECs............................... Ameritech, BellSouth, GTE, SBC
Systems Integrators and
Distributors...................... Anixter, Dacon, Ingram Micro, Sprint North
Supply, Williams Communications
Telecom and Datacom VARs............ Northwest Extension, Inacom, PB Exchange,
Pinacor, Solunet, Stevens Communications,
TeleCommute Solutions
Broadband Service Providers*........ AT&T Local Services, DSL.Net, HarvardNet,
JATO Communications, MCI, Network Access
Solutions, Northpoint Communications,
Rhythms NetConnections, US West
</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. We have regional sales
managers located in Boston, Chicago, Dallas, New York, San Francisco, Seattle,
Calgary, Montreal, Toronto, and London.
Our field-based systems engineers, located in Boston, Nashville, Newark and
Calgary, 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 Alcatel, Lucent, NEC, Nortel
Networks and Toshiba 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
40
<PAGE> 46
on a purchase order basis. We provide significant sales, marketing, training and
technical support to our channels.
Sales outside of the United States accounted for 18.3% of sales in fiscal
year 1999. We sell globally through Alcatel, Lucent, NEC and Toshiba. 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 over 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 January 31, 2000, we employed 7 people in customer support. Although we
may augment our Needham, Massachusetts and Calgary, Alberta-based support staff,
we do not intend to recruit our own direct field service and support
organization.
41
<PAGE> 47
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
January 31, 2000:
<TABLE>
<S> <C> <C>
Alcatel Dictaphone Positron
Ameritech GTE SBC
Anixter Inacom Shared Technologies
BC Tel Lucent Sprint North Supply
Bell Canada NEC Stevens Communications
BellSouth Northwest Extension Telecommute Solutions
CCA PB Exchange Teleswitch
Dacon Electronics Pinacor Williams Communications
</TABLE>
For the fiscal year ended 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. For the nine months ended January 31, 2000, Lucent accounted
for 45.7% of our revenues, and our 10 largest customers, including Lucent,
accounted for 76.8% of our revenues. No other customer represented over 10% of
revenues in either period. Approximately 78.7% and 76.8% of our revenues were
derived from ten customers in fiscal 1999 and in the nine-month period ended
January 31, 2000, respectively.
The following is a representative list of end users, by vertical market
segment, that have deployed multiple systems:
<TABLE>
<CAPTION>
FINANCIAL/INSURANCE TECHNOLOGY GOVERNMENT/EDUCATION HOSPITALITY/TRAVEL
------------------- ---------- -------------------- ------------------
<S> <C> <C> <C>
Arthur Andersen 3M American Diabetes American Express Travel
Bankers Trust Ameritrade Association Avis
Bear Stearns Ascend City of San Antonio Maritz
Comdisco Bottomline Technologies Massachusetts State Promus Hotels
Deloitte & Touche Citrix Systems Police Travel Services
Fidelity Digital (Compaq) New York University International
General Auto Insurance Landmark Systems U.S. Postal Service United Airlines
MFS Northrop Grumman World Travel Partners
Merrill Lynch
Nationsbank (Bank of TELECOM/MEDIA OTHER
America) ------------- ------
Option One CNN Argon
Prudential Securities Harte-Hanks Circuit City
Safeco Sitel Federal Express
Sun Trust TCI Otis Elevator
TD Waterhouse Group Turner Broadcasting Pacificorp
Pfizer
</TABLE>
Case Studies
Representative examples of the manner in which our products have been used
are set forth below.
Circuit City is a leading national retailer of brand-name consumer
electronics, personal computers, major appliances and entertainment software,
with over 590 store locations nationwide. As a part of its telecommuting
program, Circuit City has used our EXTender 1000+ and EXTender 3000 product
lines to connect its telecommuters to its corporate voice network. Our products
enable Circuit City to provide its employees with effective access to their
corporate PBX and its applications.
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
42
<PAGE> 48
EXTender 3000 products to route incoming calls to the appropriate call center
agents at multiple locations, thereby enabling GAIS customers to reach any agent
in any office depending upon the specific nature of customers' call. In
addition, GAIS is also using our Branch Office EXTender 6000 to provide remote
offices with transparent access to its corporate voice network.
Maritz Inc. has been in business since 1894 and, at over $2 billion in
revenue, is one of the largest sources of integrated performance improvement,
travel and marketing research services globally. As a part of its telecommuting
program, Maritz uses our EXTender 3000 products to connect a number of
telecommuters to its corporate voice network. Our products enable Maritz to
expand its recruiting reach and improve employee productivity and retention,
while reducing office space demands. In addition to the EXTender 3000, Maritz
also uses our Branch Office EXTender 6000 to integrate multiple facilities to
its existing corporate PBX system over its data network.
TD Waterhouse (Waterhouse) is a large nationwide discount brokerage firm.
To service its customer base, Waterhouse has 160 branch offices throughout the
United States. These branch offices rely on six regional centers for trading,
back office processing and other corporate functions and are linked for data
connectivity to the regional centers using T-1 connections. Because each branch
office maintained its own isolated key system, Waterhouse did not have an
integrated voice system across all of its offices. Seeking to integrate these
disparate voice systems, Waterhouse chose to replace its key systems with MCK
Branch Office EXTender 6000s. The Branch Office EXTender 6000s are linked back
to the PBXs located at the regional centers over Waterhouse's existing T-1 data
connections. This solution provides the Waterhouse branch offices with enhanced
functionality and seamless access to the corporate office. Waterhouse
anticipates achieving significant cost savings due to the combination of voice
and data on a single centrally managed network.
RESEARCH AND DEVELOPMENT
To maintain our technology leadership position, we focus our research and
development efforts on improving the functionality and performance of our
existing products and designing new products that address customer needs and
changes in the marketplace. We have assembled a team of experienced hardware and
software engineers with capabilities in both networking and telecommunications.
Our engineering expertise includes significant understanding of:
- the digital line or user side of proprietary PBX systems;
- digital audio technology, such as echo cancellation and voice compression
algorithms;
- IP telephony;
- data network and telephony interfaces; and
- network diagnostic and management frameworks.
At January 31, 2000, we employed 37 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 Needham, 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
43
<PAGE> 49
\
networks. Furthermore, we plan to develop new software components for our
universal hardware architecture that expand the basic capabilities of our
solutions to enable the delivery of new applications and services. We are
focusing development efforts on, among other things, supporting additional PBX-
based corporate telephone systems and new network environments, developing
additional software applications, expanding the port density of our existing
products and implementing additional network management capabilities. Finally,
we will continue to work with third-party software and hardware manufacturers to
establish interoperability between our products and other important elements
within common network environments.
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 37 people in our
engineering organization, 8 are dedicated full time to our product validation
laboratory. At both our Needham, Massachusetts and Calgary, Alberta development
facilities, we have constructed state of the art laboratories with equipment
from such vendors as ADC Kentrox, Alcatel, Ascend, Cisco, Copper Mountain,
Flowpoint, IBM, Jetstream, Lucent, NEC, Netopia, Newbridge, Nortel Networks,
Packeteer, Paradyne and Toshiba.
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 Needham, Massachusetts facility tests system interoperability. The
ability to deliver traffic within multiple network environments and to
interoperate with equipment from numerous vendors has become a key component to
the success of communications equipment companies. Because no communications
equipment product can be validated independently of the network within which it
operates or independently from the equipment with which it interfaces, this lab
conducts extensive tests of our product line operating within multiple network
environments and interacting with equipment from numerous equipment vendors. We
conduct extensive tests that measure device performance, quality of service and
voice prioritization within multiple network environments and across a range of
network conditions. Our facilities contain extensive telephony and data
equipment and network circuits to conduct these tests.
By combining the capabilities of our two facilities, we have implemented a
product validation procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is compatible with
most widely deployed network equipment and is capable of adapting to a wide
range of network conditions. Furthermore, the engineers in our product
validation laboratory work continually with validation engineers at other
equipment companies in order to compile feedback and recommendations to improve
our products.
MANUFACTURING
We outsource our manufacturing to three contract manufacturers. Celestica,
which is located in Exeter, New Hampshire and is ISO 9002 registered,
manufactures the Branch Office EXTender and PBXgateway products. They provide
full turnkey services, including material procurement, final assembly, testing,
shipment to our customers and warranty repair. Mack Technologies, located in
Westford, Massachusetts, manufactures our IP EXTender 4000 product line.
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
44
<PAGE> 50
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
45
<PAGE> 51
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.
46
<PAGE> 52
EMPLOYEES
At January 31, 2000, we had a total of 107 employees, of which 37 were in
research and development, 43 were in sales, marketing, business development and
customer support, 9 were in manufacturing and operations, and 18 were in finance
and administration. 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 30,000 square feet of space at our
headquarters in Needham, Massachusetts under a lease that expires in March 2007.
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.
47
<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors and their ages as of
February 29, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven J. Benson.......................... 41 President, Chief Executive Officer,
Chairman and Director
Paul K. Zurlo............................. 33 Chief Financial Officer
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
Alfred F. Brisard......................... 36 Vice President of Marketing
Michael L. Quarella....................... 45 Vice President of Operations
J. Robert Geiman.......................... 26 Senior Director of Corporate Development
Sarah N. Burke............................ 42 Director of Human Resources
Gregory M. Avis(1)........................ 41 Director
Michael H. Balmuth(2)..................... 36 Director
John B. Landry(2)......................... 52 Director
Calvin K. Manz(2)......................... 46 Director
Paul Severino(1).......................... 53 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 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.
48
<PAGE> 54
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.
Alfred F. Brisard has served as our Vice President of Marketing since
October 1999. From November 1997 to September 1999 he served as Director of
Marketing and Business Development -- New Business Initiatives for 3Com
Corporation, a provider of information access products and network system
solutions. From April 1996 to November 1997, Mr. Brisard served as Product Line
Manager for the OEM Business Unit of Compaq/Microcom, Inc., which develops and
markets computer hardware, software and services. From March 1994 to March 1996
he served as Senior Product Manager, and from September 1992 to March 1994 as a
Staff Director, for Bell Atlantic Corp., formerly NYNEX. Mr. Brisard holds a
Bachelor's degree from Northeastern University School of Engineering and an
M.B.A. from Boston College.
Michael L. Quarella has served as our Vice President of Operations since
October 1999. From January 1999 to October 1999, he served as Director of
Operations at Sensormatic Electronics Corp., a manufacturer of personal access
control and integrated security management systems. From May 1997 to December
1998, he served as Business Unit Director at ACT Manufacturing, a full service
contract manufacturing company providing printed circuit board assemblies along
with complete systems assembly and test operations. From February 1993 to May
1997, he served as Vice President of Operations at Windata, Inc., a wireless
local area networking company. From October 1990 to February 1993, he served as
Senior Director, Manufacturing at Racal-Datacom, Inc., a manufacturer of access
products and local area network system solutions. He holds a Bachelors degree
from Fitchburg State College.
J. Robert Geiman has served as our Senior Director of Corporate Development
since January 2000 and 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.
Sarah N. Burke has served as our Director of Human Resources since October
1999. From November 1990 through October 1999 she held increasingly senior
management positions at Ardent Software, a global data management software
company, including Vice President of Human Resources. Ms. Burke graduated from
The Katherine Gibbs School and received a Certificate of Human Resources from
Bentley 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
49
<PAGE> 55
Interliant, an applications service provider, as well as several private
companies. Mr. Landry holds a Bachelor's degree from Babson College.
Calvin K. Manz has served as a Director since June 1989. He founded our
company in June 1989, and served as our President and Chief Executive Officer
until June 1997. He has served as the President and Chief Executive Officer of
Odyssey Financial Inc., a financial and management advisor to technology
companies, since December 1997. Mr. Manz was a Director of Telebackup Systems
Inc., a software utilities company, from June 1997 until the company merged in
May 1999 with Veritas Software, a supplier of storage management software. Mr.
Manz also serves as a director of International Properties Group Ltd., a
publicly-traded real estate company in Canada, and several private companies.
Paul Severino has served as a Director of MCK since July 1999. He has
served as the Chairman of NetCentric Corporation, a provider of Internet
protocol telephony applications, since August 1997. From October 1994 to
November 1996, Mr. Severino served as the Chairman of the Board of Bay Networks,
Inc., after its formation from the merger of Wellfleet and Synoptics. From
October 1986 to October 1994, he served as the President and Chief Executive
Officer of Wellfleet Communications, Inc., a company he co-founded and which
merged with Bay Networks. He is a director of Media 100, Inc., a provider of
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.
The Board of Directors consists 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, Landry and Manz, 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.
50
<PAGE> 56
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
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
Former Vice President of
Marketing (4)
</TABLE>
- ---------------
(1) The number of shares of restricted stock held by each of the Named Executive
Officers at the end of the fiscal year ended April 30, 1999 is as follows:
Mr. Benson, 980,493 shares; Mr. Zurlo, 114,750 shares; Mr. Williams, 68,850
shares; Mr. Dickerson, 59,670 shares; and Ms. Lockhart, 84,150 shares. The
value of these shares of restricted stock is as follows: Mr. Benson,
$7,257,571; Mr. Zurlo, $849,375; Mr. Williams, $509,625; Mr. Dickerson,
$441,675; and Ms. Lockhart, $622,875. The values of the restricted stock
holdings were calculated on the basis of the fair market value of $7.50 per
share at April 30, 1999, as determined by the Board of Directors, minus the
consideration paid for such shares.
(2) Includes amounts paid in respect of interest due to us from the Named
Executive Officers on certain promissory notes. See "Certain Transactions."
(3) Represents premiums paid for term life insurance.
(4) Ms. Lockhart resigned in January 2000.
51
<PAGE> 57
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended April 30, 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH) DATE(2) 0%($) 5%($) 10%($)
- ---- ---------------- ----------------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven J. Benson..... 244,629 32.7% $0.098 7/16/03 $214,295.00 $2,317,632.69 $2,930,847.50
Paul K. Zurlo........ 28,359 3.8 0.098 7/16/03 24,842.25 268,675.20 339,763.08
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
Michael D.
Williams........... 17,302 2.3 0.098 7/16/03 15,156.55 163,920.39 207,291.54
7,650 1.0 0.098 9/15/03 6,701.40 72,476.65 91,653.01
3,825 0.5 0.196 11/13/03 2,975.85 35,863.33 45,451.51
3,825 0.5 0.196 2/23/04 2,975.85 35,863.33 45,451.51
Jeffrey P.
Dickerson.......... 7,650 1.0 0.098 6/23/03 6,701.40 72,476.65 91,653.01
16,918 2.3 0.098 7/16/03 14,280.17 160,282.35 202,690.92
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
Joan E. Lockhart..... 20,986 2.8 0.098 7/16/03 18,383.74 198,822.87 251,428.75
7,650 1.0 0.196 11/13/03 5,951.70 71,726.65 90,903.01
</TABLE>
- ---------------
(1) Based on an aggregate of 748,470 options granted to officers and employees
during the fiscal year ended April 30, 1999.
(2) All stock options granted vest as to 1/4th of the underlying shares on the
first anniversary of the date of grant and 1/48th of the underlying shares
monthly thereafter, so long as the optionee remains as an employee.
(3) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 0%, 5% and 10% appreciation rates established in regulations of
the SEC, compounded annually. The potential realizable value is not intended
to predict future appreciation of the price of our common stock and does not
give effect to any actual appreciation after the date of grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held by the Named Executive
Officers. The Named Executive Officers did not exercise any stock options during
fiscal year 1999. There was no public trading market for our common stock as of
April 30, 1999. Accordingly, the values of the unexercised in-the-money options
have been calculated on the basis of the fair market value at that time of $7.50
per share, as determined by the Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Benson......................... -- 244,629 -- $1,834,717.50
Paul K. Zurlo............................ -- 36,009 -- 270,067.50
Michael D. Williams...................... -- 32,602 -- 244,515.00
Jeffrey P. Dickerson..................... -- 32,218 -- 241,635.00
Joan E. Lockhart......................... -- 28,636 -- 214,770.00
</TABLE>
52
<PAGE> 58
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 February 29, 2000, 882,758 shares have been issued under the 1999
Stock Option and Grant Plan.
The 1999 Stock Option and Grant Plan is administered by the Board of
Directors or a committee designated by the Board of Directors. Subject to the
provisions of the 1999 Stock Option and Grant Plan, the Board of Directors or
the committee may select the individuals eligible to receive awards, determine
the terms and conditions of the awards granted, accelerate the vesting schedule
of any award and generally administer and interpret the plan.
The exercise price of options granted under the 1999 Stock Option and Grant
Plan is determined by the Board of Directors or the committee. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant, or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power. Non-qualified stock options may be
granted at prices which are less than the fair market value of the underlying
shares on the date granted. Options are 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.
53
<PAGE> 59
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, 111,102 shares remain available for issuance.
The 1996 Stock Option Plan may be administered by the Board of Directors or
a committee designated by the Board of Directors. Subject to the provisions of
the 1996 Stock Option Plan, the Board of Directors or the committee may select
the individuals eligible to receive awards, determine the terms and conditions
of the awards granted, accelerate the vesting schedule of any award and
generally administer and interpret the 1996 Stock Option Plan.
The exercise price of options granted under the 1996 Stock Option Plan
shall be determined by the Board of Directors or the committee. Under present
law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant, or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of outstanding capital stock. Non-
qualified stock options may be granted at prices which are less than the fair
market value of the underlying shares on the date granted. Options are typically
subject to vesting schedules, terminate ten years from the date of grant 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
54
<PAGE> 60
certain rights of first refusal held by us. 217,888 shares of Mr. Benson's
restricted stock vested upon completion of our initial public offering. On
January 25, 2000, in connection with the resignation of Ms. Lockhart, we
notified Ms. Lockhart of our exercise of a right to purchase 86,859 shares of
her restricted stock for an aggregate amount of $90,765.62. Ms. Lockhart is
currently disputing our right to repurchase 33,309 of these shares.
SEVERANCE AGREEMENT
We entered into a severance agreement with Steven J. Benson on June 17,
1997. The severance agreement provides that, in the event Mr. Benson's
employment is terminated without cause, Mr. Benson will continue to receive
salary and benefits for six months or until Mr. Benson is reemployed, whichever
occurs first.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the director has
breached his or her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or a knowing violation of law, paid a dividend or
approved a stock repurchase in violation of the Delaware General Corporation Law
or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of the Board of Directors, non-officer employees may
be, indemnified by us to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for or on our behalf. The by-laws
also provide that the right of directors and officers to indemnification shall
be a contract right and shall not be exclusive of any other right now possessed
or hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. We also have directors' and officers' insurance against certain
liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or controlling persons MCK as
described above, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
55
<PAGE> 61
CERTAIN TRANSACTIONS
Certain stock option grants to our directors and executive officers are
described in this prospectus under the caption "Management -- Executive
Compensation."
PRIVATE PLACEMENT TRANSACTIONS
We have issued preferred stock in private placement transactions as
follows. The tables below do not give effect to the 1.53 to 1 stock split:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
DATE OF ISSUANCE SERIES SHARES SHARE CONSIDERATION
---------------- ----------------------------- ---------- --------- -------------
<S> <C> <C> <C> <C>
June 1996................ Series E Redeemable Preferred 20,000 $100.00 $ 2,000,000
of subsidiary
June 1996 and July
1998................... Series A Redeemable Preferred 14,985,733 1.00 14,985,733
June 1996................ Series B Redeemable 3,968,384 .42 1,666,667
Convertible Preferred
July 1998................ Series C Redeemable Preferred 28,505 87.70 2,500,000
July 1998................ Series D Redeemable 1,672,354 1.49 2,500,000
Convertible Preferred
</TABLE>
The following table summarizes the shares of our preferred stock and Series
E Redeemable Preferred Stock of our subsidiary purchased from us 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................. 14,910,804 3,948,543 -- -- --
Lazard Freres................... -- -- 23,944 1,404,778 --
Calvin K. Manz.................. -- -- -- -- 20,000
</TABLE>
Pursuant to an agreement dated November 14, 1996, Summit Partners sold 2,000,000
shares of Series A Redeemable Preferred Stock to Calvin K. Manz. 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 65% of the restricted stock owned by Mr.
Williams and 60% of the restricted stock owned by Mr. Dickerson were vested on
February 29, 2000, 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. Upon the resignation of Ms. Lockhart in January 2000,
42,626 shares of Ms. Lockhart's restricted stock were vested and we notified Ms.
Lockhart of our exercise of a repurchase right with respect to the remaining
33,309 shares for an aggregate amount of $3,265.59. Ms. Lockhart is currently
disputing our right to repurchase these shares. Approximately 67% of Mr. Zurlo's
restricted stock is vested as of February 29, 2000, and the
56
<PAGE> 62
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 67% of Mr. Benson's restricted stock is vested as of February 29,
2000 and the remainder shall vest ratably on an annual basis through 2001.
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 vests 1/4th on
the first anniversary of the date of grant and 1/48th of the shares monthly
thereafter. Upon the resignation of Ms. Lockhart in January 2000, we notified
her of our exercise of a right to repurchase all 53,550 of these shares of Ms.
Lockhart's restricted stock for an aggregate amount of $87,500.
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.
Upon completion of our initial public offering in October 1999:
- we redeemed 12,910,804 shares of our Series A redeemable preferred stock,
held by Summit Partners, for an aggregate redemption price of
$16,388,020;
- we redeemed 23,887 shares of our Series C redeemable preferred stock,
held by Lazard Freres, for an aggregate redemption price of $2,637,573;
and
- we redeemed 2,000,000 shares of our Series A redeemable preferred stock
and 20,000 shares of Series E redeemable preferred stock of our
subsidiary, held by Calvin K. Manz, for an aggregate redemption price of
$2,586,793.
57
<PAGE> 63
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."
58
<PAGE> 64
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of February 29, 2000 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;
- each other person selling stock in this offering;
- 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
February 29, 2000. The applicable percentage of "beneficial ownership" after the
offering is based upon 19,567,556 shares of common stock outstanding.
The address of Summit Partners is 600 Atlantic Avenue, Boston, MA 02210.
The address of Messrs. Avis and Balmuth is c/o Summit Partners, 600 Atlantic
Avenue, Boston, MA 02210. The address of Lazard Freres and Co. LLC is 30
Rockeller Plaza, New York, NY 10020. The address of all other 5% stockholders is
c/o MCK Communications, Inc. 117 Kendrick Street, Needham, Massachusetts 02494.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
BEFORE THE OFFERING AFTER THE OFFERING
------------------------- NUMBER OF SHARES ----------------------
NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
----------- ----------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS, DIRECTORS AND NAMED
EXECUTIVE OFFICERS
Summit Partners(1).................... 5,942,554 30.4% 648,393 5,294,161 27.1%
Lazard Freres and Co. LLC............. 2,157,862 11.0 234,243 1,923,619 9.8
Steven J. Benson(2)................... 1,130,121 5.8 120,434 1,009,687 5.1
Paul K. Zurlo(3)...................... 173,550 * 18,472 155,078 *
Michael D. Williams(4)................ 127,814 * 13,998 113,816 *
Jeffrey P. Dickerson(5)............... 130,656 * 14,892 115,764 *
Joan E. Lockhart(6)................... 52,131 * -- 52,131 *
Gregory M. Avis(7).................... 5,942,554 30.4 648,393 5,294,161 27.1
Michael H. Balmuth(8)................. 5,942,554 30.4 648,393 5,294,161 27.1
John B. Landry(9)..................... 63,632 * 7,780 55,852 *
Calvin K. Manz(10).................... 3,108,373 15.9 337,424 2,770,949 14.2
Paul Severino(11)..................... 45,900 * 4,983 40,917 *
OTHER SELLING STOCKHOLDERS
Gordon Bried(12)...................... 2,072 * 380 1,692 *
Alfred J. Brisard..................... 22,950 * 10,000 12,950 *
Patrick J. Curley(13)................. 170,995 * 17,760 153,235 *
Conner Doyle(14)...................... 2,432 * 398 2,034 *
Michael Duran......................... 5,151 * 559 4,592 *
FSC Corp.............................. 257,501 1.3 27,953 229,548 1.2%
J. Robert Geiman(15).................. 4,781 * 4,463 318 *
Juergen Giebler(16)................... 56,529 * 5,000 51,529 *
Marnie Latour(17)..................... 5,339 * 1,300 4,039 *
Jennifer McAuliffe(18)................ 1,594 * 765 829 *
David Milne(19)....................... 2,000 * 1,017 983 *
Tim Nolan(20)......................... 6,694 * 2,670 4,024 *
Shaun O'Brien(21)..................... 4,128 * 841 3,287 *
Herman Oothuysen(22).................. 1,690 * 535 1,155 *
Alex Phillips(23)..................... 1,776 * 459 1,317 *
Mike Redding(24)...................... 17,213 * 4,590 12,623 *
Julian Sanders(25).................... 979 * 670 309 *
Bonnie Lynn Sefton(26)................ 1,705 * 230 1,475 *
</TABLE>
59
<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
BEFORE THE OFFERING AFTER THE OFFERING
------------------------- NUMBER OF SHARES ----------------------
NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
----------- ----------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Jonathan Wenocur(27).................. 10,787 * 3,200 7,587 *
Yarmouth Trust........................ 152,834 * 16,591 136,243 *
All executive officers and directors
as a group (11 persons)(28)......... 10,916,545 55.4% 1,194,136 9,722,409 49.3%
</TABLE>
- ---------------
* Less than 1%
(1) Represents 5,447,427 shares held by Summit Ventures IV, L.P., 247,256
shares held by Summit Subordinated Debt Fund, L.P., and 247,871 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 Summit
Partners. Summit Partners, LLC, through an investment committee, has voting
and dispositive authority over the shares held by Summit Ventures IV, L.P.,
Summit Debt Fund L.P. and Summit Investors III L.P.
(2) Includes 76,426 shares underlying options granted to Mr. Benson which are
exercisable within 60 days of February 29, 2000 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.
(3) Includes 8,027 shares underlying options granted to Mr. Zurlo which are
exercisable within 60 days of February 29, 2000.
(4) Includes 8,744 shares underlying options granted to Mr. Williams which are
exercisable within 60 days of February 29, 2000.
(5) Includes 19,819 shares underlying options granted to Mr. Dickerson which
are exercisable within 60 days of February 29, 2000.
(6) Excludes 33,309 shares as to which we have notified Ms. Lockhart of our
exercise of a repurchase right. Ms. Lockhart is currently disputing our
right to repurchase these shares.
(7) Represents shares described in note (1) above, beneficially owned by Summit
Partners. Summit Partners, LLC, through an investment committee, has voting
and dispositive authority over the shares held by Summit Ventures IV, L.P.,
Summit Debt Fund L.P. and Summit Investors III L.P. Mr. Avis disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(8) Represents shares described in note (1) above, beneficially owned by Summit
Partners. Summit Partners, LLC, through an investment committee, has voting
and dispositive authority over the shares held by Summit Ventures IV, L.P.,
Summit Debt Fund L.P. and Summit Investors III L.P. Mr. Balmuth disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(9) Includes 598 shares underlying options granted to Mr. Landry which are
exercisable within 60 days of February 29, 2000.
(10) Represents shares held by Manz Developments, Inc., of which Mr. Manz holds
100% of the voting stock and 48% of the total equity.
(11) Includes 15,300 shares underlying options granted to Mr. Severino which are
exercisable within 60 days of February 29, 2000.
(12) Includes 2,072 shares underlying options granted to Mr. Bried which are
exercisable within 60 days of February 29, 2000.
(13) Includes 12,408 shares underlying options granted to Mr. Curley which are
exercisable within 60 days of February 29, 2000.
60
<PAGE> 66
(14) Includes 2,432 shares underlying options granted to Mr. Doyle which are
exercisable within 60 days of February 29, 2000.
(15) Includes 4,781 shares underlying options granted to Mr. Geiman which are
exercisable within 60 days of February 29, 2000.
(16) Includes 56,529 shares underlying options granted to Mr. Giebler which are
exercisable within 60 days of February 29, 2000.
(17) Includes 5,339 shares underlying options granted to Ms. Latour which are
exercisable within 60 days of February 29, 2000.
(18) Includes 1,594 shares underlying options granted to Ms. McAuliffe which are
exercisable within 60 days of February 29, 2000.
(19) Includes 2,000 shares underlying options granted to Mr. Milne which are
exercisable within 60 days of February 29, 2000.
(20) Includes 4,399 shares underlying options granted to Mr. Nolan which are
exercisable within 60 days of February 29, 2000.
(21) Includes 4,128 shares underlying options granted to Mr. O'Brien which are
exercisable within 60 days of February 29, 2000.
(22) Includes 1,690 shares underlying options granted to Mr. Oothuysen which are
exercisable within 60 days of February 29, 2000.
(23) Includes 1,776 shares underlying options granted to Mr. Phillips which are
exercisable within 60 days of February 29, 2000.
(24) Includes 17,213 shares underlying options granted to Mr. Redding which are
exercisable within 60 days of February 29, 2000.
(25) Includes 979 shares underlying options granted to Mr. Sanders which are
exercisable within 60 days of February 29, 2000.
(26) Includes 1,705 shares underlying options granted to Ms. Sefton which are
exercisable within 60 days of February 29, 2000.
(27) Includes 9,257 shares underlying options granted to Mr. Wenocur which are
exercisable within 60 days of February 29, 2000.
(28) Includes 141,322 shares underlying options which are exercisable within 60
days of February 29, 2000.
61
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock
of which 19,567,556 will be issued and outstanding; and 2,000,000 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 February 29, 2000, there were outstanding: (1) 18,067,556 shares of
common stock; and (2) options to purchase an aggregate of 2,061,808 shares of
common stock.
COMMON STOCK
The holders of common stock have one vote per share. Holders of common
stock are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority, or, in the case of election of directors, by a plurality, subject to
any voting 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 Partners, Lazard Freres 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 10,389,624 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
62
<PAGE> 68
on Form S-3, these stockholders may require us to file an unlimited number of
registration statements on Form S-3 under the Securities Act with respect to
their shares of common stock.
The registration rights of these stockholders will terminate when the
shares held by them may be sold under Rule 144 under the Securities Act. We are
generally required to bear all of the expenses of all demand and piggyback
registrations, except underwriting discounts and commissions. We also have
agreed to indemnify those stockholders under the terms of the Registration
Rights Agreement.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any amendment to our certificate of incorporation must first be approved by
a majority of the board of directors and thereafter approved by a majority of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment.
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.
63
<PAGE> 69
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer Company.
64
<PAGE> 70
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, 19,567,556 shares of common stock will be outstanding,
assuming the issuance of an aggregate of 1,500,000 shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of February 29, 2000, and assumes no exercise of
outstanding options. The 3,000,000 shares sold in this offering and the
3,910,000 shares sold prior to this offering will be freely tradable without
restriction under the Securities Act. The remaining 12,657,556 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.
Certain of our stockholders who will own in the aggregate 2,287,071 shares
of common stock after the offering have entered into lock-up agreements
generally providing that they will not offer, pledge, sell, offer to sell,
contract to sell, sell any option or contract to purchase, purchase any option
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any of the shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common stock
owned by them, or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the common stock until April 20, 2000 without the prior written consent of
FleetBoston Robertson Stephens Inc. In addition, all of our executive officers,
directors and certain of our stockholders who will own in the aggregate
11,875,089 shares of common stock after the offering have entered into similar
lock-up agreements providing that they will not transfer their shares of common
stock for a period of 90 days after the date of this prospectus. 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 FleetBoston Robertson Stephens Inc.
FleetBoston 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, FleetBoston 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 lock-up periods, 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
65
<PAGE> 71
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.
At February 29, 2000 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 1,180,550 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 881,258
options were outstanding under the 1999 Stock Option and Grant Plan. We have
filed a registration statement 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 statement became 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 90-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, Summit Partners, Lazard Freres and certain other
stockholders will have rights with respect to 10,389,624 shares of common stock,
subject to the 90-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.
66
<PAGE> 72
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., Dain Rauscher
Incorporated, and U.S. Bancorp Piper Jaffray Inc. 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>
FleetBoston Robertson Stephens Inc..........................
Chase Securities Inc........................................
Dain Rauscher Incorporated..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total............................................. 3,000,000
=========
</TABLE>
The underwriters propose to offer the shares of common stock directly to
the public at the 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
public offering of the shares, the offering price and other selling terms may be
changed by the representatives of the underwriters.
Over-Allotment Option. 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 450,000 additional shares of common stock at the
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. Certain of our stockholders will be obligated, as
part of the option, to sell shares to the underwriters to the extent the option
is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of common stock
offered hereby.
The following table summarizes the compensation to be paid to the
underwriters by us and the selling stockholders:
<TABLE>
<CAPTION>
TOTAL
-----------------------
WITHOUT
PER OVER- WITH OVER-
SHARE ALLOTMENT ALLOTMENT
----- ---------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by us........ $ $ $
Underwriting discounts and commissions payable by the
selling stockholders...................................... $
</TABLE>
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $750,000.
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. Certain of our stockholders, who will own in the
aggregate 2,287,071 shares of common stock after the offering, have agreed that
they will not, without the prior written consent of FleetBoston 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 until April 20,
2000. In addition, all of our executive officers, directors and certain of our
stockholders who will own in the aggregate 11,875,089 shares of common stock
after the offering have entered into similar lock-up agreements providing that
they will not transfer their shares of common stock for a period of 90 days
after the date of this prospectus. We have agreed that we will not, without the
prior written consent of FleetBoston Robertson Stephens, offer, sell or
otherwise dispose of any
67
<PAGE> 73
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 90-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 FleetBoston Robertson Stephens, such
additional options shall not be exercisable during such period. FleetBoston
Robertson Stephens may release us or our stockholders from such restrictions at
anytime, in whole or in part, without notice.
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.
Passive Market Making. In connection with this offering and before the
commencement of offers or sales of the common stock, certain underwriters who
are qualified market makers on the Nasdaq National Market may engage in passive
market making transactions in the common stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act, during the
business day prior to the pricing of the offering. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security; if all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
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.
68
<PAGE> 74
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 report of PricewaterhouseCoopers
LLP on our financial statements for the fiscal year ended April 30, 1997 (the
last fiscal year audited by PricewaterhouseCoopers LLP) did not contain any
adverse opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all the information included in the
registration statement, parts of which have been omitted as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract or other document are not necessarily complete.
Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
The registration statement can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC.
69
<PAGE> 75
(This page intentionally left blank)
\
<PAGE> 76
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)
Equity.................................................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 77
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)
equity 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 auditing standards generally
accepted in the United States. 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
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 30, 1999, except as to
Note 14, as to which the date
is October 8, 1999
F-2
<PAGE> 78
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.
We have not audited any periods subsequent to 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.
/s/ PricewaterhouseCoopers LLP
Calgary, Alberta
June 20, 1997 except as to the last paragraph of Note 14,
as to which the date is October 8, 1999.
F-3
<PAGE> 79
MCK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
--------------------------- JANUARY 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................... $ 1,867,213 $ 3,284,984 $ 8,423,665
------------ ------------ ------------
Marketable securities.............................. -- -- 19,423,284
Accounts receivable (net of allowances of $150,000
at April 30, 1998, 179,560 at April 30, 1999 and
$194,958 at January 31, 2000)................... 1,893,036 3,350,389 5,203,275
Inventory.......................................... 756,746 1,493,641 2,293,255
Prepaids and other current assets.................. 294,445 213,025 1,239,713
------------ ------------ ------------
Total current assets............................ 4,811,440 8,342,039 36,583,192
Fixed assets, net.................................... 804,970 1,054,561 1,390,654
Other assets......................................... 48,915 31,843 20,593
------------ ------------ ------------
Total assets......................................... $ 5,665,325 $ 9,428,443 $ 37,994,439
============ ============ ============
LIABILITIES AND COMMON STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable................................... $ 485,014 $ 1,666,438 $ 2,765,420
Accrued liabilities................................ 474,947 693,005 1,042,786
Accrued compensation and benefits.................. 306,086 404,490 449,823
Borrowings under line of credit.................... -- -- 210,684
Deferred revenue................................... -- -- 112,086
------------ ------------ ------------
Total current liabilities....................... 1,266,047 2,763,933 4,580,799
Long-term debt....................................... 5,000,000 2,500,000 --
Redeemable preferred stock of subsidiary............. 2,293,333 2,490,280 --
Redeemable preferred stock........................... 15,244,755 21,010,759 --
Redeemable convertible preferred stock............... 1,911,111 4,703,751 --
Common stockholders' (deficit) equity:
Common stock, $.001 par value; Authorized --
25,000,000 at April 30, 1998 and 1999, and
40,000,000 at January 31, 2000: Issued and
outstanding -- 4,978,570 shares at April 30, 1998,
5,300,183 shares at April 30, 1999, and 18,061,754
shares at January 31, 2000......................... 4,979 5,300 18,062
Additional paid-in capital........................... 152,352 1,388,002 68,784,959
Accumulated deficit.................................. (19,901,160) (24,303,510) (28,603,541)
Deferred compensation................................ -- (805,652) (5,809,186)
Accumulated other comprehensive loss................. (155,290) (165,743) (224,819)
Notes receivable from officers....................... (150,802) (158,677) (751,835)
------------ ------------ ------------
Total common stockholders' (deficit) equity.......... (20,049,921) (24,040,280) 33,413,640
------------ ------------ ------------
Total liabilities and common stockholders' (deficit)
equity............................................. $ 5,665,325 $ 9,428,443 $ 37,994,439
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 80
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 5,920,645 $ 7,875,779 $14,269,603 $10,165,907 $16,762,505
Cost of goods sold................... 2,313,015 2,799,994 5,389,557 3,893,961 6,274,120
----------- ----------- ----------- ----------- -----------
Gross profit......................... 3,607,630 5,075,785 8,880,046 6,271,946 10,488,386
Operating expenses:
Research and development........... 814,664 1,757,524 3,348,608 2,401,055 3,433,494
Sales and marketing................ 1,145,265 2,191,182 3,888,537 2,701,648 4,993,914
General and administrative......... 607,106 1,484,812 1,616,620 1,153,643 1,777,629
Amortization of stock based
compensation..................... -- -- 406,000 247,600 3,459,980
Transaction-related charges........ 493,284 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses......... 3,060,319 5,433,518 9,259,765 6,503,946 13,665,017
----------- ----------- ----------- ----------- -----------
Income (loss) from operations........ 547,311 (357,733) (379,719) (232,000) (3,176,631)
Other (income) expense:
Interest expense................... 527,060 663,121 397,969 318,018 190,215
Interest income.................... (134,204) (144,888) (130,339) (98,676) (440,480)
Other (income) expense, net........ (50,337) 77,217 (60,267) 8,885 (8,237)
----------- ----------- ----------- ----------- -----------
Total other expense.............. 342,519 595,450 207,363 228,227 (258,501)
Income (loss) before provision for
income taxes and dividends on
redeemable preferred stock of
subsidiary......................... 204,792 (953,183) (587,082) (460,227) (2,918,130)
Provision for income taxes........... 302,109 -- -- -- --
Dividends on redeemable preferred
stock of subsidiary................ 133,333 160,000 196,947 143,692 96,563
----------- ----------- ----------- ----------- -----------
Net loss............................. (230,650) (1,113,183) (784,029) (603,919) (3,014,693)
Dividends on redeemable preferred
stock.............................. 1,010,557 1,220,000 1,965,921 1,458,022 1,285,338
----------- ----------- ----------- ----------- -----------
Loss applicable to common stock...... $(1,241,207) $(2,333,183) $(2,749,950) $(2,061,941) $(4,300,031)
=========== =========== =========== =========== ===========
Basic and diluted net loss per common
share.............................. $ (0.39) $ (0.67) $ (0.71) $ (0.54) $ (0.47)
=========== =========== =========== =========== ===========
Shares used in computing basic and
diluted net loss per common
share.............................. 3,188,152 3,476,282 3,881,526 3,814,543 9,078,711
=========== =========== =========== =========== ===========
Pro forma basic and diluted loss per
share.............................. $ (0.20) $ (0.18) $ (0.30)
Shares used in computing pro forma
basic and diluted loss per share... 12,012,167 11,764,572 14,547,220
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 81
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON
SHARES STOCK
COMPREHENSIVE OF AT ADDITIONAL
INCOME COMMON PAR PAID-IN ACCUMULATED DEFERRED
(LOSS) STOCK VALUE CAPITAL DEFICIT COMPENSATION
------------- ---------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1996.......... 1,000 $ 100 $ -- $ (207,533) $ --
Cancellation of old common stock... (1,000) (100) -- 100 --
Issuance of new common stock....... 3,108,373 3,108 -- (2,032) --
Dividends to Manz Development,
Inc.............................. -- -- -- (16,119,603) --
Dividends on preferred stock....... -- -- -- -- (1,010,557) --
Stock options exercised............ 214,929 215 1,470 -- --
Other.............................. -- -- -- 2,298 --
Net loss........................... $ (230,650) -- -- -- (230,650) --
----------- ---------- ------- ----------- ------------ -----------
Total comprehensive income
(loss)........................... $ (230,650) -- -- -- -- --
===========
Balance at April 30, 1997.......... 3,323,302 3,323 1,470 (17,567,977) --
Stock options exercised............ 117,090 118 1,618 -- --
Sale of restricted stock........... 1,538,178 1,538 149,264 -- --
Foreign currency translation
adjustment....................... $ (155,290) -- -- -- -- --
Dividends on preferred stock....... -- -- -- -- (1,220,000) --
Net loss........................... (1,113,183) -- -- -- (1,113,183) --
----------- ---------- ------- ----------- ------------ -----------
Total comprehensive income
(loss)........................... $(1,268,473) -- -- -- -- --
===========
Balance at April 30, 1998.......... 4,978,570 4,979 152,352 (19,901,160) --
Stock options exercised............ 241,288 241 16,203 -- --
Sale of restricted stock........... 114,750 115 11,135 -- --
Cancellation of restricted stock... (34,425) (35) (3,340) -- --
Foreign currency translation
adjustment....................... $ (10,453) -- -- -- -- --
Deferred compensation.............. 1,211,652 (1,211,652)
Amortization of deferred
compensation..................... 406,000
Dividends on preferred stock....... -- -- -- (1,965,921) --
Issuance of preferred stock in
exchange for redemption
premium.......................... -- -- -- (1,652,400) --
Net loss........................... (784,029) -- -- -- (784,029) --
----------- ---------- ------- ----------- ------------ -----------
Total comprehensive income
(loss)........................... $ (794,482) -- -- -- -- --
===========
Balance at April 30, 1999.......... 5,300,183 5,300 1,388,002 (24,303,510) (805,652)
Foreign currency translation
adjustment (unaudited)........... $ (59,076) -- -- -- -- --
Deferred compensation
(unaudited)...................... 8,463,514 (8,463,514)
Amortization of deferred
compensation (unaudited)......... 3,459,980
Sale of restricted stock
(unaudited)...................... 397,800 398 687,102 -- --
Dividends on preferred stock
(unaudited)...................... -- -- -- (1,285,338) --
Sale of common stock (unaudited)... 3,685,600 3,686 53,421,050 -- --
Stock options exercised
(unaudited)...................... 87,820 88 8,033 -- --
Conversion of Series B and D
Preferred Stock (unaudited)...... 8,677,210 8,677 4,907,937 -- --
Cancellation of restricted stock
(unaudited)...................... (86,859) (87) (90,679) -- --
Payment on notes receivable
(unaudited)...................... -- -- -- -- -- --
Net loss (unaudited)............... (3,014,693) -- -- -- (3,014,693) --
----------- ---------- ------- ----------- ------------ -----------
Total comprehensive income (loss)
(unaudited)...................... $(3,073,769) -- -- -- -- --
===========
Balance at January 31, 2000
(unaudited)...................... 18,061,754 $18,062 $68,784,959 $(28,603,541) $(5,809,186)
========== ======= =========== ============ ===========
<CAPTION>
TOTAL
ACCUMULATED NOTES COMMON
OTHER RECEIVABLES STOCKHOLDERS'
COMPREHENSIVE FROM (DEFICIT)
INCOME OFFICERS EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance at April 30, 1996.......... $ -- $ -- $ (207,433)
Cancellation of old common stock... -- -- --
Issuance of new common stock....... -- -- --
Dividends to Manz Development,
Inc.............................. -- -- (16,119,603)
Dividends on preferred stock....... -- -- (1,010,557)
Stock options exercised............ -- -- 2,761
Other.............................. -- -- 2,298
Net loss........................... -- -- (230,650)
--------- --------- ------------
Total comprehensive income
(loss)........................... -- -- --
Balance at April 30, 1997.......... -- -- (17,563,184)
Stock options exercised............ -- -- 1,736
Sale of restricted stock........... -- (150,802) --
Foreign currency translation
adjustment....................... (155,290) -- (155,290)
Dividends on preferred stock....... -- -- (1,220,000)
Net loss........................... -- -- (1,113,183)
--------- --------- ------------
Total comprehensive income
(loss)........................... -- -- --
Balance at April 30, 1998.......... (155,290) (150,802) (20,049,921)
Stock options exercised............ -- -- 16,444
Sale of restricted stock........... -- (11,250) --
Cancellation of restricted stock... -- 3,375 --
Foreign currency translation
adjustment....................... (10,453) -- (10,453)
Deferred compensation..............
Amortization of deferred
compensation..................... 406,000
Dividends on preferred stock....... -- -- (1,965,921)
Issuance of preferred stock in
exchange for redemption
premium.......................... -- -- (1,652,400)
Net loss........................... -- (784,029)
--------- --------- ------------
Total comprehensive income
(loss)........................... -- -- --
Balance at April 30, 1999.......... (165,743) (158,677) (24,040,280)
Foreign currency translation
adjustment (unaudited)........... (59,076) -- (59,076)
Deferred compensation
(unaudited)......................
Amortization of deferred
compensation (unaudited)......... 3,459,980
Sale of restricted stock
(unaudited)...................... -- (687,500) --
Dividends on preferred stock
(unaudited)...................... -- -- (1,285,338)
Sale of common stock (unaudited)... -- -- 53,424,736
Stock options exercised
(unaudited)...................... -- -- 8,121
Conversion of Series B and D
Preferred Stock (unaudited)...... -- -- 4,916,614
Cancellation of restricted stock
(unaudited)...................... -- 90,766 --
Payment on notes receivable
(unaudited)...................... -- 3,576 3,576
Net loss (unaudited)............... -- -- (3,014,693)
--------- --------- ------------
Total comprehensive income (loss)
(unaudited)...................... -- -- --
Balance at January 31, 2000
(unaudited)...................... $(224,819) $(751,835) $ 33,413,640
========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 82
MCK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss.............................................. $ (230,650) $(1,113,183) $ (784,029) $ (603,919) $ (3,014,693)
Depreciation and amortization......................... 160,075 230,342 393,977 298,841 549,826
Stock based compensation.............................. -- -- 406,000 247,600 3,459,980
Deferred income taxes................................. 22,593 (80,000) -- -- --
Dividends accrued on redeemable preferred stock of
subsidiary.......................................... 133,333 160,000 196,947 148,841 96,563
Transaction-related charges........................... 44,554 -- -- -- --
Change in operating assets and liabilities:
Accounts receivable................................. 712,364 (846,047) (1,457,353) (869,706) (1,852,886)
Inventory........................................... (222,271) 283,403 (736,895) (585,989) (799,614)
Prepaids and other current assets................... (943,093) 366,050 81,420 124,564 (1,026,688)
Accounts payable.................................... (373,529) 357,431 1,181,424 559,110 1,098,982
Accrued liabilities................................. 1,380 451,344 218,058 (65,046) 349,781
Accrued compensation and benefits................... (166,085) 272,666 98,404 (1,615) 45,333
Deferred revenue.................................... -- -- -- -- 112,086
------------ ----------- ----------- ----------- ------------
Net cash (used) provided by operating
activities..................................... (861,329) 82,006 (402,047) (747,319) (981,330)
Cash flows from investing activities:
Purchase of fixed assets.............................. (318,908) (565,526) (675,650) (470,192) (889,559)
Purchase of marketable securities..................... -- -- -- -- (19,423,284)
------------ ----------- ----------- ----------- ------------
Net cash (used) by investing activities........... (318,908) (565,526) (675,650) (470,192) (20,312,843)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of
issuance costs...................................... 15,000,000 -- 4,940,323 4,940,323 --
Dividends paid to Manz Development, Inc............... (14,119,603) -- -- -- --
Issuance (repayment) of subordinated debt............. 5,000,000 -- (2,500,000) (2,500,000) (2,500,000)
Payment of debt and equity issuance costs............. (297,382) -- -- -- --
Redemption of preferred stock......................... (500,000) -- -- -- (24,804,444)
Repayment of promissory note.......................... (1,166,667) -- -- -- --
Increase (decrease) in short-term borrowings.......... 390,684 (749,496) -- -- 210,684
Issuance of common stock, net......................... -- -- -- -- 53,566,798
Proceeds from exercise of stock options............... 2,761 1,736 16,444 2,514 8,121
------------ ----------- ----------- ----------- ------------
Net cash provided (used) by financing
activities..................................... 4,309,793 (747,760) 2,456,767 2,442,837 26,481,159
Effect of exchange rate changes on cash................. 97,909 (129,761) 38,701 4,430 (48,305)
------------ ----------- ----------- ----------- ------------
Net increase (decrease) in cash......................... 3,227,465 (1,361,041) 1,417,771 1,229,756 5,138,681
Cash and equivalents at beginning of period............. 789 3,228,254 1,867,213 1,867,213 3,284,984
------------ ----------- ----------- ----------- ------------
Cash and equivalents at end of period................... $ 3,228,254 $ 1,867,213 $ 3,284,984 $ 3,096,969 $ 8,423,665
============ =========== =========== =========== ============
Non-cash transactions:
Dividends on non-subsidiary preferred stock........... $ 931,215 $ 1,049,199 $ 1,782,309 $ 1,458,022 $ 1,285,338
Sale of restricted stock.............................. -- 150,802 7,875 7,875 596,734
Dividends to Manz Development, Inc.................... 2,212,675 330,801 380,559 286,641 193,025
Issuance of preferred stock in exchange for redemption
premium............................................. -- -- 1,652,400 1,652,400 --
Conversion of Series B and D redeemable preferred
stock to common stock............................... -- -- -- -- 4,916,614
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 83
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999 (AUDITED)
AND FOR THE NINE MONTH PERIODS ENDED JANUARY 31, 2000 AND 1999 (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> 84
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> 85
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 nine month periods ended January 31, 1999
and 2000 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 nine month period ended January 31, 2000 are not necessarily indicative
of results in future periods.
3. INVENTORY
Inventories consisted of:
<TABLE>
<CAPTION>
APRIL 30,
------------------------ JANUARY 31,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................. $ 230,888 $ 518,235 $1,002,210
Work-in-process................................ 382,211 780,584 931,379
Finished goods................................. 143,647 194,822 359,666
---------- ---------- ----------
$ 756,746 $1,493,641 $2,293,255
========== ========== ==========
</TABLE>
F-10
<PAGE> 86
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 nine months
ended January 31, 2000. Interest is charged at the bank's base rate (7.75% at
April 30, 1999 and 8.50 at January 31, 2000). 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 $586,694 (unaudited)
and $196,568 (unaudited) for the nine months ended January 31, 1999 and 2000,
respectively, associated with these credit agreements.
6. INCOME TAXES
Pre-tax income (loss) is summarized by country as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Canada................................................... $130,693 $(180,545) $(195,394)
United States............................................ 74,099 (772,638) (391,688)
-------- --------- ---------
Total.......................................... $204,792 $(953,183) $(587,082)
======== ========= =========
</TABLE>
F-11
<PAGE> 87
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Current:
Canada................................................... $246,041 $ 80,000 $ --
United States............................................ 25,194 -- --
-------- --------- ---------
271,235 80,000
--
Deferred:
Canada................................................... 30,874 (80,000) --
-------- --------- ---------
Total.......................................... $302,109 $ -- $ --
======== ========= =========
</TABLE>
The provision for income taxes differed from the amount computed by
applying the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate......... $ 71,677 $(333,614) $(205,479)
Tax loss with no current benefit......................... -- 330,104 187,943
Foreign tax differential................................. 12,573 (16,290) (12,214)
Non-deductible expenses.................................. 220,103 19,800 29,750
Other, net............................................... (2,244) -- --
-------- --------- ---------
Total.......................................... $302,109 $ -- $ --
======== ========= =========
</TABLE>
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals....................................... $ 201,000 $ 198,000
Tax credits................................................. 32,000 63,000
Net operating loss carryforward............................. -- 190,100
--------- ---------
Total deferred tax assets......................... 233,000 451,100
--------- ---------
Deferred tax liabilities:
Depreciation................................................ (14,000) (18,000)
Other....................................................... (15,000) (10,000)
--------- ---------
Total deferred tax liabilities.................... (29,000) (28,000)
--------- ---------
Valuation allowance......................................... (204,000) (423,100)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
The Company has incurred cumulative losses for the three year period ended
April 30, 1999. Consequently, the Company does not have an objective and
verifiable basis for concluding that it is more likely than not the Company will
generate taxable income in the foreseeable future. Accordingly, the Company has
provided a valuation allowance covering its net deferred tax asset.
At April 30, 1998 and 1999, the Company had $31,500 and $63,000 of Canadian
investment tax credits earned as a result of government incentive programs which
expire in 2008 and 2009 respectively and net operating loss carryforwards of
$518,600 which expire in 2019.
The Company paid income taxes of $264,000, $18,900 and $912 in 1997, 1998
and 1999, respectively.
F-12
<PAGE> 88
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
----------- -----------
<S> <C> <C>
Redeemable preferred stock:
Series A redeemable preferred stock, 13,333,333 and
14,985,733 shares issued (liquidation value of
$13,333,333 and $14,985,733, plus accrued dividends of
$1,986,113 and $3,373,199) at April 30, 1998 and 1999,
respectively........................................... $15,244,755 $18,284,241
Series C redeemable preferred stock, 28,505 shares issued
(liquidation value of $2,850,000 plus accrued dividends
of $256,356) at April 30, 1999......................... -- 2,726,518
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 and $490,280) at April 30, 1998 and 1999,
respectively........................................... 2,293,333 2,490,280
----------- -----------
Total............................................. $17,538,088 $23,501,039
=========== ===========
Redeemable convertible preferred stock:
Series B redeemable convertible preferred stock, 3,968,384
shares issued (liquidation value of $1,666,667 plus
accrued dividends of $244,444 and $408,567) at April
30, 1998 and 1999, respectively........................ $ 1,911,111 $ 2,075,234
Series D redeemable convertible preferred stock, 1,672,354
shares issued (liquidation value of $2,500,000 plus
accrued dividends of $158,356) at April 30, 1999....... -- 2,628,517
----------- -----------
Total............................................. $ 1,911,111 $ 4,703,751
=========== ===========
</TABLE>
Each share of preferred stock accrues daily dividends on a cumulative basis
at a rate of 8% per annum on their respective liquidation values. Total accrued
and unpaid dividends at April 30, 1998 and 1999 were $2,523,890 and $4,686,758,
respectively. The Series A, C and D preferred stock were recorded net of
$74,691, $29,838 and $29,839 of issuance costs, respectively. The Series E
preferred stock represents redeemable preferred stock in the Company's Canadian
subsidiary. All of the Series E preferred stock is owned by Manz Developments,
Inc. (MDI), the beneficial owners of which also own 3,108,373 shares of common
stock and 2,000,000 shares of Series A preferred stock of the Company.
Each share of Series A, C and E preferred stock, together with any accrued
and unpaid dividends, are to be redeemed by the Company in three equal
installments in June 2001, June 2002 and June 2003. Series A, C and E preferred
stock automatically redeem in the event of a change in ownership, and may also
be redeemed at the option of the holder after a qualified initial public
offering, as defined.
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
F-13
<PAGE> 89
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 1996
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 1996 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 1996 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 1996 Plan, at a
weighted average exercise price of $.0007, $.052 and $.046 per share,
respectively.
In August 1999, the Company adopted the 1999 Stock Option and Grant Plan
(the 1999 Plan). The 1999 Plan provides for the issuance of up to 3,060,000
shares of common stock of the Company as either incentive stock options or
non-qualified stock options. The 1999 Plan is administered by the Compensation
Committee of the Board of Directors. Options granted under the 1999 Plan
generally vest as to 25% of the underlying shares on the first anniversary of
the date of grant and ratably over the remaining twelve quarters and expire ten
years from the date of grant. At January 31, 1999, there were 28,703 options
exercisable under the 1999 Plan.
F-14
<PAGE> 90
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes option activity over the life of the 1996
Plan and 1999 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)....................................... 1,095,665 9.51
Exercised (unaudited)..................................... (87,820) 0.09
Canceled (unaudited)...................................... (88,876) 0.27
--------- -------
Outstanding at January 31, 2000 (unaudited)................. 1,890,611 $5.46
========= =======
</TABLE>
The following table presents certain information about options outstanding
as of January 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICE OPTIONS LIFE (YRS.) EXERCISABLE
- -------------- --------- ----------- -----------
<S> <C> <C> <C>
$ 0.0007 75,345 1.41 75,345
$ 0.098 601,242 3.22 223,741
$ 0.196 211,151 4.07 35,291
$ 1.634 318,240 4.37 29,835
$ 8.17 200,813 9.61 153
$12.75 192,570 9.68 11,250
$13.50 125,500 9.68 --
$16.00 2,000 9.71 2,000
$19.75 500 9.91 --
$22.50 129,250 9.92 --
$23.563 6,500 9.88 --
$28.625 15,000 9.85 --
$29.875 12,500 9.97 --
--------- -------
1,890,611 377,615
--------- -------
</TABLE>
The Company's stock plans are accounted for under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB No. 25). Under APB No. 25, no compensation expense is
recorded when the exercise price of options granted equals the market price of
the underlying stock on the date of grant. The Company recorded deferred
compensation charges of $1,211,652 and $8,463,514 related to stock options
granted below market exercise prices during the fiscal year ended April 30, 1999
and the nine months ended January 31, 2000, respectively. Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123), requires the Company to disclose, on a pro forma basis, the effect on net
income (loss) as if the Company had recorded compensation expense for its
stock-based compensation plans based on the fair value of the awards. On a pro
forma basis, net loss for 1999, 1998 and 1997 would have been approximately
$833,000,
F-15
<PAGE> 91
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$1,114,000, and $232,000, respectively and net loss per share would have not
differed materially from reported net loss per share.
However, the pro forma effect in 1997, 1998 and 1999 of expensing the
estimated fair value of stock options is not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options and stock purchase shares in future years.
The fair market value for these options was estimated at the date of grant
using the minimum value method and the following weighted-average assumptions
for options granted in 1997, 1998 and 1999: risk-free interest rate of 5.0%,
4.5% and 5.0%; a weighted-average expected life of the option of five years; and
no dividends. The weighted-average fair value of stock options granted in 1997,
1998 and 1999 was $0.02, $0.02 and $.45. The weighted average remaining
contractual life for those stock options outstanding at April 30, 1999 was 3.94
years. The options outstanding at April 30, 1999 have exercise prices ranging
from $0.0007 to $0.196 per share.
The Company issued 114,750 shares of restricted common stock having a fair
value of $0.98 per share in June 1998 and 1,538,178 shares of restricted common
stock having a fair value of $0.098 per share in January 1998 to certain
executives and a member of the Board of Directors in exchange for promissory
notes of $0.098 per share. The promissory notes are non-interest bearing to
employees insofar as the Company is required to reimburse the employees for any
interest on the promissory notes that is payable to the Company. The face value
of the promissory notes approximate their fair market value. Upon termination
for any reason other than for cause or in the event of the merger, consolidation
or sale of substantially all of the Company's assets or voting securities, the
Company must repurchase all the non-vested restricted stock of the executives at
the original issue price. If an executive is terminated for cause, the Company
must repurchase such executive's vested and non-vested restricted stock. The
Company has a right of first refusal prior to any transfer of restricted stock.
The restricted stock generally vests over four years and the promissory notes
have a five-year maturity. The outstanding balance of the promissory notes at
April 30, 1998 and 1999 is $150,802 and $158,677, respectively.
At April 30, 1999, the Company had reserved 9,694,912 shares of common
stock for issuance under the 1996 Stock Option Plan and upon conversion of the
Series B and D preferred stock.
9. EMPLOYEE SAVINGS PLANS
The Company maintains a retirement savings plan under section 401(k) of the
Internal Revenue Code. The plan covers substantially all U.S. employees and
allows participants to defer a portion of their annual compensation on a pre-tax
basis. The Company also maintains a Registered Retirement Savings Plan for its
Canadian employees which allows participants to defer a portion of their annual
compensation on a pre-tax basis. The Company made no contributions to either
plan during 1997, 1998 or 1999.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space in the United States and Canada under
non-cancelable operating leases. The Company's Canadian facility is leased from
Manz Developments, Inc., a related party. Rent expense under this arrangement
was approximately $96,000 in 1997 and 1998 and $99,000 in 1999. Total rent
expense under all operating leases for 1997, 1998 and 1999 was approximately
$96,000, $264,000 and $333,000, respectively. At April 30, 1999, future minimum
lease commitments were approximately $333,000 in 2000, $273,000 in 2001,
$207,000 in 2002 and $69,000 in 2003.
F-16
<PAGE> 92
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
NINE
PRO FORMA MONTHS
NINE MONTHS ENDED YEAR ENDED ENDED
YEARS ENDED APRIL 30, JANUARY 31, 2000 APRIL 30, JANUARY 31,
--------------------------------------- ------------------------- ----------- -----------
1997 1998 1999 1999 2000 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss................... $ (230,650) $(1,113,183) $ (784,029) $ (603,919) $ (3,014,693) $ (784,029) $(3,014,693)
Dividends on preferred
stock.................... 1,010,557 1,220,000 1,965,921 1,458,022 1,285,338 1,643,492(1) 1,285,338
----------- ----------- ----------- ----------- ------------ ----------- -----------
Numerator for basic and
diluted earnings per
share-income available to
common stockholders...... $(1,241,207) $(2,333,183) $(2,749,950) $(2,061,941) $ (4,300,031) $(2,427,521) 4,300,031
=========== =========== =========== =========== ============ =========== ===========
Denominator:
Denominator for basic and
diluted earnings per
share -- weighted-average
shares................... 3,188,152 3,476,282 3,881,526 3,814,543 9,078,711 12,012,167(2) 14,547,220
=========== =========== =========== =========== ============ =========== ===========
Basic and diluted earnings
(loss) per share........... $ (0.39) $ (0.67) $ (0.71) $ (0.54) $ (0.47) $ (0.20) $ (0.30)
=========== =========== =========== =========== ============ =========== ===========
</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>
NINE MONTHS
ENDED
YEAR ENDED APRIL 30, JANUARY 31,
------------------------ ---------------
1997 1998 1999 1999 2000
----- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options.............. 562 471 972 334 1,891
===== ===== ====== ===== ======
Shares of nonvested restricted stock............. -- 1,429 1,119 1,151 907
===== ===== ====== ===== ======
Shares potentially issuable upon conversion of
Series B and D preferred stock................. 7,205 8,565 14,413 8,658 --
===== ===== ====== ===== ======
</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> 93
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CORPORATE RESTRUCTURING
In June 1996, the Company completed a recapitalization. The
recapitalization consisted of the following major transactions:
1) Issued 3,968,384 shares of Series B redeemable convertible preferred
stock in the Company valued at $1,666,667 and 20,000 shares of Series E
redeemable preferred stock in its Canadian subsidiary valued at
$2,000,000 to MDI, the then sole shareholder of the Company.
2) Sold 13,333,333 shares of Series A redeemable preferred stock to an
outside investor for $13,333,333.
3) Arranged for the outside investor to purchase from MDI the 3,968,384
shares of Series B redeemable convertible preferred stock for
$1,666,667.
4) Obtained $5,000,000 of 12.5% subordinated promissory notes from the
outside investor.
5) Paid the following to MDI: $14,119,603 of dividends, $500,000 for
redemption of preferred stock and $1,166,667 for repayment of an
outstanding promissory note.
6) Incurred a transaction charge of $493,284, consisting of $448,730 of
employee stock options redeemed for cash and other charges of $44,554.
Subsequent to the series of transactions described above, the outside
investor, through ownership of 3,968,384 shares of Series B redeemable
convertible preferred stock, owned 66.1% of the Company, and MDI, through
ownership of 3,108,373 shares of common stock, owned 33.9% of the Company.
14. SUBSEQUENT EVENTS
On June 1, 1999, the Company increased its option pool for the 1996 Plan,
by 306,000 shares. Subsequent to the increase, the Company granted approximately
377,910 options to key employees.
On July 1, 1999, the Company entered into a financing agreement with a bank
to provide a $500,000 equipment line of credit. Under the terms of the
agreement, the Company can draw up to $500,000 through September 1999 to
purchase capital equipment. Drawings under the line are treated as a term loan
which is payable in 36 equal monthly installments of principal and interest. The
equipment line carries a rate of interest equal to the bank's base rate plus 50
basis points (8.5% at July 30, 1999). The Company has drawn approximately
$230,000 on the line in July.
On July 6, 1999, the Company granted 15,300 nonqualified stock options to
one of its Directors, Paul Severino, with an exercise price of $1.63 per share,
and on August 24, 1999, the Company issued 30,600 shares of common stock for an
aggregate purchase price of $250,000. These stock options and shares of common
stock were fully vested on the date of grant.
On July 12, 1999, the Company issued 374,850 shares of restricted common
stock to certain executives in exchange for promissory notes equal to $612,500
in the aggregate. The fair market value of the restricted common stock issued
was $11.25 per share.
On August 19, 1999, MCK Communications, Inc. ("MCK Delaware") was formed as
a Delaware Corporation. As a result of a migratory merger effected on October 5,
1999, MCK Communications, Inc. ("MCK Nevada"), a Nevada corporation, became a
wholly-owned subsidiary of MCK Delaware.
On September 21, 1999, the Company issued 22,950 shares of common stock to
one of its executive officers, Alfred F. Brisard, for an aggregate purchase
price of $75,000, and the Company granted 130,050 incentive stock options to Mr.
Brisard with an exercise price of $8.17 per share. The stock options vest as to
1/4 of the shares on the first anniversary of the grant date and 1/16th of the
shares quarterly thereafter.
On October 8, 1999, the Company completed a 1.53 to 1 stock split. Share
numbers for all periods presented have been adjusted to give effect to this
stock split.
F-18
<PAGE> 94
MCK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INITIAL PUBLIC OFFERING (UNAUDITED)
The Company completed its Initial Public Offering of 3,400,000 shares of
common stock in October 1999 raising approximately $49.5 million, net of
offering and distribution costs. MCK Communications, Inc. is listed on the
NASDAQ National Market under the symbol "MCKC."
Upon completion of the Initial Public Offering, the Company redeemed
14,985,733, 28,505, and 20,000 shares of Series A, Series C and Series E
Redeemable Preferred Stock, respectively. The aggregate redemption price for the
Series A, Series C and Series E preferred stock was $19,070,164, $3,147,487 and
$2,586,793, respectively. In addition, 3,968,384 shares of Series B Redeemable
Preferred Stock were converted into 6,102,195 shares of the Company's common
stock and 1,672,354 shares of Series D Redeemable Preferred Stock were converted
into 2,575,015 shares of the Company's common stock.
On November 22, 1999, the underwriters of the Initial Public Offering
exercised their over-allotment option and purchased an additional 255,000 shares
of the Company's common stock at the offering price of $16.00. The Company
received an additional $3,794,400, net of underwriting discounts and
commissions, in this transaction. Additionally, certain stockholders sold
255,000 shares of their stock in the Company. The Company did not receive any
proceeds on such sales by its stockholders.
F-19
<PAGE> 95
(This page intentionally left blank)
\
<PAGE> 96
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.
<PAGE> 97
[MCK COMMUNICATIONS LOGO]
<PAGE> 98
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........................................ $ 61,822
NASD Filing Fee............................................. 23,917
Nasdaq National Market Listing Fee.......................... 90,000
Accounting Fees and Expenses................................ 150,000
Legal Fees and Expenses..................................... 200,000
Printing Expenses........................................... 75,000
Blue Sky Qualification Fees and Expenses.................... 15,000
Transfer Agent's Fee........................................ 10,000
Miscellaneous............................................... 124,261
----------
Total.................................................. 750,000
==========
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our amended and restated certificate of incorporation provides
that no director of MCK Communications be personally liable to MCK
Communications, its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach of the director's
duty of loyalty to MCK Communications or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or repurchases, or (4) for any transaction from which the director
derived an improper personal benefit. In addition, the first amended and
restated certificate of incorporation provides that if the Delaware General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by MCK Communications of its officers and certain non-officer employees under
certain circumstances against expenses, including attorneys fees, judgments,
fines and amounts paid in settlement, reasonably incurred in connection with the
defense or settlement of any threatened, pending or completed legal proceeding
in which any such person is involved by reason of the fact that such person is
or was an officer or employee of the registrant if such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of MCK Communications, and, with respect to criminal actions
or proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful.
Under Section 7 of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions, MCK
Communications, its directors, certain officers and persons who control MCK
Communications within the meaning of the Securities Act against certain
liabilities.
II-1
<PAGE> 99
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant during the past three years.
Further included is the consideration, if any, received by the Registrant for
such shares, and information relating to the section of the Securities Act or
rule of the Securities and Exchange Commission under which exemption from
registration was claimed.
1. An aggregate of 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 January 2000, MCK Communications granted stock options
to purchase an aggregate of 2,840,340 shares of common stock to
directors, employees and consultants with exercise prices ranging from
$.001 to $29.88 per share pursuant to MCK Communications 1996 and 1999
Stock Option Plans. As of January 31, 2000, 661,126 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).
</TABLE>
II-2
<PAGE> 100
<TABLE>
<S> <C>
**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 Second Amended and Restated Certificate of Incorporation of the Registrant.
**3.2 First Amended and Restated By-laws of the Registrant.
**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.
10.18 Lease Agreement by and between Wellsford/Whitehall Holdings, L.L.C. and MCK Communications, Inc. dated
January 10, 2000.
**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.
***27.1 Financial Data Schedule.
</TABLE>
- ---------------
** Included in the Registrant's Registration Statement on Form S-1 (File No.
333-85821) and incorporated herein by reference.
II-3
<PAGE> 101
*** Previously filed.
+ Confidential treatment obtained as to portions of this exhibit. The
confidential information has been filed separately with the Securities and
Exchange Commission.
(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> 102
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 April 3, 2000.
MCK COMMUNICATIONS, INC.
By: /s/ PAUL K. ZURLO
------------------------------------
Paul K. Zurlo
Chief Financial 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>
* President, Chief Executive Officer and April 3, 2000
- --------------------------------------------------- Director (Principal Executive
Steven J. Benson Officer)
/s/ PAUL K. ZURLO Chief Financial Officer (Principal April 3, 2000
- --------------------------------------------------- Financial Officer and Principal
Paul K. Zurlo Accounting Officer)
* Director April 3, 2000
- ---------------------------------------------------
Calvin K. Manz
* Director April 3, 2000
- ---------------------------------------------------
John B. Landry
* Director April 3, 2000
- ---------------------------------------------------
Gregory M. Avis
* Director April 3, 2000
- ---------------------------------------------------
Michael H. Balmuth
* Director April 3, 2000
- ---------------------------------------------------
Paul Severino
By: /s/ PAUL K. ZURLO
----------------------------------------------
Paul K. Zurlo
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 103
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 Second Amended and Restated Certificate of Incorporation of
the Registrant.
**3.2 Form of First Amended and Restated By-laws of the
Registrant.
**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.
10.18 Lease Agreement by and between Wellsford/Whitehall Holdings,
L.L.C. and MCK Communications, Inc. dated January 10, 2000.
**16.1 Letter regarding change in certifying accountants
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- -------------------
<C> <S>
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.
***27.1 Financial Data Schedule.
</TABLE>
- ---------------
** Included in the Registrant's Registration Statement on Form S-1 (Filed No.
333-85821) and incorporated herein by reference.
*** Previously filed.
+ Confidential treatment obtained as to portions of this exhibit. The
confidential information has been filed separately with the Securities and
Exchange Commission.
<PAGE> 1
Exhibit 1.1
UNDERWRITING AGREEMENT
April __, 2000
FleetBoston Robertson Stephens Inc.
Chase Securities Inc.
Dain Rauscher Wessels Incorporated
U.S. Bancorp Piper Jaffray Inc.
c/o FleetBoston 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 1,500,000 shares of its Common
Stock, par value $.001 per share (the "Common Shares") and 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") severally propose to sell to the
Underwriters an aggregate of 1,500,000 Common Shares. The 1,500,000 Common
Shares to be sold by the Company and the 1,500,000 Common Shares to be sold by
the Selling Stockholders are collectively called the "Firm Shares." In addition,
the stockholders of the Company named in SCHEDULE B have severally granted to
the Underwriters an option to purchase up to an additional 450,000 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 450,000 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". FleetBoston Robertson
Stephens Inc. ("Robertson Stephens"), Chase Securities Inc., Dain Rauscher
Wessels Incorporated and U.S. Bancorp Piper Jaffray Inc. 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. 333-32090), which contains a form of prospectus to be used in
connection with the public offering and sale of the Shares. Each such
prospectus, subject to completion, used in connection with such public offering
(including any documents incorporated or deemed incorporated by reference
therein) is called a "preliminary prospectus." 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
<PAGE> 2
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 under the Securities Act and including any documents incorporated or
deemed incorporated by reference therein, 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", 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 (including any documents
incorporated or deemed incorporated by reference therein), is called the
"Prospectus". All references in this Agreement to the Registration Statement,
the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus, 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. Each
preliminary prospectus, as of its date, and the Prospectus, as amended or
supplemented, as of its date and at all subsequent times through the 30th day of
the date hereof, 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 except as contemplated by the Prospectus, 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 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 footnotes to the financial statements contained 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 or
those which will terminate in accordance with their terms upon closing of the
offering. 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
5
<PAGE> 6
herein contemplated nor the fulfillment of the terms hereof will conflict with,
result in a 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. For purposes of this
clause, the Underwriters agree to waive, solely with respect to the Shares to be
sold by the Company hereunder, the restrictions contained in Section 3(A)(l) of
that certain Underwriting Agreement dated October 21, 1999 among the Company,
certain selling stockholders named therein and FleetBoston Robertson Stephens
Inc.
(s) No Defaults or Violations. Excepts as described in the
Prospectus, 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
6
<PAGE> 7
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 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 including any documents incorporated or deemed incorporated by
reference therein (the "Incorporated Documents"); 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 or any Incorporated Document by the Securities Act or by
the Exchange Act or the rules and regulations of the Commission thereunder which
have not been accurately
7
<PAGE> 8
described in the Registration Statement or Prospectus or any Incorporated
Document in compliance in all material respects with the Securities Act or by
the Exchange Act or the rules and regulations of the Commission thereunder or
(ii) might reasonably be expected to result in any Material Adverse Change or
that might materially affect their properties, assets or rights.
(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 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 Selling Stockholder 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 true, accurate and complete copies
of all of the Lock-up Agreements presently in effect or effected hereby. The
Company hereby represents
8
<PAGE> 9
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 Robertson Stephens.
(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.
(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
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, severally and not jointly, 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
9
<PAGE> 10
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 Option Shares to
be sold by such Selling Stockholder on deposit with the Custodian are 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 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 First Closing Date and the Second Closing Date (as defined below) will
have, good and valid title to all of the Option 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 material
consent, approval, authorization or order of any court or governmental agency or
body is required
10
<PAGE> 11
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 material 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 have been complied with or 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 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
First Closing Date and the Second Closing Date (as defined below) will be, true,
correct, and complete in all material respects, and does not, and on the First
Closing Date and 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
in the Prospectus under the caption "Principal and Selling Stockholders" (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) 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
11
<PAGE> 12
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.
(l) Confirmation of Company Representations and Warranties.
Without having undertaken to determine independently the accuracy or
completeness of the information in the representation and warranties of the
Company contained herein or the information contained in the Registration
Statement, such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 1A hereof are
not true and correct, is familiar with the Registration Statement and the
Prospectus and has no knowledge of any material fact, condition or information
not disclosed in the Registration Statement or the Prospectus which has had or
may result in a Material Adverse Change, whether or not arising from
transactions in the ordinary course of business of the Company and its
subsidiaries, considered as one entity, and is not prompted to sell the Option
Shares to be sold by such Selling Stockholder by any information concerning the
Company which is not set forth in the Registration Statement and the Prospectus.
The information pertaining to such Selling Stockholder under the caption
"Principal and Selling Stockholders" in the Prospectus is complete and accurate
in all material respects.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. Upon the terms herein set forth, (i) the
Company agrees to issue and sell to the several Underwriters an aggregate of
1,500,000 Firm Shares and (ii) the Selling Stockholders agree to sell to the
several Underwriters an aggregate of 1,500,000 Firm Shares, each Selling
Stockholder severally agrees to sell the number of Firm Shares set forth
opposite such Selling Stockholders named on SCHEDULE B. On the basis of the
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 and the Selling
Stockholders 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.
12
<PAGE> 13
(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 Selling
Stockholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 450,000 Option Shares from 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)
each Selling Stockholder agrees, 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 bears to the total
number of Option Shares. The Representative may cancel the option 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 and the Selling Stockholders 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 First Closing Date (and, if applicable, 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.
Robertson Stephens, 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
13
<PAGE> 14
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.
(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 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 (ii) 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
14
<PAGE> 15
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 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
15
<PAGE> 16
and supplements thereto (including any documents incorporated or deemed
incorporated by reference therein) 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 Robertson Stephens 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.
(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 April __, 2001 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 Robertson Stephens, for a
period of 90 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 stock options and 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 stock
options and shares may be transferred except as provided in the Lock-up
Agreement during the period of 90 days from the date that the Registration
Statement is declared effective (the "Lock-Up Period") and the Company
16
<PAGE> 17
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
three 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, severally and not jointly, 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 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 Robertson Stephens. 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
17
<PAGE> 18
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 and the Selling
Stockholders 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:
(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 any
Incorporated Document 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,
(i) there shall not have been any Material Adverse Change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the
18
<PAGE> 19
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.
(ii) There shall not have occurred any downgrading, nor shall
any notice have been given or any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organized," as such term is defined
for purposes of Rule 436(g)(2) under the Act.
(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 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 Delaware General Corporation Law 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 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 Securities 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
19
<PAGE> 20
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 Securities 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 ten quarter period ended January 31, 2000 (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
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;
20
<PAGE> 21
(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 and the Incorporated Documents, when such
Incorporated Documents became effective or were filed with the
Commission, contained all material information required to be included
therein by the Securities Act or the Exchange Act and the applicable
rules and regulations of the Commission thereunder, as the case may be,
and in all material respects conformed to the requirements of the
Securities Act or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, 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 that is not disclosed in the Prospectus,
(e) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company or any of its subsidiaries that is not
disclosed in the Prospectus, 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.
(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. The Underwriters
hereby agree to waive the restrictions of the lock-up agreements executed by
Selling Stockholders with respect to the Firm Shares and Option Shares listed in
EXHIBIT A hereto when sold pursuant to this Agreement on the First Closing Date
and Second Closing Date, respectively.
(j) Opinion of Counsel for the Selling Stockholders. You shall
have received on the First Closing Date and the Second Closing Date, as the case
may be, the opinion of Hutchins, Wheeler & Dittmar, a Professional Corporation,
on behalf of the Summit Entities and McDermott, Will & Emery on behalf of the
other Selling Stockholders,
21
<PAGE> 22
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, 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 in any such opinion, representation or certificate so relied upon
shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel. Such counsel may also rely on the representations and
warranties of each Selling Stockholder contained in this Agreement.
(k) Selling Stockholders' Certificate. On the First Closing Date
and the Second Closing Date, as the case may be, 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.
(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.
22
<PAGE> 23
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.
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).
23
<PAGE> 24
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
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
24
<PAGE> 25
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
reasonable expenses (including the fees and disbursements of counsel chosen by
Robertson Stephens) as such expenses are 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, severally and not
jointly, 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, 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
25
<PAGE> 26
preparation thereof; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of such Selling Stockholders contained herein; or
(iv) in whole or in part upon any failure of such Selling Stockholders to
perform its 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 reasonable expenses (including the fees
and disbursements of counsel chosen by Robertson Stephens) as such expenses are
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 each Underwriter
and each person who controls such Underwriter agrees not to assert its rights to
indemnity against any Selling Stockholder pursuant to this Section 7(a) for
losses, claims, damages or liabilities, unless and until (i) such Underwriter or
controlling person has requested indemnification and reimbursement from the
Company for such losses, claims, damages or liabilities including any legal or
other expenses reasonably incurred) and (ii) the Company does not within 60 days
of the date of such request (A) agree in writing to indemnify such Underwriter
or controlling person and (B) reimburse in full such Underwriter or controlling
person for all such losses, claims, damages or liabilities (including legal and
other expenses) incurred. 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 Agreement
for each Selling Stockholder shall not exceed the amount equal to the initial
public offering price of the Option 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.
26
<PAGE> 27
(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 on the front of the Prospectus, in the table and in the first paragraph
and the second and sixth paragraphs under the caption "Underwriting" and as to
statements regarding Robertson Stephens, the fourth paragraph under the caption
"Shares Eligible for Future Sale" in the Prospectus; and the Underwriters
confirm that such statements are true and correct in all material respects.
(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 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
27
<PAGE> 28
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 (Robertson Stephens 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 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
28
<PAGE> 29
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 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, (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 and (iii) no Selling Stockholder shall be required
to contribute any amount in excess of the initial public offering price of the
Option Shares sold by such Selling Stockholder, less the underwriting discount,
as set forth on the cover page of the Prospectus. The Underwriters' obligations
in this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
29
<PAGE> 30
(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 5, 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
30
<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:
31
<PAGE> 32
If to the Representative:
FLEETBOSTON 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
Facsimile: (617) 824-1100
Attention: Michael H. Balmuth
With a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Facsimile: (617) 951-1295
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
32
<PAGE> 33
enforceability of any other Section, paragraph or provision hereof. If any
Section, 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 or the Second Closing Date,
as the case may be, 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
33
<PAGE> 34
as provided in Sections 5, 6, and 7 hereof, the Company or the Selling
Stockholders, or (ii) purchase the shares which the 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 First Closing Date or the Second
Closing Date, as the case may be, 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]
34
<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]
SELLING STOCKHOLDERS:
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
Its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
By:
--------------------------
Its: Attorney-in-fact for the Summit
Entities named in SCHEDULE B hereto
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:
--------------------------
Attorney-in-fact for the Summit Entities
named in SCHEDULE B hereto
35
<PAGE> 36
SUMMIT INVESTORS III, L.P.
By:
--------------------------
Attorney-in-fact for the Summit Entities
named in SCHEDULE B hereto
By:
--------------------------
Attorney-in-fact for the Selling
Stockholders (other than the Summit
Entities) named in SCHEDULE B hereto
36
<PAGE> 37
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
FLEETBOSTON ROBERTSON STEPHENS INC.
CHASE SECURITIES INC.
DAIN RAUSCHER WESSELS INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY FLEETBOSTON ROBERTSON STEPHENS INC.
By:
---------------------------------
Authorized Signatory
37
<PAGE> 38
SCHEDULE A
Number of
Firm Common Shares
Underwriters To be Purchased
FLEETBOSTON ROBERTSON STEPHENS INC..........................
CHASE SECURITIES INC........................................
DAIN RAUSCHER WESSELS INCORPORATED..........................
U.S. BANCORP PIPER JAFFRAY INC..............................
Total Underwriters (___)........................... 3,000,000
S-A
<PAGE> 39
SCHEDULE B
<TABLE>
<CAPTION>
Number of Maximum Number
Firm Shares of Option Shares to
Selling Stockholder to be Sold be Sold
<S> <C> <C>
Company 1,500,000 0
Summit Ventures IV, L.P. 594,370 211,413
Summit Subordinated Debt Fund IV, L.P. 26,978 9,594
Summit Investor III, L.P. 27,045 9,617
Lazard Freres & Co. LLC 234,243 83,317
FSC Corp. 27,953 9,942
The Yarmouth Trust 16,591 5,901
Michael Duran 559 199
Manz Development, Inc. 337,424 120,017
John B. Landry 7,780 0
Paul Severino 4,983 0
Steven Benson 105,899 0
Benson Family L.P. 14,535 0
Alfred J. Brisard 10,000 0
J. Robert Geiman 4,463 0
Paul Zurlo 18,472 0
Michael Williams 13,998 0
Patrick Curley 17,760 0
Jeffrey Dickerson 14,892 0
Gordon Bried 380 0
Connor Doyle 398 0
Juergen Giebler 5,000 0
Marnie Latour 1,300 0
Jennifer McAuliffe 765 0
David Milne 1,017 0
Tim Nolan 2,670 0
Shaun O'Brien 841 0
Herman Oothuysen 535 0
Alex Phillips 459 0
Mike Redding 4,590 0
Julian Saunders 670 0
</TABLE>
S-B
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C>
Bonnie Lynn Sefton 230 0
Jonathan Wenocur 3,200 0
-------------------- --------------------
Total: 3,000,000 450,000
==================== ====================
</TABLE>
A-C
<PAGE> 41
EXHIBIT A
LOCK-UP AGREEMENT
FleetBoston Robertson Stephens Inc.
As a Representative of the Several Underwriters
555 California Street, Suite 2600
San Francisco, California 94104
RE: MCK Communications, Inc. (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 (the "Representative") 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 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 90 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 prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
A-1
<PAGE> 42
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> 43
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 Communications
(Nevada), Inc. and 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
contained in or arising under any Exhibit to the Registration Statement
or otherwise known to us.
(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;
B-1
<PAGE> 44
(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, based upon conversations with the SEC,
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 Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial and statistical 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;
(xi) 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;
(xii) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of the Delaware
corporate law statutes relating to the Company are accurate and fairly
present the information required to be presented by the Securities Act;
(xiii) 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;
(xiv) 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 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
B-2
<PAGE> 45
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;
(xv) 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;
(xvi) 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;
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, 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 as the same may have been amended or waived.
(xviii) 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.
(xix) 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. To such counsel's knowledge, the Company has
not received any notice of infringement by the Company 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
B-3
<PAGE> 46
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.
B-4
<PAGE> 47
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
C-1
<PAGE> 48
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> 49
EXHIBIT E
[FORM OF SELLING STOCKHOLDER OPINION]
We are of opinion that:
(1) The Underwriting Agreement and a Power of Attorney and Custody
Agreement has been duly authorized by each Selling Stockholder that is not a
natural person, and duly executed and delivered by or on behalf of such Selling
Stockholder and are valid and binding agreements of such Selling Stockholder,
enforceable in accordance with their respective terms.
(2) Each Selling Stockholder has all necessary power and authority
to execute and deliver, and to perform its obligations under, the Underwriting
Agreement and the Power of Attorney and Custody Agreement and has full legal
right, power and authority to sell the Shares to be sold by such Selling
Stockholder pursuant to the Underwriting Agreement.
(3) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation by any Selling Stockholder of the transactions contemplated
in the Underwriting Agreement or the Power of Attorney and Custody Agreement,
except such as may have been obtained under the Securities Act and such as may
be required under the blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters.
(4) Assuming that the Underwriters are acquiring the Shares
without notice of any adverse claim within the meaning of Section 8-102 of the
Uniform Commercial Code as in effect in The Commonwealth of Massachusetts, upon
delivery of certificates for the Shares by or on behalf of each Selling
Stockholder to the Underwriters and payment therefor in accordance with the
Underwriting Agreement, the Underwriters will acquire all rights of the Selling
Stockholders in to such Shares, free and clear of any adverse claims.
E-1
<PAGE> 1
Ex. 5.1
April 3, 2000
MCK Communications, Inc.
313 Washington Street
Newton, MA 02458
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to MCK Communications,
Inc. (the "Company") in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
of a Registration Statement on Form S-1 (the "Registration Statement") relating
to 3,450,000 shares (including 450,000 shares to cover the over-allotment
option) of Common Stock, par value $.001 per share (the "Registration
Statement"), of which 1,500,000 shares may be sold by the Company (the "Company
Shares") and 1,950,000 shares may be sold by certain selling stockholders (the
"Selling Stockholder Shares"), to be sold to the several underwriters (the
"Underwriters"), of which FleetBoston Robertson Stephens Inc., Chase Securities
Inc., Dain Rauscher Incorporated and U.S. Bancorp Piper Jaffray Inc., are the
representatives (the "Representatives"), pursuant to an Underwriting Agreement
(the "Underwriting Agreement") to be entered into between the Company and the
Representatives of the Underwriters.
As counsel for the Company, we have examined the form of the proposed
Underwriting Agreement being filed as an exhibit to the Registration Statement,
the Company's Amended and Restated Certificate of Incorporation, as amended, and
the Company's Amended and Restated By-laws, each as presently in effect, and
such records, certificates and other documents of the Company as we have deemed
necessary or appropriate for the purpose of this opinion.
Based on the foregoing, we are of the opinion that (A) when (i) the
Underwriting Agreement is completed (including the insertion therein of pricing
terms) and executed by the Company and on behalf of the Underwriters, and (ii)
the Company Shares are sold to the Underwriters and paid for pursuant to the
terms of the Underwriting Agreement, the Company Shares will be duly authorized,
legally issued, fully paid and non-assessable by the Company under the General
Corporation Law of the State of Delaware, the applicable provisions of the
Delaware Constitution and the reported judicial decisions interpreting
<PAGE> 2
MCK Communications, Inc.
April 3, 2000
Page 2
those laws ("Delaware Corporate Law"), and (B) the Selling Stockholder Shares
are duly authorized, legally issued, fully paid and non assessable by the
Company under Delaware Corporate Law.
We hereby consent to being named as counsel to the Company in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters," and to the inclusion of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
McDermott, Will & Emery
<PAGE> 1
EXHIBIT 10.18
LEASE
BY AND BETWEEN
WELLSFORD/WHITEHALL HOLDINGS, L.L.C.
("LANDLORD")
AND
MCK COMMUNICATIONS, INC.
("TENANT")
CUTLER LAKE CORPORATE CENTER
117 KENDRICK STREET
NEEDHAM, MASSACHUSETTS
<PAGE> 2
TABLE OF CONTENTS
1. TERMS...................................................................8
1.1 PREMISES.......................................................8
1.2 TENANT'S SHARE.................................................8
1.3 LEASE TERM.....................................................8
1.4 COMMENCEMENT DATE..............................................9
1.5 RENT...........................................................9
1.6 ADDITIONAL RENT...............................................10
1.7 NOTICE AND PAYMENT ADDRESSES..................................10
1.8 RENT PAYMENT ADDRESS..........................................11
1.9 LEASE YEAR....................................................11
2. PAYMENT OF RENT & ADDITIONAL RENT......................................12
3. SECURITY DEPOSIT.......................................................12
3.1 SECURITY DEPOSIT..............................................12
3.2 INTENTIONALLY DELETED.........................................15
3.3 NO SEPARATE ACCOUNT...........................................15
4. USES; TENANT COVENANTS.................................................15
4.1 PERMITTED USE.................................................15
4.2 OTHER GENERAL USE COVENANTS...................................15
5. ENVIRONMENTAL PROVISIONS; RECYCLING....................................16
5.1 GENERAL.......................................................16
5.2 TENANT'S WARRANTIES AND COVENANTS.............................17
5.3 PERMITTED MATERIALS...........................................19
5.4 LANDLORD'S COVENANTS..........................................19
5.5 RECYCLING REGULATIONS.........................................20
6. LATE CHARGES; INTEREST.................................................20
6.1 LATE CHARGE...................................................20
6.2 INTEREST......................................................21
7. REPAIRS AND MAINTENANCE................................................21
7.1 LANDLORD'S RESPONSIBILITIES...................................21
7.2 TENANT'S RESPONSIBILITIES.....................................21
7.3 NOTIFICATION REQUIREMENTS.....................................22
7.4 EXPENSES......................................................22
2
<PAGE> 3
8. UTILITIES AND SERVICES.................................................22
8.1 HOURS OF SERVICE..............................................22
8.2 ADDITIONAL HVAC SERVICE.......................................23
8.3 ADDITIONAL PROVISIONS.........................................23
8.4 MEASUREMENT OF TENANT'S ELECTRICAL CONSUMPTION................24
8.5 INTERRUPTION IN SERVICES......................................24
8.6 YEAR 2000 COMPLIANCE..........................................24
9. COSTS OF ELECTRICITY AND EXPENSE INCREASES.............................25
9.1 DEFINED.......................................................25
9.2 BASE YEAR.....................................................25
9.3 ESTIMATED PAYMENTS............................................25
9.4 ANNUAL RECONCILIATION.........................................26
9.5 OPERATING COSTS...............................................26
9.6 EXCLUSIONS....................................................29
9.7 FURTHER ADJUSTMENT............................................30
9.8 INTENTIONALLY DELETED.........................................30
10. INCREASES IN REAL ESTATE TAXES.........................................30
10.1 DEFINED.......................................................30
10.2 BASE YEAR.....................................................31
10.3 ESTIMATED PAYMENTS............................................31
10.4 ANNUAL RECONCILIATION.........................................31
10.5 REAL ESTATE TAXES.............................................31
10.7 SEPARATE TAX LOT..............................................32
11. ADDITIONAL PROVISIONS; OPERATING COSTS AND REAL ESTATE TAXES
......................................................................32
11.1 PARTIAL YEAR; END OF TERM.....................................32
11.2 OTHER TAXES...................................................32
11.3 TIMING OF ESTIMATES...........................................32
11.4 TENANT'S RIGHT OF REVIEW......................................33
12. TENANT'S INSURANCE.....................................................33
12.1 COVERAGE REQUIREMENTS.........................................33
12.2 RATING; CERTIFICATES; CANCELLATION............................34
13. LANDLORD'S INSURANCE...................................................34
3
<PAGE> 4
14. DAMAGE OR DESTRUCTION..................................................35
14.1 DAMAGE REPAIR.................................................35
14.2 TERMINATION FOR MATERIAL OR UNINSURED DAMAGES.................36
14.3 BUSINESS INTERRUPTION.........................................36
14.4 REPAIRS.......................................................36
14.5 END OF TERM CASUALTY..........................................37
14.6 RELOCATION TO INTERIM SPACE...................................37
15. MACHINES AND EQUIPMENT; ALTERATIONS AND ADDITIONS: REMOVAL
OF FIXTURES............................................................38
15.1 FLOOR LOAD, AND EXCESSIVE NOISE, VIBRATION,
AND ELECTRICAL USAGE..........................................38
15.2 ALTERATIONS - GENERALLY.......................................38
15.3 REMOVAL OF ALTERATIONS........................................39
15.4 ADDITIONAL COVENANTS REGARDING ALTERATIONS....................39
16. ACCEPTANCE OF PREMISES.................................................41
17. TENANT IMPROVEMENTS....................................................41
18. ACCESS.................................................................41
19. MUTUAL WAIVER OF CLAIMS AND SUBROGATION................................42
19.1 TENANT........................................................42
19.2 LANDLORD......................................................42
19.3 CARRIERS......................................................42
20. INDEMNIFICATION........................................................42
20.1 TENANT'S INDEMNITY............................................42
20.2 LANDLORD'S INDEMNITY..........................................43
21. ASSIGNMENT AND SUBLETTING..............................................43
21.1 CONSENT REQUIRED..............................................43
21.2 PROCEDURE.....................................................43
21.3 CONDITIONS....................................................44
21.4 AFFILIATED ENTITY; SALE OF BUSINESS...........................45
21.5. RIGHT OF TERMINATION..........................................46
22. ADVERTISING............................................................47
22.1 GENERALLY.....................................................47
22.2 SIGNAGE PROGRAM/PERMITTED SIGNAGE.............................47
23. LIENS. ...............................................................47
4
<PAGE> 5
24. DEFAULT................................................................48
24.1 TENANT'S DEFAULT..............................................48
24.2 REMEDIES......................................................49
25. SUBORDINATION..........................................................52
26. SURRENDER OF POSSESSION................................................53
27. NON-WAIVER.............................................................53
28. HOLDOVER...............................................................53
29. CONDEMNATION...........................................................54
29.1 DEFINITIONS...................................................54
29.2 TAKING........................................................54
29.3 AWARD.........................................................55
29.4 MORTGAGEE RIGHTS..............................................56
30. NOTICES................................................................56
31. MORTGAGEE PROTECTION...................................................56
32. COSTS AND ATTORNEYS' FEES..............................................57
33. BROKERS................................................................57
34. LANDLORD'S LIABILITY AND DEFAULT.......................................58
34.1 NO PERSONAL LIABILITY.........................................58
34.2 NOTICE AND CURE...............................................58
34.3 RIGHTS AND REMEDIES - GENERALLY...............................58
34.4 TENANT'S RIGHT TO PERFORM LANDLORD'S OBLIGATIONS
AFTER A DEFAULT BY LANDLORD...................................59
35. ESTOPPEL CERTIFICATES..................................................59
36. FINANCIAL STATEMENTS...................................................60
37. TRANSFER OF LANDLORD'S INTEREST........................................60
38. RIGHT TO PERFORM.......................................................60
39. INTENTIONALLY DELETED..................................................61
40. SALES AND AUCTIONS.....................................................61
5
<PAGE> 6
41. NO ACCESS TO ROOF......................................................61
42. SECURITY...............................................................62
43. AUTHORITY OF TENANT AND LANDLORD.......................................62
44. NO ACCORD OR SATISFACTION..............................................62
45. INTENTIONALLY DELETED..................................................62
46. PARKING................................................................62
47. GENERAL PROVISIONS.....................................................63
47.1 ACCEPTANCE....................................................63
47.2 JOINT OBLIGATION..............................................63
47.3 MARGINAL HEADINGS, ETC........................................63
47.4 CHOICE OF LAW.................................................63
47.5 SUCCESSORS AND ASSIGNS........................................63
47.6 RECORDATION...................................................63
47.7 QUIET POSSESSION..............................................64
47.8 INABILITY TO PERFORM; FORCE MAJEURE...........................64
47.9 PARTIAL INVALIDITY............................................64
47.10 CUMULATIVE REMEDIES...........................................64
47.11 ENTIRE AGREEMENT..............................................64
47.12 SURVIVAL......................................................64
47.13 CONSENTS......................................................64
47.14 SAVING CLAUSE.................................................65
47.15 RESERVATION...................................................65
47.16 KEYS..........................................................65
47.17 RULE AGAINST PERPETUITIES.....................................65
47.18 CERTAIN TERMINOLOGY...........................................66
48. INTENTIONALLY DELETED. ...............................................66
49. WAIVER OF JURY TRIAL...................................................66
50. ROOF RIGHTS............................................................66
50.1 GENERALLY.....................................................66
50.2 INSURANCE PREMIUMS............................................67
50.3 NO REPRESENTATIONS............................................67
50.4 COMPLIANCE WITH LEGAL REQUIREMENTS............................67
50.5 ADDITIONAL COVENANTS..........................................67
6
<PAGE> 7
51. EXTENSION OPTION.......................................................68
51.1 GENERAL.......................................................68
51.2 TERMS.........................................................68
51.3 THREE APPRAISER METHOD........................................68
51.4 DOCUMENTATION. ...............................................69
52. RIGHT OF FIRST OFFER...................................................69
53. ADDITIONAL SCHEDULES...................................................73
EXHIBIT A-1 Location and Dimensions of Premises
EXHIBIT A-2 Legal Description of Land
EXHIBIT B Declaration of Lease Commencement
EXHIBIT C Construction Exhibit
EXHIBIT D Approved Form of Letter of Credit
EXHIBIT E Rules and Regulations
EXHIBIT F Janitorial Specifications
EXHIBIT G Form Estoppel Certificate
EXHIBIT H Form of Subordination, Non-Disturbance and Attornment Agreement
7
<PAGE> 8
LEASE
THIS LEASE is made this ______ day of January, 2000, by and between
WELLSFORD/WHITEHALL HOLDINGS, L.L.C., a Delaware limited liability company
("Landlord") with a mailing address of c/o Wellsford Commercial Properties
Trust, 79 Milk Street, Boston, MA 02109, and MCK Communications, Inc., a
Delaware corporation ("Tenant") with a mailing address of 313 Washington Street,
Newton, Massachusetts 02458.
R E C I T A L S:
Landlord, for and in consideration of the rents and all other charges
and payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, grants and conveys to
Tenant, and Tenant hereby hires and takes from Landlord, a leasehold interest in
the premises described below (the "Premises"), subject to all matters
hereinafter set forth and upon and subject to the covenants, agreements, terms,
provisions and conditions of this Lease for the term hereinafter stated.
NOW THEREFORE Landlord and Tenant hereby agree to the following:
1. TERMS.
1.1 PREMISES. The Premises demised by this Lease are 32,665 rentable
square feet of the building located at 117 Kendrick Street, Needham,
Massachusetts (the "Building"), together with a nonexclusive right to use
parking and other common areas. The land upon which the Building is situated,
which is described in EXHIBIT A-2 attached hereto and incorporated herein by
reference, shall be referred to hereinafter as the "Land". The location and
dimensions of the Premises are shown on EXHIBIT A-1, attached hereto and
incorporated herein by reference. No easement for light or air is incorporated
in the Premises. The rentable area of the Building is 212,227 square feet and
Landlord and Tenant hereby stipulate that the rentable area of the Building and
Premises are as set forth herein.
1.2 TENANT'S SHARE. "Tenant's Share" shall mean a fraction, the
numerator of which is the total rentable square footage of the Premises, and the
denominator of which is the total rentable square footage of the Building.
Tenant's Share as of the date of execution of this Lease is fifteen and 39/100
percent (15.39%), (calculated as 32,665/212,227). Tenant's Share shall be
adjusted for changes in the total rentable square footage of the Premises and/or
Building, including without limitation changes which may result from any
condemnation or other taking of a portion of the Building.
1.3 LEASE TERM. The term of this Lease (the "Term" or "Lease Term")
shall commence on the Commencement Date, as defined in Section 1.4, below (and
as more fully set forth in EXHIBIT C hereto), and shall expire eighty-four (84)
months thereafter (the "Lease Expiration Date"); provided that if the
Commencement Date is a date other than the first day of a calendar month, the
8
<PAGE> 9
Lease Term shall commence on the Commencement Date and run for the number of
months set forth above beginning on the first day of the first calendar month
following the Commencement Date.
1.4 COMMENCEMENT DATE. The "Commencement Date" shall be the date upon
which Landlord's Work (as defined in EXHIBIT C) is Substantially Complete (as
defined in EXHIBIT C), provided, however, that if as part of Landlord's Work,
Landlord has not on or before March 15, 2000 (subject to Tenant Delays) laid
down a sufficient amount of carpeting, in Landlord's reasonable judgment, to
enable Tenant to commence Tenant's Work (as defined in EXHIBIT C) and to
prosecute such work continuously to completion on or before April 1, 2000 (the
"Delivery Date"), the Commencement Date shall be no earlier than May 1, 2000.
Occupancy of the Premises by Tenant prior to the Commencement Date
shall be at Tenant's sole risk and deemed pursuant to, and subject to, all of
the terms and provisions of this Lease, including the payment of Base Rent,
Costs of Electricity, and Tenant's Share of Expense Increases and Tax Increases
(as such terms are hereinafter defined), except as may otherwise be expressly
set forth herein; provided, however, that except as may be set forth in EXHIBIT
C hereto, Tenant shall not be entitled to take occupancy of the Premises or any
portion thereof prior to the date it receives notice from Landlord that
Landlord's Work is Substantially Complete.
Subject to Force Majeure and Tenant Delays, Landlord will use all
reasonable and diligent efforts to achieve Substantial Completion of Landlord's
Work on or before the Delivery Date. Subject to Force Majeure, in the event that
the Commencement Date, as established hereby and pursuant to the operation of
the provisions of EXHIBIT C regarding Tenant Delays, occurs after the Delivery
Date, Tenant's Rent (as defined in Section 1.5 below) hereunder shall abate by
one (1) day for each day that the Commencement Date follows the Delivery Date.
Notwithstanding the foregoing, in the event Substantial Completion shall not
have occurred on or prior to that day which is six (6) months after the
execution hereof, subject to an additional period of up to three (3) months if
Substantial Completion is delayed by the occurrence of one or more events of
Force Majeure (the "Outside Delivery Date"), Tenant shall be permitted to
terminate this Lease by written notice given to Landlord within ten (10) days
after the Outside Delivery Date. If such notice is not so given, Tenant's right
to so terminate this Lease shall be deemed to have been waived.
Landlord and Tenant hereby agree to execute a Declaration, in the form
attached hereto as EXHIBIT B, to confirm the Commencement Date. Tenant's failure
to execute said Declaration shall not affect the Commencement Date or the Lease
Expiration Date, as same are determined by the terms of this Lease.
Notwithstanding the foregoing provisions of this Section 1.4, for purposes of
this Lease, the term "Commencement Date" shall also mean any adjusted
Commencement Date which may be established pursuant to the operation of the
provisions of EXHIBIT C to this Lease.
1.5 RENT. The base rent payable by Tenant hereunder ("Base Rent") is
set forth in this Section 1.5, below. In addition to the Base Rent, Tenant shall
pay Costs of Electricity (as described in Section 8.4), Tenant's Share of
Expense Increases (as described in Section 9) and Tax Increases (as described in
Section 10), and any other increases in Base Rent described in this Section 1.5,
below, all of which shall be deemed additional rent due under this Lease. The
combination of Base Rent and additional rent as described in this Section 1.5 is
sometimes collectively referred to in this
9
<PAGE> 10
Lease as "Rent". Except as otherwise expressly provided in this Lease, Base Rent
shall be payable monthly, in advance, on first day of each calendar month of the
Term, without prior notice, demand, deduction or offset. If the Commencement
Date begins on a date other than the first day of a calendar month or the Term
ends on a day other than the last day of the calendar month, Rent for such month
shall be prorated based on the number of days in the calendar month included in
the Term.
1.5.1 The monthly payments of Base Rent for the Premises
(which may be referred to herein as "Monthly Rent") shall be as follows:
ANNUAL BASE RENT
MONTHS PER SQUARE FOOT ANNUAL BASE RENT MONTHLY BASE RENT
- ------ --------------- ---------------- -----------------
1-60 $26.95 $880,321.75 $73,360.15
61-84 $27.95 $912,986.75 $76,082.23
1.6 ADDITIONAL RENT. Any sum owed or reimbursable by Tenant to Landlord
under this Lease (excluding monthly Base Rent) shall be considered "additional
rent" hereunder, and, except for items of additional rent for which demand is
required pursuant to the express terms of this Lease, shall be payable without
demand, set-off or deduction, except as otherwise expressly provided in this
Lease. The items of additional rent described in Section 1.5, above, shall be
payable monthly, in advance, on first day of each calendar month of the Term,
together with Tenant's monthly Base Rent payment.
1.7 NOTICE AND PAYMENT ADDRESSES. Any notices under this Lease shall be
governed by the terms of Section 30, below. The notice addresses of the parties
are as follows:
If to Landlord: c/o Wellsford Commercial Properties Trust
79 Milk Street
Boston, Massachusetts 02110
Attention: Boston Hub Chief Operating Officer
with a copy to:
Wellsford/Whitehall Holdings, L.L.C.
c/o Wellsford Commercial Properties Trust
Chatham Executive Center
26 Main Street, First Floor
Chatham, New Jersey 07928
Attention: General Counsel
and:
10
<PAGE> 11
Wellsford/Whitehall Holdings, L.L.C.
c/o Wellsford Real Properties, Inc.
535 Madison Avenue, 26th Floor
New York, New York 10022
Attention: Mr. Edward Lowenthal
and:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Robert F. Houser, P.C.
If to Tenant: MCK Communications, Inc.
313 Washington Street
Newton, Massachusetts 02458
Attention: Paul Zurlo, Chief Financial Officer
(Pre-Commencement Date Only)
with a copy to:
McDermott Will & Emery
28 State Street
Boston, Massachusetts 02109
Attention: Peter Friedenberg, Esq.
Notwithstanding the foregoing, the notice address of Tenant shall be at the
Premises on and after the Commencement Date. Either party may, upon ten (10)
days prior written notice to the other, designate a new address to which all
notices hereunder shall be directed.
1.8 RENT PAYMENT ADDRESS. Tenant shall send payments of Base Rent and
additional rent hereunder to Landlord at the following address:
Northeast Real Estate Services
7/57 Wells Avenue
Newton, Massachusetts 02459
Attention: Don Casey
Landlord may, upon ten (10) days prior written notice to Tenant, designate a new
address to which all payments of Base Rent and additional rent hereunder shall
be sent.
1.9 LEASE YEAR. Each twelve (12) month period within the Lease Term
shall be referred to herein as a "Lease Year." The first Lease Year shall
commence on the Commencement Date and terminate on the last day of the twelfth
full calendar month after such Commencement Date. Each
11
<PAGE> 12
subsequent Lease Year shall commence on the date immediately following the last
day of the preceding Lease Year and shall continue for a period of twelve (12)
full calendar months, except that the last Lease Year of the Lease Term shall
terminate on the date this Lease expires or is otherwise terminated.
2. PAYMENT OF RENT & ADDITIONAL RENT.
Tenant shall pay Landlord the Rent due under this Lease in lawful money
of the United States. Rent (including any monthly estimated payments for Costs
of Electricity and Tenant's Share of Expense Increases and Tax Increases payable
in accordance with this Lease) shall be paid in advance on or before the first
day of each month, at the address noted in Section 1.8, or to such other party
or at such other place as Landlord may hereafter from time to time designate in
writing. Rent under this Lease for any partial month at the beginning of the
Lease Term shall be prorated based on the Rent in effect for the first month in
which Rent is payable hereunder. All other payments due under this Lease shall
be paid no later than thirty (30) days after the date Landlord provides Tenant
with a written request for payment which sets forth the amount due. In the event
of any dispute concerning the computation of the amount of any additional rent
due, Tenant shall pay the amount specified by Landlord pending the resolution of
the dispute, provided such payment shall be without prejudice to Tenant's right
to continue to challenge the disputed computation. In the event that Tenant
successfully challenges the disputed computation, Landlord shall refund to
Tenant the amount of any overpayment of such additional rent within thirty (30)
days after the dispute is finally resolved, together with interest at the rate
of 5% per annum calculated from the date upon which Tenant made the overpayment
to Landlord until the date such amount is paid by Landlord to Tenant.
3. SECURITY DEPOSIT
3.1 SECURITY DEPOSIT.
(a) Simultaneously with the execution of this Lease by Tenant,
Tenant shall deliver to Landlord a security deposit in an amount equal to One
Million Twenty-Four Thousand and 00/100 Dollars ($1,024,000.00), in the form of
an irrevocable and unconditional standby Letter of Credit (as defined below), in
accordance with the requirements more fully set forth in Section 3.1(b), below
(the "Security Deposit"). The Security Deposit shall constitute security for
payment of Base Rent and additional rent and for the performance of any and all
other covenants, agreements and obligations of Tenant under this Lease. If
Tenant defaults (and such default continues beyond any applicable notice and
cure periods) with respect to any covenant or condition of this Lease, including
but not limited to the payment of Base Rent, additional rent or any other
payment due under this Lease, and the obligation of Tenant to maintain the
Premises and deliver possession thereof back to Landlord at the expiration or
earlier termination of the Lease Term in the condition required herein, then
Landlord may (without any waiver of Tenant's default being deemed to have
occurred) draw upon the Letter of Credit and apply all or any part of the
proceeds thereof to the payment of any sum in default, or any other sum which
Landlord may be required or deem necessary to spend or incur by reason of
Tenant's default, or to satisfy in part or in whole any damages suffered by
Landlord as a result of Tenant's default. In the event of such application,
Tenant shall promptly deposit with Landlord in the form of an additional letter
of credit the amount necessary to restore the Security
12
<PAGE> 13
Deposit to the full amount set forth above. Notwithstanding the foregoing to the
contrary, Landlord shall be entitled to draw upon the Letter of Credit prior to
the expiration of any applicable notice and grace periods afforded to Tenant
hereunder if the Letter of Credit shall expire prior to the expiration of any
such applicable notice and grace periods. The parties expressly acknowledge and
agree that the Security Deposit is not an advance payment of Base Rent or
additional rent, nor a measure of Landlord's damages in the event of any default
by Tenant. If Tenant shall fully and faithfully comply with all the terms,
provisions, covenants, and conditions of this Lease, the Letter of Credit shall
be returned to Tenant for cancellation within thirty (30) days after all of the
following have taken place: (a) expiration of the Lease Term or earlier
termination of the Lease; (b) removal of Tenant's property from the Premises;
and (c) the surrender of the Premises and vacation thereof by Tenant to Landlord
in accordance with this Lease. Landlord shall transfer the Security Deposit to
any transferee of the Building or Landlord's interest therein, and thereafter
such transferee shall be liable for the return of the Security Deposit, and
Landlord shall be released from all liability for the return thereof, subject to
such transferee's acceptance of the Security Deposit and assumption of the
liability therefor.
(b) The letter(s) of credit to be delivered by Tenant to
Landlord under Section 3.1(a), above (the "Letter of Credit"), shall be (i) in
form and substance satisfactory to Landlord in its sole discretion; (ii) at all
times in the amount of the Security Deposit, and shall permit multiple draws;
(iii) issued by a commercial bank reasonably acceptable to Landlord from time to
time and located in the state in which the Premises is located; (iv) made
payable to, and expressly transferable and assignable at no charge to Landlord
by, the owner from time to time of the Building (which transfer/assignment shall
be conditioned only upon the execution by such owner of a written document in
connection with such transfer/assignment); (v) payable at sight upon presentment
to a local branch of the issuer of a simple sight draft signed by Landlord or
its property manager accompanied by a certificate stating that Landlord is
permitted to draw upon such Letter of Credit under the express terms of this
Lease, and setting forth the amount that Landlord is permitted to draw; (vi) a
term of not less than one (1) year; and (vii) at least thirty (30) days prior to
the then-current expiration date of such Letter of Credit, renewed (or
automatically and unconditionally extended) from time to time through the
sixtieth (60th) day after expiration of the Lease Term. Landlord hereby approves
BankBoston, N.A., as the issuer of the Letter of Credit, and the form of Letter
of Credit attached hereto as EXHIBIT D. Notwithstanding anything in this Lease
to the contrary, any grace period or cure periods which are otherwise applicable
under Section 24, hereof, shall not apply to any of the foregoing, and,
specifically, if Tenant fails to comply with the requirements of subsection
(vii), above, Landlord shall have the immediate right to draw upon the Letter of
Credit in full and hold the proceeds thereof as a cash Security Deposit. Each
Letter of Credit shall be issued by a commercial bank that has a credit rating
with respect to certificates of deposit, short term deposits or commercial paper
of at least P-2 (or equivalent) by Moody's Investor Service, Inc., or at least
A-2 (or equivalent) by Standard & Poors Corporation. If the issuers credit
rating is reduced below P-2 (or equivalent) by Moody's Investor Service, Inc.,
or at least A-2 (or equivalent) by Standard & Poors Corporation, or if the
financial condition of the issuer changes in any other materially adverse way,
then Landlord shall have the right to require that Tenant obtain from a
different issuer a substitute letter of credit that complies in all respects
with the requirements of this Section, and Tenant's failure to obtain such
substitute letter of credit within ten (10) business days after Landlord's
written demand therefor (with no other notice, or grace or cure period being
13
<PAGE> 14
applicable thereto) shall entitle Landlord to immediately draw upon the existing
Letter of Credit in full, without any further notice to Tenant. In the event
that any issuer of a Letter of Credit held by Landlord is placed into
receivership or conservatorship by the Federal Deposit Insurance Corporation, or
any successor or similar entity, then, effective as of the date such
receivership or conservatorship commences, said Letter of Credit shall be deemed
not to meet the requirements of this Section, and, within ten (10) business days
thereof, Tenant shall replace such Letter of Credit with cash or other
collateral acceptable to Lessor in its sole and absolute discretion (and
Tenant's failure to do so shall constitute an Event of Default under this Lease
(with no other notice, or grace or cure period being applicable thereto). Any
failure or refusal of the issuer to honor the Letter of Credit shall be at
Tenant's sole risk and shall not relieve Tenant of its obligations hereunder
with respect to the Security Deposit.
(c) If, on or before February 28th of each Lease Year included
in the Term beginning February 28, 2002, and provided there has been no default
by Tenant under this Lease which continued beyond any applicable notice and cure
periods during the immediately preceding twelve-month period, Tenant
demonstrates to the reasonable satisfaction of Landlord that (i) Tenant has
achieved "positive net cash flow" (as hereinafter defined) from operations of at
least One Million Dollars ($1,000,000) in each of the immediately preceding four
consecutive fiscal quarters ending January 31st and (ii) Tenant has unrestricted
cash and unrestricted securities in excess of Fifteen Million Dollars
($15,000,000) in each of the immediately preceding four consecutive fiscal
quarters ending January 31st, the face amount of the Letter of Credit shall be
reduced by twenty-five percent (25%) of the original face amount of the Letter
of Credit (the "Reduction Amount") upon Tenant's receipt of Landlord's written
authorization therefor. If Landlord fails to disapprove or to issue written
authorization for the Reduction Amount within thirty (30) days after Tenant
delivers all necessary financial information to Landlord evidencing Tenant's
satisfaction of the terms and conditions set forth in clauses (i) and (ii)
hereof, Tenant shall send Landlord written notice, marked "URGENT" (the "Deemed
Authorization Notice") requesting Landlord's response thereto within three (3)
business days from Landlord's receipt of the Deemed Authorization Notice. If
Landlord fails to respond to the Deemed Authorization Notice within such three
(3) business day period, Landlord's authorization of the Reduction Amount shall
be deemed given. If Tenant fails to meet such test for any Lease Year, the
Letter of Credit shall not be reduced for that Lease Year and Tenant shall only
be entitled to a reduction of the face amount of the Letter of Credit by the
Reduction Amount if Tenant thereafter satisfies such requirement as of February
28th of the immediately following Lease Year. As used herein, "positive net cash
flow" shall mean the sum of (a) income from operations of Tenant after taxes,
but in all events, prior to non-recurring and/or extraordinary income items, and
(b) line item amounts for "amortization of stock-based compensation" and
"operating expenses for research and development," all as determined pursuant to
generally acceptable accounting principles, consistently applied. Tenant shall
provide and certify such statements and reports as Landlord reasonably requires
in order to verify such achievement. If Tenant is a publicly held company, such
information shall include quarterly 10Q filings with the Securities and Exchange
Commission. Otherwise, such statement shall include financial statements of
Tenant audited by one of the so-called "big-four" accounting firms.
14
<PAGE> 15
3.2 INTENTIONALLY DELETED.
3.3 NO SEPARATE ACCOUNT. Landlord shall not be obligated to hold the
Security Deposit in a separate account from other Building or project funds.
4. USES; TENANT COVENANTS.
4.1 PERMITTED USE. The Premises are to be used solely for the following
"Permitted Uses": (a) general office and administrative purposes, (b) office for
sales personnel, (c) prototype assembly provided that no manufacturing shall be
permitted in connection therewith, and (d) validation/testing facility for
telecommunications equipment and hardware, and for no other business or purpose.
Landlord represents and warrants that general office use is permitted under
applicable zoning and title restrictions.
4.2 OTHER GENERAL USE COVENANTS.
4.2.1 Tenant shall not commit or allow to be committed any
waste upon the Premises, nor any public or private nuisance nor any other act
which disturbs the quiet enjoyment of any other tenant in the Building. If any
of the Tenant's office machines or equipment or other activities within the
Premises involve unusual volume or vibration and disturb any other tenant in the
Building, then Tenant shall provide adequate insulation, or take such other
action, as may be necessary to eliminate the noise or disturbance.
4.2.2 Tenant will, at its own cost, promptly comply with and
carry out all Requirements (defined below) to the extent that same apply to (a)
the manner of Tenant's occupation or use of the Premises, (b) the conduct of
Tenant's business therein, or (c) the construction of any improvements or
alterations therein by (or at the request of) Tenant, including without
limitation Tenant's Work (as defined in EXHIBIT C hereto) but specifically
excluding Landlord's Work (as defined in EXHIBIT C hereto). The term
"Requirements" shall mean all orders, requirements or conditions now or
hereafter imposed with respect to Tenant, the Premises, the Building and the
Land by the ordinances, laws, rules, orders, and/or regulations (including
without limitation all present and future laws, orders and regulations regarding
recycling of trash and smoking in the workplace, and all building and life
safety codes) of the state in which the Premises are located and the federal
government and any other federal, state, or local governmental authority, or
public or quasi-public authority, having jurisdiction over the Premises. The
foregoing notwithstanding, to the extent that (i)(A) the Requirements relate to
the compliance of the Premises (or any portion thereof) with applicable building
codes, regulations, or laws which were in effect prior to the date hereof and
(B) the design or installation of the item(s) which require such modification
was Landlord's responsibility under EXHIBIT C of this Lease, or (ii)(A) the
Requirements in effect from and after the date hereof pertain to the Building as
a whole or the Land and (B) modifications to the Premises, the Building, or the
Land are required in order to bring same into compliance with any of the
Requirements in effect from and after the date hereof, Landlord shall be
responsible for the compliance of such item(s) with the Requirements, including
without limitation costs of compliance of Landlord's Work and Base Building
Improvements, the Building as a whole, and/or the Land with the physical
accessibility requirements of Title III of the Americans With Disabilities Act
(such
15
<PAGE> 16
requirements, the "ADA") but, with regard to clause (ii) only, without prejudice
to Landlord's rights, if any, to include such items within Operating Costs as
defined in (and limited by) Sections 9.5 and 9.6 of this Lease; provided,
however, if any such required modifications are the result of leasehold
improvements made by (or at the request of) Tenant, including without limitation
Alterations and Tenant's Work, or because of any particular use made of the
Premises by Tenant which is not in the nature of customary general office use,
all such costs shall be paid by Tenant. Tenant, at Tenant's cost, shall be
responsible for ensuring that Tenant's policies and business operations with
respect to the Premises comply with the ADA, and that Alterations (to the extent
designed by Tenant's architect) complies with the ADA. Landlord will, at its own
cost, promptly comply with and carry out all Requirements (x) to the extent that
same apply to (1) the conduct of Landlord's business operations, or (2) the
construction of any improvements or alterations therein by (or at the request
of) Landlord, including without limitation, Landlord's Work and Base Building
Improvements, and (y) except to the extent the same are Tenant's responsibility
under this Section 4.2.2 (or may be recoverable as an Operating Cost as defined
in, and limited by, Sections 9.5 and 9.6 of this Lease).
4.2.3 Tenant shall observe such reasonable rules and
regulations as may be adopted and made available to Tenant by Landlord from time
to time for the safety, care and cleanliness of the Premises or the Building and
for the preservation of good order therein. The initial rules and regulations
for the Building are attached as EXHIBIT E hereto and made a part hereof by this
reference (as the same may be amended in accordance herewith, the "Rules and
Regulations"). Landlord shall have the right from time to time to make
reasonable modifications to the Rules and Regulations, provided (i) such
modifications shall only be applicable to Tenant if communicated to Tenant in
writing at least ten (10) days prior to the effective date of such modification,
(ii) such modified Rules and Regulations shall not materially modify any
economic obligations of Tenant hereunder or otherwise impair the rights of
Tenant expressly set forth in this Lease, and (iii) in the event of any
irreconcilable conflict between the terms of this Lease and the terms of the
Rules and Regulations (as amended), the terms of this Lease shall be
controlling. Landlord shall not be responsible to Tenant for the nonperformance
of any of said rules and regulations by any other tenants or occupants of the
Building, provided Landlord shall not enforce any such rules and regulations
against Tenant in a discriminatory manner.
4.2.4 No act shall be done or knowingly permitted by Tenant,
or its agents, employees and/or contractors, in or about the Premises that is
unlawful or that will increase the existing rate of insurance on the Building.
To Landlord's knowledge, general office use is neither unlawful, nor will it
result in any increase in the existing rate of insurance in the Building. In the
event the existing rate of insurance is increased because of any breach by
Tenant of this covenant, Tenant shall pay to Landlord any and all fines,
penalties, and/or increases in insurance premiums resulting from such breach.
5. ENVIRONMENTAL PROVISIONS; RECYCLING.
5.1 GENERAL. Tenant agrees to comply with any and all Environmental
Laws (defined below) in connection with (1) Tenant's use of the Premises, (2)
any assignment, sublease or license of the Premises or any part thereof by
Tenant, (3) any termination of this Lease and
16
<PAGE> 17
surrender of possession upon a default by Tenant hereunder, (4) any corporate
reorganization, consolidation, recomposition or similar change in Tenant's
organization, (5) any acts, omissions and other activities of Tenant in or on
the Building and the Land, and/or (6) any other fact or circumstance the
existence and continuation of which imposes upon Tenant the obligation to comply
therewith.
5.2 TENANT'S WARRANTIES AND COVENANTS. During the Term, Tenant
warrants, represents and covenants to and with Landlord as follows:
5.2.1 The Premises will not, as the result of any acts or
omissions of Tenant, contain (A) asbestos in any form, (B) urea formaldehyde
foam insulation, (C) transformers or other equipment which contain dielectric
fluid containing levels of polychlorinated biphenyls in excess of fifty (50)
parts per million, or (D) any flammable explosives, radioactive materials,
hazardous materials, hazardous wastes, hazardous, controlled or toxic
substances, or any pollutant or contaminant, or related materials defined in or
controlled pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (42 U.S.C. Sections 9601 et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801 et
seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Sections 9601 et seq.), the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), and
in the regulations adopted and publications promulgated pursuant thereto, and
any and all other federal, state and local laws, rules and regulations or orders
pertaining to health, the environment and/or Hazardous Materials including,
without limitation, Massachusetts General Laws Chapter 21E (collectively,
"Environmental Laws") (the substances described in (A), (B), (C) or (D) above
being hereinafter collectively referred to as "Hazardous Materials").
5.2.2 Except as specifically permitted by this Lease, the
Premises will never be used by Tenant for any activities involving, directly or
indirectly, the use, generation, treatment, transportation, storage or disposal
of any Hazardous Materials.
5.2.3 Tenant (A) shall comply in the operation of its
business, and in its use and occupancy of the Premises, with all Environmental
Laws, (B) shall not store, utilize, generate, treat, transport or dispose of (or
permit or acquiesce in the storage, utilization, generation, transportation,
treatment or disposal of) any Hazardous Materials on or from the Premises, and
(C) shall cause its employees, agents, contractors, assignees, sublessees,
licensees and (while within the Premises) invitees and business visitors to
comply with the representations, warranties and covenants herein contained. For
all purposes of this Section 5, references to "Tenant" shall be deemed to
include acts and omissions committed by Tenant and Tenant's agents, employees,
contractors, subcontractors, assignees, sublessees, licensees and, while within
the Premises, invitees and business visitors.
5.2.4 In the event of any storage, presence, utilization,
generation, transportation, treatment or disposal of Hazardous Materials by
Tenant in, on or about the Premises, Building and/or Land, or in the event of
any Hazardous Materials Release (as hereinafter defined) for which Tenant bears
responsibility under the provisions of this Section 5, Tenant shall, at the
direction of Landlord or any federal, state, or local authority or other
governmental authority, remove or cause the removal
17
<PAGE> 18
of any such Hazardous Materials and rectify any such Hazardous Materials
Release, and otherwise comply or cause compliance with the laws, rules,
regulations or orders of such authority, all at the expense of Tenant, including
without limitation, the undertaking and completion of all investigations,
studies, sampling and testing and all remedial, removal and other actions
necessary to clean up and remove all such Hazardous Materials, on, from or
affecting the Premises. If Tenant shall fail to proceed with such removal or
otherwise comply with such laws, rules, regulations or orders within the cure
period permitted under the applicable law, regulation or order, the same shall
constitute a default under Section 23 hereof, and Landlord may, but shall not be
obligated to, do whatever is necessary to eliminate such Hazardous Materials
from the Premises or otherwise comply with the applicable law, rule, regulation
or order, acting either in its own name or in the name of Tenant pursuant to
this Section, and the cost thereof shall be borne by Tenant and thereupon become
due and payable as additional rent hereunder. Tenant shall give to Landlord and
its agents and employees access to the Premises for such purposes and hereby
specifically grants to Landlord a license to remove the Hazardous Materials and
otherwise comply with such applicable laws, rules, regulations or orders, acting
either in its own name or in the name of the Tenant pursuant to this Section.
5.2.5 Tenant hereby indemnifies and holds Landlord and each of
its shareholders, subsidiaries, affiliates, officers, directors, partners,
employees, agents and trustees, and any receiver, trustee or other fiduciary
appointed for the Building, harmless from, against, for and in respect of, any
and all Environmental Liabilities arising out of or relating to the violation by
Tenant (or any of its agents, employees, contractors and, while within the
Premises, invitees) of any of its representations, warranties and covenants
under this Section 5. "Environmental Liabilities" shall mean any and all
damages, losses, settlement payments, obligations, liabilities, claims, actions
or causes of actions, encumbrances, fines, penalties, and costs and expenses
suffered, sustained, incurred or required to be paid by any party indemnified
(including, without limitation, reasonable fees and disbursements or attorneys,
engineers, laboratories, contractors and consultants) arising as a result of, or
in connection with, the matter indemnified against, and will encompass, without
limitation, costs associated with cleanups, remedial and response actions,
remedial investigations and feasibility studies, permits and licenses required
by, or undertaken in order to comply with the requirements of, any federal,
state or local law, regulation, or agency or court, any damages for injury to
person, property or natural resources, claims of governmental agencies or third
parties for cleanup costs and costs of removal, discharge, and satisfaction of
all liens, encumbrances and restrictions on the Premises relating to the
foregoing. "Hazardous Materials Release" shall mean any release, spill, leak,
pumping, pouring, emitting, emptying, discharge, injection, escaping, leaching,
dumping or disposing into the environment (air, land or water) of any Hazardous
Materials. The foregoing indemnification and the responsibilities of Tenant
under this Section 5 shall survive the termination or expiration of this Lease.
5.2.6 Tenant shall promptly notify Landlord in writing of (a)
the occurrence of any Hazardous Materials Release caused by Tenant or any party
for whom Tenant is responsible under this Section 5, or (b) any pending or
threatened regulatory actions relating to the Building or Land known to Tenant
arising out of the acts or omissions of Tenant or any party for whom Tenant is
responsible under this Section 5, or (c) any claims made by any governmental
authority or third party, relating to any Hazardous Materials or Hazardous
Materials Release on or from, the Premises
18
<PAGE> 19
arising out of the acts or omissions of Tenant or any party for whom Tenant is
responsible under this Section 5; and Tenant shall promptly furnish Landlord
with copies of any correspondence or legal pleadings or documents in connection
therewith. Landlord shall have the right, but shall not be obligated, to notify
any governmental authority of any state of facts which may come to its attention
with respect to any Hazardous Materials or Hazardous Materials Release on or
from the Premises.
5.2.7 Upon expiration of the Term or any Extension Term, as
applicable, Tenant shall deliver the Premises to Landlord free of any and all
Hazardous Materials introduced in violation of Tenant's covenants under the
Lease, and free of any liens, encumbrances, restrictions and/or Environmental
Liabilities for which Tenant is responsible hereunder.
5.3 PERMITTED MATERIALS. Notwithstanding Section 5.2 to the contrary,
but subject to clauses (i) and (ii) of this Section 5.3, below, Tenant shall be
permitted to temporarily store reasonable amounts of Hazardous Materials that
are used in the ordinary course of Tenant's operation of the Permitted Uses (the
"Permitted Materials") provided (i) such Permitted Materials are properly used,
stored and disposed of in a manner and location meeting the requirements of all
Environmental Laws and (ii) all Permitted Materials shall be approved in advance
by Landlord with the exception those materials typically used in the operation
of standard office equipment or for cleaning purposes, such as office cleaners,
printing toners and the like, and which are used stored and disposed of in
accordance with all applicable Environmental Laws (which common materials shall
not require special written approval by Landlord). Any use, storage and disposal
of Permitted Materials shall be subject to all of the terms of this Section 5
(except for the terms prohibiting same), and Tenant shall be responsible for
obtaining any required permits and paying any fees and providing any testing
required by any governmental agency with respect to any Permitted Materials. If
said Permitted Materials are not being stored, used, or disposed of in
compliance with all applicable laws, then Tenant shall immediately take such
corrective action as requested by Landlord. Should Tenant fail to take such
corrective action within forty-eight (48) hours (or such lesser time period as
may be appropriate in the event of Emergency (as defined in Section 47.18(E)
below), Landlord shall have the right to perform such work on Tenant's behalf
and at Tenant's sole expense, and Tenant shall promptly reimburse Landlord for
any and all reasonable costs associated with said work.
5.4 LANDLORD'S COVENANTS. Landlord has, prior to the date hereof,
provided Tenant with a copy of a report entitled "Phase I Environmental Site
Assessment and Subsurface Investigation" dated May 1998 and prepared by ENSR
(the "Environmental Report"), which Landlord obtained in connection with its
acquisition of the Land and the Building. Landlord hereby represents to Tenant
that, to Landlord's knowledge, based solely on the Environmental Report (and
subject to any matters set forth therein), and other than Hazardous Materials
used in the ordinary operation of a commercial office project which, to
Landlord's knowledge, are being used, handled and disposed of in accordance with
the requirements of Environmental Laws, there are no Hazardous Materials in, on
or under the Building or Land, in violation of the requirements of any
Environmental Laws. If, during or prior to the Lease Term, (a) Hazardous
Materials are introduced in, on or under the Building or Land, other than as a
result of the acts or omissions of Tenant or any party for whom Tenant is
responsible under this Lease, or (b) Landlord otherwise violates the
requirements of any Environmental Laws, or (c) Hazardous Materials contamination
in, on or under the Building or the Land which existed prior to Tenant's taking
occupancy of the Premises is discovered, and in either
19
<PAGE> 20
case, such contamination is not the responsibility of Tenant pursuant to
Sections 5.2 and 5.3, above, then as between Landlord and Tenant, Landlord shall
be responsible for making a prompt assessment of the scope and nature of the
problem, and for taking remedial action, in conjunction (if appropriate) with
applicable federal, state or local authorities; and in the event the presence of
such Hazardous Materials was not caused by Tenant, or its employees, contractors
or invitees, Landlord shall be responsible at its sole expense (and without
reimbursement pursuant to Section 9 of this Lease) for the cost to remediate any
such contamination and/or correct any such violation, and for all fines,
penalties and other actual damages arising therefrom. In performing any such
remediation pursuant to this Section 5.4, Landlord shall use all commercially
reasonable efforts to protect Tenant's property from damage or loss, and to
minimize interference with and/or disruption to Tenant's ongoing business
operations (subject to the applicable legal requirements associated with such
remediation). The foregoing is without prejudice to Landlord's right to seek
recovery of damages or losses from the parties at fault in any Hazardous
Materials Release.
5.5 RECYCLING REGULATIONS. Tenant shall comply with all orders,
requirements and conditions now or hereafter imposed by any ordinances, laws,
orders and/or regulations (hereinafter collectively called "regulations") of any
governmental body having jurisdiction over the Premises or the Building, whether
required of Landlord or otherwise, regarding the collection, sorting, separation
and recycling of waste products, garbage, refuse and trash (hereinafter
collectively called "waste products") including but not limited to the
separation of such waste products into receptacles reasonably approved by
Landlord and the removal of such receptacles in accordance with any collection
schedules prescribed by such regulations. Landlord shall, in its activities
within the Building and its provision of services hereunder, comply (or cause
its agents and contractors to comply) with the foregoing regulations (the cost
of which shall be included within "Operating Costs" under Section 9.5 of this
Lease. Landlord reserves the right (a) to refuse to accept from Tenant any waste
products that are not prepared for collection in accordance with any such
regulations, and (b) to require Tenant to pay all costs, expenses, fines,
penalties or damages that may be imposed on Landlord or Tenant by reason of
Tenant's failure to comply with any such regulations.
6. LATE CHARGES; INTEREST.
6.1 LATE CHARGE. Tenant hereby acknowledges that late payment to
Landlord of Base Rent or additional rent will cause Landlord to incur
administrative costs and loss of investment income not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. If
any Base Rent or additional rent due from Tenant is not received by Landlord or
Landlord's designated agent within five (5) business days after the date due,
then Tenant shall pay to Landlord a late charge equal to five percent (5%) of
such overdue amount, plus any attorneys' fees and costs incurred by Landlord by
reason of Tenant's failure to pay Rent and other charges when due hereunder. The
parties hereby agree that such late charges represent a fair and reasonable
estimate of the administrative cost that Landlord will incur by reason of
Tenant's late payment. Landlord's acceptance of such late charges shall not
constitute a waiver of Tenant's default with respect to such overdue amount or
estop Landlord from exercising any of the other rights and remedies granted
hereunder.
20
<PAGE> 21
6.2 INTEREST. In addition to the administrative late charge provided
for under Section 6.1, above, if any Base Rent or additional rent due from
Tenant to Landlord is not paid within five (5) business days after the date due
(if Tenant was not assessed a late charge by virtue of such late payment) or
thirty (30) days after the date due (if Tenant was assessed a late charge by
virtue of such late payment), such unpaid amount shall bear interest from the
date originally due until the date paid at an annual rate of interest (the
"Default Rate") equal to the lesser of (a) the Prime Rate plus three percent
(3%) or (b) the highest annual rate of interest permitted under applicable law.
Landlord's acceptance of such interest shall not constitute a waiver of Tenant's
default with respect to such overdue amount or estop Landlord from exercising
any of the other rights and remedies granted hereunder. The term "Prime Rate"
shall mean the "Prime Rate" of interest as published from time to time in the
Wall Street Journal, or if not so published, then the "Prime Rate" as
established from time to time by the bank in which Landlord maintains its bank
accounts with respect to the Building.
7. REPAIRS AND MAINTENANCE.
7.1 LANDLORD'S RESPONSIBILITIES. Landlord shall maintain or cause to be
maintained, and after receiving notice or actual knowledge of the need for
repair, shall repair and/or replace (as necessary) all structural and
non-structural portions of the Building Systems (as hereafter defined), Common
Areas (as hereafter defined) and Structural Elements (as hereafter defined) in a
manner consistent with the level of maintenance and repair customary for the
first-class office building in the Needham/Newton/Route 128 area, provided that,
to the extent any of such maintenance or repairs is rendered necessary by the
negligence or willful misconduct of Tenant, its agents, customers, employees,
independent contractors, guests or (while within the Premises) invitees, Tenant
shall be obligated to reimburse Landlord for all costs sustained by Landlord in
connection therewith to the extent such costs are not covered by the fire and
casualty insurance maintained, or required to be maintained, by Landlord on the
Building, which reimbursement shall be due no later than ten (10) days after
Landlord's written demand. For the purposes of this Section 7, "Building
Systems" shall mean the mechanical, electrical, plumbing, sprinkler, and HVAC
systems serving the Building but shall specifically exclude dedicated HVAC
systems serving only the Premises (the "Dedicated HVAC Units"), and specialty
installations requested by Tenant which shall be maintained at Tenant's sole
cost and expense; "Common Areas" shall mean those areas of the Land and Building
which are available for the non-exclusive use of any tenant of the Building,
including without limitation sidewalks, parking areas, driveways, lobbies,
landscaping, restrooms, stairs, corridors, janitor's closets, and electrical and
telephone closets; and "Structural Elements" shall mean the structural
components of the Building's base building improvements, including structural
components which integrate with the interior tenant improvements within the
Premises, including without limitation the roof, foundations, exterior
structural walls and other load-bearing elements of the Building.
7.2 TENANT'S RESPONSIBILITIES. Except for (i) repairs to Building
Systems, Common Areas and Structural Elements, (ii) warranty repairs related to
Base Building Improvements and Landlord's Work (if any), (iii) janitorial and
cleaning services to the extent provided by or through Landlord under Section
8.1, below, and (iv) repairs to the interior of the Premises to the extent the
same are rendered necessary by the negligence or willful misconduct of Landlord
and its agents, employees and independent contractors, and are not covered by
the fire and casualty insurance maintained, or
21
<PAGE> 22
required to be maintained, by Tenant under this Lease, Tenant shall be
responsible (at Tenant's sole expense) for repairs and maintenance to the
interior of the Premises.
7.3 NOTIFICATION REQUIREMENTS. Landlord shall be under no obligation to
inspect the Premises. Tenant shall promptly report in writing to Landlord any
defective condition in the Premises actually known to Tenant which Landlord is
required to repair, and failure to so report such defects shall excuse any delay
by Landlord in commencing and completing such repair to the extent the same
would otherwise be Landlord's responsibility under this Lease. In addition, if
Tenant fails to report a defective condition within the Premises promptly, and
such failure results in any incremental additional repair expense, Tenant shall
be responsible for such incremental additional expense.
7.4 EXPENSES. All expenses incurred by Landlord pursuant to this
Section 7 (to the extent not payable directly by Tenant as above provided) will
be included within "Operating Costs" as defined in Section 9, below, to the
extent not excluded under Section 9.6. Operating Costs will not include (and
Landlord will be solely responsible for) costs associated with (a) the
correction of any defects in construction and/or incomplete items of
construction as determined in accordance with the provisions of Paragraph 15 of
EXHIBIT C, (b) any repairs or replacements of the Structural Elements
(collectively "Structural Repairs") during the initial seven-year Lease Term,
provided that the foregoing shall not restrict the inclusion within Operating
Costs of (i) costs of ordinary maintenance of the Structural Elements, such as
periodic caulking and the like, and (ii) costs of repair or replacement of
Structural Elements to the extent necessitated by Alterations or other
improvements integrated therein by Tenant (such as repairs to any Structural
Element necessitated by Tenant's installation of Dedicated HVAC Units serving
only the Premises or other similar items or equipment which exceed the maximum
floor load or place extra stress on such Structural Elements, or the like), and
(c) any repairs or replacements performed under warranty. The foregoing
notwithstanding, in the event a Structural Repair is needed in lieu of a
necessary repair after the initial Lease Term, Landlord shall have the right to
amortize the cost thereof on a monthly basis over the useful life of the
replacement item (as determined in accordance with generally accepted accounting
principles, consistently applied) at an interest rate of twelve percent (12%)
per annum in order to defray such expense, calculated as of the date of such
capital expense, and to recover from Tenant as part of Operating Costs hereunder
the lesser of (A) the annual repair cost that would have been incurred in order
to repair such item rather than replace it, as reasonably estimated by Landlord
for each such year during the actual useful life of such item (but terminating
on and after the Lease Expiration Date), or (B) the sum of all such amortization
payments payable during each such year during the useful life of such item (but
terminating on and after the Lease Expiration Date).
8. UTILITIES AND SERVICES.
8.1 HOURS OF SERVICE. From 8:00 a.m. to 6:00 p.m. on weekdays and from
8:00 a.m. to 1:00 p.m. on Saturday (collectively "Normal Business Hours")
(excluding the following holidays: New Year's Day, President's Day, Memorial
Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day
and any holiday designated as such by an Executive Order of the President of the
United States or by Act of Congress, herein collectively referred to as
"Holidays"), Landlord shall furnish (i) electricity to the Premises for lighting
and for the operation of normal and
22
<PAGE> 23
customary office machines, heating, ventilation and air-conditioning service
("HVAC") as set forth in EXHIBIT C and (ii) hot and cold water to common area
restrooms. Landlord shall also provide for toilet cleaning and supply, common
area and in-suite janitorial services, and window washing (collectively
"Janitorial Services") on weekdays (excluding Holidays) in accordance with the
specifications set forth in EXHIBIT F. Landlord shall also provide electrical
service (excluding HVAC) and hot and cold water, as above provided, at all times
other than Normal Business Hours. The cost of all of the foregoing services
furnished by Landlord shall constitute Operating Costs or Costs of Electricity,
as the case may be, and shall be payable as provided in Section 9 of this Lease.
8.2 ADDITIONAL HVAC SERVICE. If requested by Tenant, Landlord shall
furnish HVAC service at times other than Normal Business Hours at the cost of
such service as established from time to time by Landlord, which amount shall be
paid by Tenant as additional rent as provided in Section 2 hereof. Such cost
shall be based upon Landlord's actual out-of-pocket cost including for
electrical utility service associated therewith, plus a reasonable amount to
account for accelerated depreciation of equipment and increased repair and
maintenance expense. Tenant must notify Landlord (through the individual or
calling procedure established by Landlord's property manager to serve such
function) no later than 1:00 p.m. on a business day for after-hours HVAC service
that day, and no later than 1:00 p.m. on Friday or the day before a holiday for
after-hours HVAC service for the following weekend or holiday. If the quantity
or kind of utilities or services furnished by Landlord to the Premises to meet
Tenant's requirements is excessive or abnormal relative to the utilities and
services consumed by office tenants generally, as determined in accordance with
Section 8.4, below, and is not otherwise captured as a cost reimbursable by
Tenant to Landlord through Tenant's obligation to pay Costs of Electricity (for
example, unusual or excessive water consumption), Tenant shall reimburse
Landlord upon demand for the additional cost resulting from Tenant's excessive
or abnormal consumption.
8.3 ADDITIONAL PROVISIONS. Except as specifically provided in Section
8.5, below, Landlord shall not be liable to Tenant for any loss, injury or
damage to property, or loss of income or other business loss, caused by or
resulting from any variation, interruption, or failure of such services due to
any cause whatsoever, or from failure to make any repairs or perform any
maintenance, except that, subject to Section 19.1 of this Lease, Landlord will
not be excused from liability to Tenant for loss, injury or damage to property
arising from the above-described causes to the extent caused by Landlord's
negligence or willful misconduct or breach of this Lease and not covered or
coverable under any policies of insurance (or any self-insurance) which Tenant
is required to obtain or provide pursuant to any applicable provisions of this
Lease. In addition, Landlord shall not be liable to Tenant for (a) any damage to
the Premises, (b) any loss, damage or injury to any property therein or thereon,
(c) any claims for the interruption of or loss to Tenant's business or (d) for
any indirect damages or consequential losses, to the extent occasioned by
bursting, rupture, leakage or overflow of any plumbing or other pipes, other
water leakage or flooding, or other similar causes in, above, upon or about the
Premises or the Building. If any public utility or governmental body shall
require Landlord or Tenant to restrict the consumption of any utility or reduce
any service to the Premises or the Building, Landlord and Tenant shall comply
with such requirements, without any abatement or reduction of the Base Rent,
additional rent or other sums payable by Tenant hereunder, except as (and solely
to the extent) provided in Section 8.5 below.
23
<PAGE> 24
8.4 MEASUREMENT OF TENANT'S ELECTRICAL CONSUMPTION. Landlord shall, at
Tenant's expense, install electrical measurement devices or submeters to measure
Tenant's electrical consumption precisely. For purposes of determining Tenant's
obligation to pay Costs of Electricity as set forth in Section 9, below,
Tenant's electrical consumption hereunder, as determined by measurement devices,
shall be that associated with the electrical lights, outlets, other electrical
connections located within the Premises and the Dedicated HVAC Units and shall
not include the electrical consumption of the HVAC unit which generally serves
the Premises (the cost of which electrical consumption shall be included within
Operating Costs pursuant to Section 9)(the "Costs of Electricity"). Tenant's
Costs of Electricity shall be an amount equal to the total cost of the
electricity furnished to the Building multiplied by a fraction, the numerator of
which shall be Tenant's electrical consumption as measured by the submeter for
the Premises, and the denominator of which shall be the total electricity
supplied to the Building as measured by the main meter serving the entire
Building.
8.5 INTERRUPTION IN SERVICES. Notwithstanding any provision of Section
8.3, above, to the contrary, in the event that (i)(A) the supply of hot and cold
water, HVAC service and/or electrical or gas service (each an "Essential
Service") to the Premises is interrupted as a result of the negligence or
willful misconduct of Landlord, or its agents, employees or contractors (and not
as a result of any cause beyond Landlord's reasonable control, such as a general
electrical outage or blackout), or (B) Landlord negligently or willfully fails
to perform maintenance and repair work as required hereunder and (ii) such
interruption or failure to make the requisite repairs continues for a period
exceeding five (5) consecutive business days after Tenant first notifies
Landlord of such interruption or failure in writing, and (iii) as a result
thereof Tenant is unable to and does not in fact conduct business from the
Premises or any applicable portion thereof, then from and after such fifth (5th)
consecutive business day, Tenant shall be entitled to abate its Base Rent and
additional rent obligations hereunder as to the Premises or portion thereof
which is not usable (and is in fact not used) until such time as the applicable
Essential Service is restored or the requisite repairs are made. The foregoing
shall constitute Tenant's sole and exclusive remedy in the event of an
interruption of services to the Premises. In addition, if Landlord fails
promptly to commence, and to use diligent efforts thereafter, to cure (or to
cause the applicable utility provider to cure) the applicable interruption or
failure (even if not caused by Landlord's negligence or misconduct), then Tenant
shall have the right to exercise its right of self-help as more fully set forth
in Section 34.4, below (subject to any provisions therein requiring notice and
the opportunity to cure), and all reasonable expenses incurred by Tenant in the
exercise of such right shall be recoverable by Tenant from Landlord.
8.6 YEAR 2000 COMPLIANCE. Landlord represents and warrants to Tenant
that, to the best of its knowledge based on documentation provided by its
vendors and/or service providers, all equipment, software, and appliances,
including but not limited to elevators, heating, ventilating and air
conditioning systems, card key access systems, door locks, energy management
systems, sprinkler systems, fire detection and life safety systems and other
Building Systems, which equipment, software, and appliances (i) are within
Landlord's control, (ii) affect Landlord's ability to satisfy its obligations to
Tenant under the Lease, and (iii) materially and adversely impact Tenant's use
and occupancy of the Premises, will remain fully functional and perform their
normal operations without any interruptions or malfunctions in the services or
operations as a result of the
24
<PAGE> 25
passage of time from calendar year 1999 to calendar year 2000, as well as on and
after January 1, 2000. If any repairs, alterations, or replacements must be made
to any of the aforesaid equipment, software, or appliances in order to prevent
or eliminate any interruptions or malfunctions in the services or operations as
a result of such passage of time from each date to the next, Landlord hereby
agrees to use commercially reasonable efforts to cause any such repairs,
alterations, or replacements to be made on or before December 31, 1999, and to
provide Tenant with evidence of the completion of such repairs, alterations, or
replacements promptly after such completion. Landlord further agrees that any
interruptions or malfunctions of any of the aforesaid Building systems which may
occur as the result of the passage of time from calendar year 1999 to calendar
year 2000, will not be deemed to constitute a "Force Majeure" or an event, the
occurrence of which is beyond the reasonable control of Landlord to prevent or
avoid. Notwithstanding the foregoing, nothing contained herein shall be
construed as a representation or warranty by Landlord with respect to any
equipment, software, or appliance which is owned, operated, or otherwise under
the control of any public or private utility or any authority having
jurisdiction over the Building or over such equipment, software, or appliance.
9. COSTS OF ELECTRICITY AND EXPENSE INCREASES.
9.1 DEFINED. For each calendar year or portion thereof during the Term,
Tenant shall pay as additional rent to Landlord (i) Tenant's Cost of Electricity
and (ii) Tenant's Share of an amount (hereinafter referred to as "Expense
Increases") equal to the difference between:
(a) Operating Costs (defined in Section 9.5, below) for such
calendar year; and
(b) Operating Costs for the Operating Costs Base Year (defined
in Section 9.2, below).
9.2 BASE YEAR. For all purposes hereof, the "Operating Costs Base Year"
shall be the 2000 calendar year.
9.3 ESTIMATED PAYMENTS. Tenant shall make monthly installment payments
on an estimated basis toward (i) Costs of Electricity, and (ii) Tenant's Share
of Expense Increases, in an amount equal to one-twelfth (1/12) of Landlord's
estimate of Costs of Electricity and one-twelfth (1/12) of Landlord's estimate
of the Tenant's Share of Expense Increases for the then-current calendar year.
Tenant's obligation to make monthly installment payments toward Costs of
Electricity shall commence on first (1st) day of the first (1st) full calendar
month of the Term, and Tenant's obligation to make monthly installment payments
toward Tenant's Share of Expense Increases shall not commence until the first
(1st) day of the thirteenth (13th) full calendar month of the Term. The
foregoing estimate(s) shall be based on Landlord's reasonable estimate of Costs
of Electricity and Expense Increases for such calendar year (which shall not
exceed 105% of the prior year's Costs of Electricity and Expense Increases in
the absence of evidence that a larger estimate is warranted). Landlord shall
endeavor to communicate such estimate to Tenant on or before the date Landlord
provides Tenant with the Expense Statement referenced in Section 9.4, below,
provided that until Landlord provides such estimate to Tenant, Tenant's
estimated payments will be based upon the prior year's estimate. Landlord
currently estimates Costs of Electricity to equal $1.00 per square
25
<PAGE> 26
foot per year. If at any time or times during such calendar year, it appears to
Landlord that Costs of Electricity or Tenant's Share of Expense Increases for
such calendar year will vary from Landlord's estimate by more than five percent
(5%) on an annualized basis, Landlord may, by written notice to Tenant, revise
its estimate for such calendar year and Tenant's estimated payments hereunder
for such calendar year shall thereupon be based on such revised estimate. The
foregoing notwithstanding, to the extent determined on the basis of submetering
or measuring devices, Costs of Electricity shall be paid by Tenant within thirty
(30) days after Landlord's written invoice therefor, and shall be based upon
Tenant's actual consumption at the actual cost charged for such electrical
service by the utility provider.
9.4 ANNUAL RECONCILIATION. Within one hundred twenty (120) days after
the end of each calendar year after the Operating Costs Base Year, Landlord
shall provide to Tenant a statement (the "Expense Statement") setting forth
Costs of Electricity and Operating Costs for such calendar year and Tenant's
Share of Expense Increases for such year, calculated in accordance with Section
9.1, above. Within thirty (30) days after the delivery of such Expense
Statement, Tenant shall pay to Landlord any deficiency between (a) the sum of
(i) the amount shown as Costs of Electricity for such calendar year and (ii) the
amount shown as Tenant's Share of Expense Increases for such calendar year, and
(b) any payments made by Tenant thereto in accordance with Section 9.3, above.
If the payments made by Tenant pursuant to Section 9.3 exceed the amount shown
in the Expense Statement as Costs of Electricity and as Tenant's Share of
Expense Increases for such calendar year, the excess amount shall be applied
against the next payment(s) of Base Rent or additional rent coming due
hereunder, unless the Lease shall have expired, in which event Landlord shall
refund such excess at the time of its delivery of the Expense Statement.
9.5 OPERATING COSTS. The term "Operating Costs" shall mean any and all
expenses incurred by Landlord in connection with the operation, management,
maintenance and repair of the Building and the Land, and all easements, rights
and appurtenances thereto, but excluding the expenses identified in Section 9.6,
below. Operating Costs shall include:
(a) [Intentionally Deleted];
(b) subject to the limits on certain capital expenditures set
forth in Section 9.5(l), below, and any other limits on amounts that may be
included within Operating Costs pursuant to Section 7.4 above, the costs to
repair and maintain the Building, Land, Building Systems, Common Areas and
Premises;
(c) all expenses paid or incurred by Landlord and surcharges
imposed against the Building for electricity, water, gas, sewer, oil, and other
utility services, including electricity provided to the HVAC units which serve
the Building, including without limitation any HVAC units which serve those
areas of the Building (including the Premises) which are leased and/or leasable
to tenant (including Tenant), and excluding only the Dedicated HVAC Units, the
electricity provided to the electrical lights, outlets, and other electrical
connections located within those portions of the Building (including the
Premises) that are leased or leasable to tenants (including Tenant);
26
<PAGE> 27
(d) subject to the limits on certain capital expenditures set
forth in Section 9.5(l) below, and any other limits on amounts that may be
included within Operating Costs pursuant to Section 7.4 above, any other costs
and expenses incurred in connection with the provision of the utilities and
services set forth in Section 8, above, including without limitation the
maintenance, repair and replacement of the Building Systems furnishing such
utilities and/or services;
(e) the cost of Building supplies and materials (including
personal property used in the repair and maintenance of the Building and Common
Areas);
(f) the cost of cleaning and janitorial services in or about
the Premises, the Building (including without limitation Common Areas) and the
Land;
(g) the cost of window glass replacement, repair and cleaning;
(h) the cost of repair and maintenance of the grounds,
including costs of landscaping, gardening and planting, including service or
management contracts with independent contractors, and including security and
energy management services and costs;
(i) subject to the limits on certain capital expenditures set
forth in Section 9.5(l) below, costs to achieve day-to-day compliance with any
governmental laws, rules, orders or regulations in the operation of the Building
and the provision of services hereunder (the cost of day-to-day compliance being
understood to mean ordinary Operating Costs incurred in performing operational
functions which are required in order to comply with applicable legal
requirements, such as repairing non-functioning life safety equipment like smoke
detectors or fire extinguishers, meeting trash recycling obligations, etc., and
shall exclude the cost of any alterations, additions, improvements or
renovations except as permitted under Section 9.5(l) below);
(j) utility taxes;
(k) the amount of compensation (including employment taxes,
fringe benefits, salaries, wages, medical, surgical, and general welfare
benefits such as health, accident and group life insurance, pension payments,
payroll taxes, and worker's compensation insurance) paid for all persons who
perform duties in connection with the operation, management, maintenance and
repair of the Building, including building engineers, custodial staff and
similar operating personnel, and including the property and asset managers, but
excluding any executives or other employees of Landlord or its property and
asset management firms who are above the level of property manager, and
excluding any portion of such compensation which is not reasonably allocable to
services performed for the Building;
(l) any capital expenditures incurred to reduce Costs of
Electricity or Operating Costs, to comply with any governmental law, order,
regulation or other legal requirement enacted after the date of this Lease, to
replace existing equipment and machinery necessary to the day to day operation
of the Building, or which are capital replacements (i.e., replacements of common
area or common usage Building components and systems in lieu of capital repairs
otherwise required to be made thereto, but excluding capital replacements made
in lieu of Structural Repairs), provided that (i) each
27
<PAGE> 28
such capital expenditures shall be amortized on a monthly basis over the useful
life thereof as determined in accordance with generally accepted accounting
principles at an interest rate of twelve percent (12%) per annum, and the amount
recoverable by Landlord as an Operating Cost in each year of the Term thereafter
occurring (including the year in which such expenditure is made) shall equal the
sum of all such amortization payments payable during each such year, and (ii)
with respect to any capital expenditure which is incurred solely to reduce Costs
of Electricity and/or other Operating Costs, the amount otherwise recoverable
under clause 9.5(l)(i), above, shall be further limited by the amount of such
reduction which is achieved in each applicable year.
(m) cost of premiums for casualty, liability, workers'
compensation, boiler and machinery, sprinkler leakage, rent loss, use and
occupancy and other insurance;
(n) license, permit and inspection fees;
(o) property management fees at rates consistent with rates
charged for comparable office projects in the Needham/Newton/Route 128 area
which are leased on a full service, net-of-electric basis;
(p) [Intentionally Deleted];
(q) the cost of ordinary compliance with Environmental Laws
and excluding any Environmental Liabilities which are determined to be
Landlord's sole responsibility under Section 5 above;
(r) personal property taxes which may be assessed against
personal property which is used in the management, operation, and/or maintenance
of the Building, and located in the Building (or allocated between the Building
and any other building or property with respect to which such personal property
is used on an equitable basis);
(s) the cost of operating any fitness facility, conference
facility, transportation service, concierge service, or other similar amenity
furnished generally to tenants of the Building;
(t) the cost of trash removal, including all costs incurred in
connection with waste product recycling pursuant to Section 5.5 (except to the
extent any such costs are charged directly to the tenants);
(u) any local and state governmental or quasi-governmental
surcharges or special charges assessed in connection with the operation and
maintenance of the Building;
(v) the cost of uniforms and dry cleaning for on-site Building
personnel;
(w) the cost of snow and ice removal or prevention;
(x) the cost of telephone, telegraph, postage, stationery
supplies and other materials and expenses required for the routine operation of
the Building;
28
<PAGE> 29
(y) to the extent Tenant exercises its self-help rights
pursuant to Section 34.4 of this Lease, any amount reimbursed by Landlord to
Tenant, or offset by Tenant, pursuant to Section 34.4 or 34.5 shall be included
in Operating Costs for the year in which such item was performed by Tenant, but
solely to the extent the item for which Tenant is seeking reimbursement from
Landlord (or as to which Tenant has exercised such right of offset) would
otherwise have been included in Operating Costs had such item been performed by
Landlord and paid for by Landlord;
(z) any other expense or charge whether or not hereinbefore
described which, in accordance with generally accepted accounting and management
practices, would be considered a reasonable and necessary expense of
maintaining, managing, operating or repairing the Building and/or the Land.
9.6 EXCLUSIONS.
(a) Notwithstanding the foregoing, Operating Costs shall not
include any of the following: (1) capital expenditures or costs of any capital
improvements, except those included within Operating Costs to the extent
provided under Section 9.5 (l), above; (2) costs of any special services
rendered to individual tenants (including Tenant), for which a special, separate
charge shall be made; (3) painting, redecorating or other similar work which
Landlord performs for specific tenants, the expenses of which are paid by such
tenants or, if paid by Landlord, do not arise out of necessary repairs
recoverable under Section 9.5; (4) Real Estate Taxes (as defined in Section 10);
(5) depreciation or amortization of costs required to be capitalized in
accordance with generally accepted accounting practices (except as set forth in
Section 9.5(l), above); (6) ground rent, if Landlord's interest in the Land is
derived solely from a ground lease; (7) interest and amortization of funds
borrowed by Landlord (except as specifically provided above); (8) leasing
commissions, and advertising, legal, space planning and construction expenses,
incurred in procuring, negotiating leases with, and installing leasehold
improvements for, tenants or prospective tenants of the Building; (9) salaries,
wages, or other compensation paid to officers or executives of Landlord (or
Landlord's property management firm) in their capacities as officers and
executives; (10) any other expenses for which Landlord actually receives direct
reimbursement from insurance, condemnation awards, other tenants or any other
source, excluding general payments of Expense Increases pursuant to this Section
9 by Tenant and other tenants of the Building; (11) any costs of renovating or
otherwise improving space for tenants or other occupants of the Building; (12)
any costs in connection with an expansion of the Rentable Area of the Building;
(13) any costs in connection with the repair, replacement or correction of any
construction work performed by or on behalf of Landlord in connection with the
initial construction of the Building or the Premises by reason of defective or
incorrect design or construction to the extent not permitted to be included in
Operating Costs pursuant to Article 7 of this Lease; (14) any cost of
reconstruction or other work occasioned by fire, windstorm, or by any casualty
insured, or required to be insured, against hereunder, or by the exercise of the
right of eminent domain, except to the extent of any so-called "deductible"
amount under policies of insurance (which deductible amount shall not exceed
$10,000); (15) any cost of services or utilities that are provided by Landlord
to tenants, for which tenants are required to make separate payment to Landlord;
(16) any expenses in connection with services or other benefits of a type which
are not provided to Tenant, but which are provided to another tenant or
occupant; (17) any costs incurred due to violation by Landlord of the terms and
conditions of any lease; (18) any charges under any maintenance or management
contract made with an affiliate of Landlord
29
<PAGE> 30
or to any person or party otherwise directly or indirectly related to Landlord,
but only to the extent that the amount of such payment would exceed competitive
costs of the same item if furnished or provided by an unrelated person or party;
(19) any amortization or rental payments on any ground or underlying leases;
(20) any of Landlord's general overhead not directly connected with the
management/operation of the Building; (21) any compensation paid to employees or
other persons in connection with commercial concessions operated by Landlord;
(22) any items or services for which Tenant or any tenant specifically
reimburses Landlord or pays third persons; (23) any costs, fines or penalties
incurred due to any violation by Landlord of any governmental rule or authority;
(24) any increases in premium for any insurance maintained by Landlord resulting
from the extra-hazardous activities of Landlord or tenants other than Tenant;
(25) any costs of maintenance, repairs or replacements required because of the
negligent or willful act or omission of Landlord, its officers, directors,
servants, agents, employees or contractors; (26) any Environmental Liabilities
for which Landlord is responsible under this Lease; and (27) any capital
expenditures incurred to comply with any governmental law, order, regulation or
other legal requirement enacted prior to the date of this Lease.
9.7 FURTHER ADJUSTMENT. In the event Landlord shall furnish any utility
or service which is included in the definition of Operating Costs to less than
ninety-five percent (95%) of the rentable area of the Building because (i) the
average occupancy level of the Building for the Operating Costs Base Year and/or
any subsequent calendar year was not ninety-five percent (95%) or more of full
occupancy, (ii) any such utility or service is not required by or provided to
one or more of the tenants or occupants of the Building, and such tenant(s) is
(are) not required to contribute its (their) proportionate share thereof, or
(iii) any tenant or occupant is itself obtaining or providing any such utility
or services directly, then the Operating Costs for such year (including the
Operating Costs Base Year) shall be adjusted to include all additional costs,
expenses and disbursements that Landlord reasonably determines would have been
incurred had the Building been ninety-five percent (95%) occupied during the
year in question and such utilities and services provided to all tenants. The
intent of this Section 9.7 is to ensure that the reimbursement of all Operating
Costs is fair and equitably allocated among the tenants receiving such utilities
and services. In the calculation of Operating Costs hereunder, no expense shall
be charged more than once.
9.8 INTENTIONALLY DELETED.
10. INCREASES IN REAL ESTATE TAXES
10.1 DEFINED. For each calendar year or portion thereof during the
Term, Tenant shall pay as additional rent to Landlord, without diminution,
set-off or deduction, except as expressly provided in this Lease, Tenant's Share
of an amount (hereinafter referred to as "Tax Increases") equal to the
difference between:
(a) Real Estate Taxes (defined in Section 10.5, below) payable
with respect to such calendar year; and
(b) Real Estate Taxes payable with respect to the Real Estate
Tax Base Year (defined in Section 10.2, below).
30
<PAGE> 31
10.2 BASE YEAR. For all purposes hereof, the "Real Estate Tax Base
Year" shall be the 2001 fiscal tax year (i.e., July 1, 2000-June 30, 2001).
10.3 ESTIMATED PAYMENTS. Tenant shall make monthly installment payments
toward Tenant's Share of Tax Increases on an estimated basis, based on
Landlord's reasonable estimate of Tax Increases for such calendar year. Tenant
shall pay Landlord commencing on the first day of the month immediately
following the last day of the Real Estate Tax Base Year, and on the first day of
each month thereafter during the Term, one-twelfth (1/12) of Landlord's estimate
of Tenant's Share of Tax Increases for the then-current calendar year. If at any
time or times during such calendar year, it appears to Landlord that Tenant's
Share of Tax Increases for such calendar year will vary from Landlord's estimate
by more than five percent (5%) on an annualized basis, Landlord may, by written
notice to Tenant, revise its estimate for such calendar year and Tenant's
estimated payments hereunder for such calendar year shall thereupon be based on
such revised estimate.
10.4 ANNUAL RECONCILIATION. Within one hundred twenty (120) days after
the end of each calendar year after the Real Estate Tax Base Year, Landlord
shall provide to Tenant a statement (the "Tax Statement") setting forth the
total Real Estate Taxes for such calendar year and Tenant's Share of Tax
Increases for the applicable year, and if requested by Tenant at least thirty
(30) days prior to Landlord's delivery of the Tax Statement, a copy of the real
estate tax bill. Within thirty (30) days after the delivery of such Tax
Statement, Tenant shall pay to Landlord any deficiency between the amount shown
as Tenant's Share of Tax Increases for such calendar year and the estimated
payments made by Tenant toward such amount in accordance with Section 10.3,
above. In the case of excess estimated payments, the excess shall be applied
against estimated payments of Real Estate Taxes for the subsequent calendar
year, unless the Lease shall have expired, in which event Landlord shall refund
such excess, without interest, with the delivery of the Tax Statement.
10.5 REAL ESTATE TAXES. For purposes of this Lease, "Real Estate Taxes"
shall mean all taxes and assessments, general or special, ordinary or
extraordinary, foreseen or unforeseen, assessed, levied or imposed upon the Land
and/or the Building, or assessed, levied or imposed upon the fixtures,
machinery, equipment or systems in, upon or used in connection with the
operation of the Land and/or the Building under the current or any future
taxation or assessment system or modification of, supplement to, or substitute
for such system. Real Estate Taxes (a) shall include all reasonable expenses
(including, but not limited to, attorneys' fees, disbursements and actual costs)
incurred by Landlord in obtaining or attempting to obtain a reduction of such
taxes, rates or assessments, including any legal fees and costs incurred in
connection with contesting or appealing the amounts or the imposition of any
Real Estate Taxes, and (b) shall exclude any franchise, capital stock, capital,
rent, income, profit or similar tax or charge. Landlord shall pay any special
assessment by installments to the extent it has the right to do so, and in such
event, Real Estate Taxes shall include such installments and interest paid on
the unpaid balance of the assessment. In the event Landlord succeeds in
obtaining a reduction of such taxes, rates or assessments, then, after
reimbursement to Landlord of all expenses (including, but not limited to,
attorneys' fees, disbursements and actual costs) incurred by Landlord in
obtaining such reduction, Tenant shall be entitled to receive its proportionate
share of the net amount of any refund received or reduction obtained by Landlord
to the extent allocable to the Term of this Lease.
31
<PAGE> 32
10.6 FURTHER ADJUSTMENT. If in any year of calculation, including the
Real Estate Tax Base Year, the Building is (i) less than 95% occupied and the
determination of the amount of Real Estate Taxes due, as calculated by the
applicable taxing authority, is based in whole or in part upon the level of
occupancy of the Building, or (ii) or is not otherwise fully assessed, then Real
Estate Taxes calculated for any such year shall be adjusted by Landlord to
reflect a reasonable estimate of what Real Estate Taxes for such year would have
been, based on the applicable method of calculation utilized by such taxing
authority, had the Building been 95% occupied and/or otherwise fully assessed.
The intent of this Section 10.6 is to ensure that the reimbursement of all Real
Estate Taxes is fair and equitably allocated (a) between Landlord (with respect
to any unoccupied space in the Building) and the tenants of the Building and (b)
among the tenants of the Building.
10.7 SEPARATE TAX LOT. Landlord represents that the Land and the
Building constitute one tax parcel which does not include any real estate other
than the Land and the Building.
11. ADDITIONAL PROVISIONS; OPERATING COSTS AND REAL ESTATE TAXES.
11.1 PARTIAL YEAR; END OF TERM. To the extent Real Estate Taxes, and/or
any items of Operating Costs, cannot more accurately be determined for any
partial calendar year of the Term by a method other than proration, the parties
agree that such determination shall be made by multiplying the amount thereof
for the full calendar year by a fraction, the numerator of which is the number
of days during such partial calendar year falling within the Term and the
denominator of which is 365. If this Lease terminates on a day other than the
last day of a calendar year, the amount of any adjustment to Tenant's Share of
Expense Increases and Tax Increases with respect to the calendar year in which
such termination occurs shall be prorated on the basis which the number of days
from the commencement of such calendar year to and including such termination
date bears to 365; and any amount payable by Landlord to Tenant or Tenant to
Landlord with respect to such adjustment shall be payable within thirty (30)
days after delivery by Landlord to Tenant of the Expense Statement or Tax
Statement, as the case may be, with respect to such calendar year.
11.2 OTHER TAXES. In addition to Tenant's Share of both Expense
Increases and Tax Increases: (a) Tenant shall pay to Landlord (in accordance
with Section 1.5, above) Tenant's Share of any taxes imposed upon the Premises,
the Building, the Land or the rents payable hereunder (i) in the nature of a
sales or use tax (other than taxes payable by Landlord in connection with the
sale or other transfer of all or any portion of its interest in the Building
and/or Land), or (ii) in the form of a levy made in substitution for ad valorem
real estate taxes (but specifically excluding any income or franchise tax, net
profits tax, estate tax, inheritance tax or payroll tax); and (b) Tenant shall
pay, prior to delinquency, all personal property taxes payable with respect to
all property of Tenant located in the Premises or the Building and shall provide
promptly, upon request of Landlord, written proof of such payment.
11.3 TIMING OF ESTIMATES. If Landlord does not determine its estimate
for the then current calendar year of Tenant's Share of Expense Increases and/or
Tax Increases until February 1 or later, Tenant shall continue to make such
payments at the prior calendar year's rate, and in such event, Tenant's first
such estimated payment installment after such estimate is first made or updated
shall
32
<PAGE> 33
include, retroactively, any increases in the monthly estimated payments
applicable since January 1 of the same calendar year.
11.4 TENANT'S RIGHT OF REVIEW.
11.4.1 Each Expense Statement which Landlord provides to
Tenant pursuant to this Sections 9 and 10, above, shall be conclusive and
binding upon Tenant unless, within thirty (30) days after Tenant's receipt of
the Expense Statement for a particular calendar year, Tenant provides Landlord
with written notice (the "Review Notice") stating that Tenant is exercising its
right to undertake a more extensive review of the Operating Costs, Costs of
Electricity or Real Estate Taxes (hereinafter "Total Expenses") for the Building
for such calendar year. Such review shall commence within thirty (30) days after
Tenant's Review Notice on a mutually agreeable time and date, at the offices of
Landlord (or such other location as is reasonably designated by Landlord), and
shall be completed within thirty (30) days after commenced. Tenant's review
shall take place during Landlord's normal business hours, and shall be limited
to those books and/or documentation which contain the data for and the method
used by Landlord in calculating the Total Expenses for the Building for the
applicable year. Tenant's right to review Total Expenses for the Building for a
particular calendar year shall be a one-time right for any five-year period
included in the Term.
11.4.2 Tenant shall notify Landlord in writing of the results
of Tenant's review within ten (10) business days after such review is completed.
If Tenant's review demonstrates that Landlord has overstated Total Expenses, but
by less than five percent (5%), then Landlord shall credit the amount of such
overstatement against Tenant's next due payment of Base Rent and additional
rent, and Tenant shall bear the full cost of Tenant's review. If Tenant's review
demonstrates that Landlord has overstated Total Expenses by five percent (5%) or
more, then Landlord shall credit such amount against Tenant's next due payment
of Base Rent and additional rent, and Landlord shall reimburse Tenant the
reasonable and actual costs of Tenant's review, not to exceed Two Thousand Five
Hundred Dollars ($2,500). If Tenant's review demonstrates that Landlord has not
overstated Total Expenses, then (i) Landlord shall have the right to invoice
Tenant for any amount by which Tenant's Share of Total Expenses was understated,
which invoice shall be payable by Tenant within fifteen (15) days after receipt
thereof, (ii) Tenant shall bear the full cost of Tenant's review, and (iii)
Tenant shall reimburse Landlord for any reasonable and actual third party costs
which Landlord incurred in connection with such review, not to exceed Two
Thousand Five Hundred Dollars ($2,500).
12. TENANT'S INSURANCE.
12.1 COVERAGE REQUIREMENTS. Tenant shall during the Term of this Lease,
procure at its expense and keep in force the following insurance: (i) Commercial
general liability insurance naming the Landlord and Landlord's managing agent as
additional insureds against any and all claims for bodily injury and property
damage occurring in or about the Premises. Such insurance shall have a combined
single limit of not less than One Million Dollars ($1,000,000) per occurrence
with a Two Million Dollar ($2,000,000) aggregate limit and excess umbrella
liability insurance in the amount of Two Million Dollars ($2,000,000). If Tenant
has other locations that it owns or leases, the policy shall include an
aggregate limit per location endorsement. Such liability insurance
33
<PAGE> 34
shall be primary and not contributing to any insurance available to Landlord and
Landlord's insurance shall be in excess thereto. In no event shall the limits of
such insurance be considered as limiting the liability of Tenant under this
Lease; (ii) personal property insurance insuring all equipment, trade fixtures,
inventory, fixtures and personal property located within the Premises for perils
covered by the causes of loss -- special form (all risk) and in addition,
coverage for flood, earthquake and boiler and machinery (if applicable), which
insurance shall be written on a replacement cost basis in an amount equal to one
hundred percent (100%) of the full replacement value of the aggregate of the
foregoing; (iii) workers' compensation insurance in accordance with statutory
laws and employers' liability insurance with a limit of not less than One
Hundred Thousand Dollars ($100,000) per employee and Five Hundred Thousand
Dollars ($500,000) per occurrence; and (iv) such other insurance as may be
required by Landlord's beneficiaries or mortgagees of any deed of trust or
mortgage encumbering the Premises, or as is reasonable and customary for first
class office buildings in the area in which the Building is located.
12.2 RATING; CERTIFICATES; CANCELLATION. The policies required to be
maintained by Tenant shall be with companies rated A:X or better in the most
current issue of Best's Insurance Reports, and licensed to do business in the
state in which the Premises are located and domiciled in the USA. Except as
provided in Section 12.1, above, any deductible amounts under any insurance
policies required hereunder shall not exceed One Thousand Dollars ($1,000).
Certificates of insurance evidencing that Tenant has all of the coverages
required herein shall be delivered to Landlord prior to the Commencement Date.
Each policy of insurance shall provide notification to Landlord at least thirty
(30) days prior to any cancellation or modification. Tenant shall have the right
to provide insurance coverage which it is obligated to carry pursuant to the
terms hereof in a blanket policy, provided such blanket policy expressly affords
coverage to the Premises and to Landlord as required by this Lease.
13. LANDLORD'S INSURANCE.
At all times during the Lease Term, Landlord will maintain (a) all-risk
fire and extended coverage casualty insurance covering damage to the Building
and to Landlord's Work (excluding earthquake and flood insurance unless
available at commercially feasible rates) in an amount equal to 100% of the
replacement cost thereof, together with a demolition endorsement and an
increased cost of construction endorsement, (b) commercial general public
liability and property damage insurance covering any occurrence on or about the
common areas, exterior areas and other public areas of the Building and Land
from every source (including broad form contractual liability endorsement
insuring all of Landlord's insurable indemnification obligations under this
Lease) in an amount not less than One Million Dollars ($1,000,000) per
occurrence with a Two Million Dollar ($2,000,000) aggregate limit and excess
umbrella liability insurance in the amount of Seven Million Dollars
($7,000,000), (c) loss of "rental value" insurance in an amount equal to not
less than the Rent (Base Rent plus additional rent) payable under this Lease for
not less than a one (1) year period, and (d) workers compensation and employer's
liability insurance to the extent required by state law. Landlord shall also
have the right to obtain such other types and amounts of insurance coverage on
the Building and Landlord's liability in connection with the Building as
Landlord determines is customary or advisable for a Class A office building in
the Needham/Newton/Route 128 area. Tenant acknowledges and agrees that all
premiums for insurance obtained by Landlord pursuant to
34
<PAGE> 35
this Section 13 shall be included within "Operating Costs," as such term is
defined in Section 9, above. Certificates of insurance evidencing that Landlord
has all of the coverages required herein shall be delivered to Tenant on or
before the Commencement Date. Each such policy of insurance shall provide
notification to Tenant at least thirty (30) days prior to any cancellation or
non-renewal. Landlord shall have the right to provide insurance coverage which
it is obligated to carry pursuant to the terms hereof in a blanket policy,
provided such blanket policy expressly affords coverage to the Premises,
Building and Land as required by this Lease.
14. DAMAGE OR DESTRUCTION.
14.1 DAMAGE REPAIR.
14.1.1 If the Premises shall be destroyed or rendered
untenantable, either wholly or in part, by fire or other casualty, then, unless
this Lease is terminated for reasons permitted pursuant to Sections 14.2 and/or
14.5, below, Landlord shall, within thirty (30) days after the date of such
casualty, provide Tenant with Landlord's good faith written estimate (the
"Estimate") of how long it will take to repair or restore the Premises.
14.1.2 If the Estimate indicates that Landlord will require
less than one hundred eighty (180) days after the date of such casualty to
perform such repairs or restoration, then this Lease shall continue in full
force and effect, and Landlord shall, promptly after adjusting the insurance
claim and obtaining governmental approvals for reconstruction, commence and
diligently prosecute to completion the restoration of the Premises to their
condition immediately prior to such casualty, subject to Section 14.4 below and
subject to Force Majeure (as defined in Section 47.8, below) not to exceed
thirty (30) days in the aggregate, and subject further to delay caused by
Tenant. Pending Substantial Completion (as defined in EXHIBIT C) of such
restoration, Rent shall be abated in the same proportion as the untenantable
portion of the Premises bears to the whole thereof.
14.1.3 If Landlord indicates within the Estimate that it will
require in excess of one hundred eighty (180) days after the date of such
casualty to fully repair or restore the Premises in accordance herewith, then
within thirty (30) days after Landlord delivers Tenant the Estimate, either
Landlord or Tenant shall have the right to terminate this Lease by written
notice to the other, which termination shall be effective as of the date of such
notice of termination, and all liabilities and obligations of Landlord and
Tenant thereafter accruing shall terminate and be of no legal force and effect.
Pending such termination, the Rent shall be abated from the date of the fire or
other casualty in the same proportion as the untenantable portion of the
Premises bears to the whole thereof.
14.1.4 If neither party elects to terminate the Lease, as
aforesaid, and Landlord fails or declines to exercise any other termination
right pursuant to this Section 14, Landlord shall, promptly after adjusting the
insurance claim and obtaining governmental approvals for reconstruction,
commence and diligently prosecute to completion the restoration of the Premises
to their condition immediately prior to such casualty, subject to Section 14.4
below and subject to Force Majeure or delay caused by Tenant. If such
restoration is not substantially completed within one hundred eighty (180) days
after the date of the casualty (or such longer period as was referenced
35
<PAGE> 36
in the Estimate, if applicable), then for a period of up to thirty (30) days
after the expiration of such period (but in all events no later than the date
Landlord substantially completes its restoration of the Premises), Tenant shall
have the right to terminate this Lease upon thirty (30) days prior written
notice to Landlord; provided, however, that if Landlord completes such
restoration prior to the end of the thirty (30) day notice period, Tenant's
notice of termination shall be deemed rescinded and ineffective for all
purposes, and this Lease shall continue in full force and effect. The provisions
of this Section are in lieu of any statutory termination provisions allowable in
the event of casualty damage.
14.2 TERMINATION FOR MATERIAL OR UNINSURED DAMAGES. If (i) the Building
shall be materially destroyed or damaged to the extent that the restoration of
such, in Landlord's reasonable judgment, is not economical or feasible, or (ii)
the Building shall be materially destroyed or damaged by any casualty other than
a casualty covered by the insurance policies required to be maintained by
Landlord hereunder, notwithstanding that the Premises may be unaffected directly
by such destruction or damage, or (iii) Landlord's mortgagee (if any) requires
that the proceeds of insurance be applied to reduce any amounts outstanding
under such mortgage, then in any such event, Landlord may, at its election,
terminate this Lease by notice in writing to Tenant within thirty (30) days
after such destruction or damage. Such notice shall be effective thirty (30)
days after receipt thereof by Tenant.
14.3 BUSINESS INTERRUPTION. Other than rental abatement as and to the
extent provided in Section 14.1, no damages, compensation or claim shall be
payable by Landlord for inconvenience or loss of business arising from
interruption of business, repair or restoration of the Building or the Premises.
14.4 REPAIRS. Landlord's repair obligations, if any, shall be limited
to restoration of improvements which are covered by and to the extent of the
insurance policies required to be maintained by Landlord hereunder, including
without limitation, Landlord's Work and Base Building Improvements. Tenant
acknowledges that any such repairs or restorations shall be subject to
applicable laws and governmental requirements, the requirements of Landlord's
mortgagee (if any), and to delay in the process of adjusting any insurance claim
associated therewith; and neither delays resulting from any of the foregoing nor
modifications to the Building or to the interior of the Premises occurring by
virtue of the application of such requirements shall constitute a breach of this
Lease by Landlord as long as Landlord uses reasonable efforts to commence and
complete such repairs and restorations in a timely fashion consistent with the
pre-existing condition of the applicable improvements.
Notwithstanding the foregoing to the contrary, in the event
Landlord's mortgagee applies all or any portion of the insurance proceeds
received by Landlord in whole or partial satisfaction of the amounts due under
any indebtedness secured by the Property, or the insurance proceeds realized
under insurance policies required to be maintained (and which are in fact
maintained) by Landlord are insufficient to restore the Premises to
substantially the same condition they were in immediately prior to such
casualty, (a) Landlord's restoration obligation shall continue, but shall be
extended as necessary to account for the need to secure funding of the costs of
such restoration, and (b) if (i) such casualty was of a type where Tenant had
the right to terminate this
36
<PAGE> 37
Lease pursuant to Sections 14.1.3 and 14.1.4 above, (ii) Tenant declined to
terminate the Lease within the time period provided under Sections 14.1.3 and
14.1.4, (iii) the delay in restoration materially and adversely affects Tenant's
use and enjoyment of the Premises, and (iv) such restoration has not commenced
within one hundred eighty (180) days after the date of such casualty, then
Tenant shall have the right, for a period of thirty (30) days after the
expiration of such one hundred eighty (180) day period to terminate this Lease
upon thirty (30) days prior written notice to Landlord; provided that if
Landlord commences such restoration prior to the end of the thirty (30) day
notice period (with reasonable evidence that funding is available to complete
such restoration), Tenant's notice of termination shall be deemed rescinded and
ineffective for all purposes, and this Lease shall continue in full force and
effect.
14.5 END OF TERM CASUALTY. Anything herein to the contrary
notwithstanding, if more than seventy-five percent (75%) of the Premises are
destroyed or damaged during the last eighteen (18) months of the Lease Term,
then either Landlord or Tenant shall have the right to terminate this Lease upon
thirty (30) days prior written notice to the other, which termination shall be
effective on the thirtieth (30th) day after the other party's receipt of such
notice, provided that, if Tenant has an extension option which has not yet
expired under this Lease as of the date of Landlord's notice of termination, and
Tenant exercises such extension option in the manner required by Section 51,
below, prior to that date which is ten (10) business days after the date of
Landlord's written notice to Tenant terminating this Lease pursuant to this
Section 14.5, Tenant's extension option shall be deemed to have been exercised,
Landlord's notice of termination pursuant to this Section 14.5 shall be deemed
to have been rescinded, and the provisions of Sections 14.1 and 14.4, above,
shall apply to such restoration. The notice of termination contemplated under
this Section 14.5 must be delivered within thirty (30) days after the date of
such casualty, or shall be deemed waived.
14.6 RELOCATION TO INTERIM SPACE. If all or part of the Premises is
damaged or destroyed by fire or other casualty and neither party elects to
exercise its termination right hereunder (or if no termination rights are
triggered), then Landlord shall have the option, to be exercised by delivering
written notice to Tenant within thirty (30) days after the date of such
casualty, to relocate Tenant to available space in the Building which is
comparable to the Premises (the "Interim Space") for the period during which the
Premises are repaired or restored, provided that (i) Landlord shall pay the
reasonable and actual costs to move Tenant's moveable fixtures, furniture and
equipment into the Interim Space, and out of the Interim Space when the Premises
is repaired, (ii) the square footage of the Interim Space shall not be less than
ninety percent (90%) of the square footage of the Premises unless Tenant agrees
otherwise, (iii) the Interim Space shall be reasonably suitable for the conduct
and operation of Tenant's business, and (iv) upon occupancy of the Interim
Space, Tenant shall pay Landlord Base Rent and additional rent for the Interim
Space as set forth in this Lease, which shall be adjusted to reflect the square
footage of the Interim Space; however, in no event shall the Base Rent and
additional rent for the Interim Space exceed the Base Rent and additional rent
for the Premises. If Landlord exercises the foregoing option, Tenant shall
relocate from the Premises to the Interim Space within thirty (30) days after
receipt of Landlord's notice; and Tenant shall relocate from the Interim Space
to the reconstructed Premises within thirty (30) days after Landlord notifies
Tenant that the repair of the Premises has been substantially completed.
37
<PAGE> 38
15. MACHINES AND EQUIPMENT; ALTERATIONS AND ADDITIONS: REMOVAL OF
FIXTURES.
15.1 FLOOR LOAD, AND EXCESSIVE NOISE, VIBRATION, AND ELECTRICAL USAGE.
Tenant shall not, without Landlord's prior consent, place a load upon the floor
of the Premises which exceeds the maximum live load per square foot which
Landlord (or Landlord's architect or engineer) determines (in its good faith
professional judgment) is appropriate for the Building. To the best of
Landlord's knowledge, the maximum appropriate floor load for the Building is two
hundred (200) pounds per square foot. Tenant will notify Landlord prior to the
installation of any high-density filing systems, or any unusually heavy
equipment or machinery, in the Premises, and all such installations shall be
subject to Landlord's reasonable consent. Business machines, mechanical
equipment and materials belonging to Tenant which cause vibration, noise, cold,
heat or fumes that may be transmitted to the Building or to any other leased
space therein to such a degree as to be objectionable to Landlord or to any
other tenant in the Building shall be placed, maintained, isolated, stored
and/or vented by Tenant (at its expense) so as to absorb and prevent such
vibration, noise, cold, heat or fumes. Except as may otherwise be provided in
EXHIBIT C hereto, Landlord shall not be required to supply electrical current
for equipment that requires more than 110 volts, and Tenant will not install or
operate in the Premises any electrical or other equipment whose electrical
energy consumption exceeds that of normal office use, without first obtaining
the prior consent in writing of Landlord, who may condition such consent upon
the payment by Tenant of additional rent to compensate (at cost) for excess
consumption of water and/or electricity, increases to the capacity of Building
Systems, and other similar requirements. All changes, replacements or additions
to any Building Systems which may be necessitated by the installation and
operation of such electrical equipment and/or machinery by Tenant shall be
subject to Landlord's consent, and shall be performed under Landlord's direction
at Tenant's expense.
15.2 ALTERATIONS - GENERALLY. Tenant may make cosmetic alterations
(i.e., repainting, replacement of carpeting, installation of wall covering,
etc.) to the Premises, the costs of which in the aggregate do not exceed
$50,000, without Landlord's consent, provided that Landlord is notified in
writing prior to commencement of any such cosmetic alterations and the same do
not diminish the value of the Premises in more than a DE MINIMIS amount. All
other alterations, additions and improvements proposed to be made to the
Premises by Tenant including, without limitation, the Dedicated HVAC Units
(hereinafter, "Alterations") shall be subject to Landlord's prior written
approval, in accordance with the standards hereafter set forth. In the case of
Alterations which are structural or visible from the exterior of the Premises,
such approval may be withheld or conditioned in Landlord's sole, absolute, and
subjective discretion. In the case of all other Alterations, such consent may
not be unreasonably withheld, conditioned, or delayed. Without limitation, it
shall not be unreasonable for Landlord to deny its consent to any Alterations
(a) which would diminish the value of the leasehold improvements to the Premises
in more than a DE MINIMIS amount, (b) which would adversely affect any Building
Systems, (c) which would adversely affect the structural elements of the
Building, (d) which would impose on Landlord any special maintenance, repair, or
replacement obligations not within the scope of those expressly provided for
herein, or (e) which would constitute non-standard office improvements, meaning
improvements which are unusual or extraordinary for standard office usage,
including curved walls, circular rooms, windowless office areas, vault areas,
areas involving special electrical or fire suppression systems, etc. The
foregoing
38
<PAGE> 39
notwithstanding, (i) Landlord will not withhold its consent to a proposed
Alteration solely on the basis described in clause (d) if Tenant agrees, at the
time of its request for approval or notice of such Alterations, to pay all costs
associated with Landlord's meeting the additional obligations described in
clause (d), and (ii) Landlord will not withhold its consent to a proposed
Alteration solely on the basis described in clause (e) if Tenant agrees, at the
time of its request for approval or notice of such Alterations, to remove such
Alteration(s) and restore the Premises to its condition prior to the
installation thereof, at Tenant's sole expense, upon the expiration or sooner
termination of this Lease. All Alterations (including without limitation
cosmetic alterations) shall be made (1) at Tenant's sole expense, (2) according
to plans and specifications approved in writing by Landlord (to the extent
Landlord's consent is required), (3) in compliance with all applicable laws, (4)
by a licensed contractor, and (5) in a good and workmanlike manner conforming in
quality and design with the Premises existing as of the Commencement Date. In
addition, except for (A) any Alterations which Landlord requires Tenant to
remove as a pre-condition to the installation thereof, (B) Tenant's movable
office partitions, furniture, and trade fixtures, and (C) the Dedicated HVAC
Units which Tenant may elect to remove, or Landlord may require Tenant to
remove, subject to and in accordance with the provisions of Section 15.3 below,
all Alterations (including without limitation cosmetic alterations) made by
Tenant shall at once become a part of the realty and shall be surrendered with
the Premises.
15.3 REMOVAL OF ALTERATIONS. Upon the expiration or sooner termination
of the Lease Term, Tenant shall, at Tenant's expense, diligently remove all
Alterations made by Tenant after the Commencement Date and designated by
Landlord or agreed to by Tenant, as the case may be, to be removed at the time
of Landlord's approval or Tenant's request for approval or notice thereof (or
otherwise required to be removed by Tenant pursuant to EXHIBIT C). Tenant shall
repair any damage to the Premises caused by such removal and, except as
otherwise provided herein, restore the applicable portion of the Premises to its
condition prior to such Alteration. Tenant shall remove all of its movable
property and trade fixtures, and if Tenant so elects or Landlord so requires,
the Dedicated HVAC Units, at the expiration or earlier termination of this
Lease, and shall pay to Landlord the cost of repairing any damage to the
Premises or Building resulting from such removal. In no event shall Tenant
remove any portion of Landlord's Work or Base Building Improvements except as
otherwise expressly provided in this Lease. All items of Tenant's movable
property, trade fixtures and personal property (including, without limitation,
the Dedicated HVAC Units) that are not removed from the Premises or the Building
by Tenant at the termination of this Lease (or at any time when Landlord has the
right of reentry due to a Tenant default) shall be deemed abandoned and become
the exclusive property of Landlord, without further notice to or demand upon
Tenant and may be removed by Landlord at Tenant's expense and with no liability
to Tenant whatsoever. Tenant's obligations under these Sections 15.2 and 15.3
shall survive the expiration or termination of this Lease.
15.4 ADDITIONAL COVENANTS REGARDING ALTERATIONS.
15.4.1 Tenant shall be responsible for and shall pay when due
all costs associated with the preparation of plans and the performance of
Alterations, and the same shall be performed in a lien-free, first-class, and
good and workmanlike manner, and in accordance with applicable codes and
requirements, including the requirements of the ADA. In the event that (a)
Tenant shall
39
<PAGE> 40
fail to pay the costs associated with Alterations on a timely basis; (b) as a
result of such failure, a statutory and/or common law lien is asserted against
the Premises or the Building; and (c) Tenant shall fail, within thirty (30) days
after notice of such assertion, to cause (by payment, posting of a proper bond,
or otherwise) such lien to be released of record, the same shall constitute a
default by Tenant for all purposes of this Lease, and Landlord shall have the
right (but not the obligation), at Tenant's expense, to cause such lien to be
released of record. Unless otherwise approved by Landlord, Tenant shall only use
new, first-class materials in connection with Alterations. All contractors and
subcontractors performing any work on behalf of Tenant within the Premises shall
be subject to Landlord's approval and licensed to do business in jurisdiction
within which the Premises is located.
15.4.2 Tenant shall ensure that all contractors and
subcontractors performing Alterations are insured in amounts required by law and
reasonably acceptable to Landlord. Alterations may not commence, nor may Tenant
permit its contractors and subcontractors to commence or continue any such work,
until all required insurance has been obtained, and, if Landlord requests, until
certificates of such insurance have been delivered to Landlord. Such insurance
policies shall name Landlord, Landlord's property manager, and Landlord's
mortgagee(s) as additional insureds. Such certificates of insurance shall
provide that no change or cancellation of such insurance coverage shall be
undertaken without thirty (30) days' prior written notice to Landlord. In the
event Tenant employs a contractor or subcontractor to perform all or part of any
Alterations, Tenant shall purchase, or cause its contractor to carry, General
Contractor's and Subcontractor's Required Minimum Coverages and Limits of
Liability as follows, which coverages shall be in amounts required by law and
reasonably acceptable to Landlord and in addition to any and all insurance
required to be procured by Tenant pursuant to the terms of this Lease: Workers'
Compensation, Employer's Liability Insurance, any insurance required by any
Employee Benefit Act (or similar statute), Comprehensive General Liability
Insurance (including Contractor's Protective Liability), Comprehensive
Automotive Liability Insurance, and Builder's Risk insurance.
15.4.3 Tenant agrees that Landlord and its agents and managers
will have the right to inspect any Alterations made by Tenant's contractor(s)
and subcontractor(s), and Tenant agrees to cooperate with Landlord to facilitate
such inspections. In the performance of Alterations in accordance with this
Lease, Tenant shall cause its contractor to use reasonable and diligent efforts
not to interfere with ongoing operations in the Building. Tenant's contractor
shall be responsible for all utility costs associated with the performance of
Alterations and shall either supply its own electricity and other utilities, or
shall reimburse Landlord for all utility consumption associated with such work.
Tenant shall cause its contractor(s) to keep all construction areas clean and
free of trash and debris and shall otherwise comply with any other reasonable
rules and regulations established by Landlord with regard to construction
activities within the Building. Tenant's construction contract shall indemnify
Tenant and Landlord from damages, losses and expenses associated with the acts
and omissions of Tenant's contractor, its agents, employees and subcontractors.
To the extent that any Alterations involve construction work which affects any
exterior portions of the Building or Common Areas, Landlord may impose
additional requirements as a condition of its approval of such Alterations to
ensure that Tenant restores all affected areas of the Building's exterior and/or
common areas to their original condition upon completion and otherwise protects
and
40
<PAGE> 41
restores all affected work areas within the Building (including any portions of
the Common Areas of the Building) utilized or affected in performing such
Alterations.
15.4.4 Tenant shall provide to Landlord copies of all
applications for permits, copies of all governmental inspection reports and/or
certificates, and any and all notices or violations communicated to Tenant or
its contractors by applicable governmental authorities, promptly upon receipt
and/or submission thereof, as the case may be. Tenant agrees to comply (or to
cause its contractors to comply) with all applicable federal, state and local
laws, regulations and ordinances in the performance of Alterations, and to
promptly rectify any violations of such laws caused by the acts or omission of
Tenant, its employees, agents and/or contractors, and Tenant shall be
responsible for any non-compliance by Tenant or its agents, employees and
contractors. Tenant and its contractor performing Alterations shall (a) provide
copies of warranties for Alterations and the materials and equipment which are
incorporated into the Building and Premises in connection therewith, (b) provide
to Landlord all operating and maintenance manuals for all equipment and
materials incorporated into the Building and/or Premises as part of any
Alterations, and (c) either assign to Landlord, or enforce on Landlord's behalf,
all such warranties to the extent repairs and/or maintenance on warranted items
would be covered by such warranties and are otherwise Landlord's responsibility
under this Lease.
16. ACCEPTANCE OF PREMISES.
Landlord shall tender, and Tenant shall accept possession of the
Premises in accordance with the terms of Section 1.4 hereof and EXHIBIT C
hereto. All provisions regarding delivery of possession of the Premises,
construction of leasehold improvements to the Premises and any adjustments which
may be made with respect to the Commencement Date are set forth in Section 1.4
and/or EXHIBIT C. The definition of "Substantial Completion" shall be as set
forth in EXHIBIT C.
17. TENANT IMPROVEMENTS.
Any initial improvements to be performed by Tenant to the Premises,
including without limitation, Tenant's Work, shall be treated as Alterations to
the Premises and thus governed by Article 15, above, to the extent not
specifically addressed in EXHIBIT C hereto.
18. ACCESS.
Tenant shall permit Landlord and its agents to enter the Premises at
all reasonable times and (except in cases of Emergency, as defined herein) upon
reasonable prior notice, not to exceed two (2) business days: to inspect the
same; to show the Premises to prospective tenants, or interested parties such as
prospective lenders and purchasers; to clean, repair, alter or improve the
Premises or the Building; to discharge Tenant's obligations when Tenant has
failed to do so within any applicable grace period provided for herein; to post
notices of non-responsibility and similar notices and "For Sale" or "For Lease"
signs upon or adjacent to the Building and to place "For Lease" signs upon or
adjacent to the Premises at any time within the twelve (12) month period prior
to the expiration of the Lease Term or at any time after the Premises has been
vacated by Tenant; or for any other legitimate business purpose. Tenant shall
permit Landlord and its agents to enter the Premises at any
41
<PAGE> 42
time, and with only such notice as may be practicable under the circumstances
(including no notice if the circumstances so dictate), in the event of an
Emergency. When reasonably necessary, Landlord may temporarily close entrances,
doors, corridors or other facilities without liability to Tenant by reason of
such closure, provided any such closures shall be minimized to the extent
reasonably practicable in light of the applicable legal requirements and/or
nature of the repairs. Landlord, in the exercise of all of its rights under this
Section 18, shall use commercially reasonable efforts to minimize disruption of
Tenant's use and occupancy of the Premises.
19. MUTUAL WAIVER OF CLAIMS AND SUBROGATION.
19.1 TENANT. Notwithstanding anything to the contrary in this Lease,
whether the loss or damage is due to the negligence of Landlord or Landlord's
agents or employees, or any other cause, Tenant hereby releases Landlord and
Landlord's agents and employees from responsibility for and waives its entire
claim of recovery for (i) any and all loss or damage to the personal property of
Tenant located in the Building, including, without limitation, the Building
itself and such property as may be attached to the Building itself, arising out
of any of the perils which are covered by Tenant's property insurance policy,
with extended coverage endorsements which Tenant is required to obtain under the
applicable provisions of this Lease, whether or not actually obtained, or (ii)
loss resulting from business interruption or loss of rental income, at the
Premises, arising out of any of the perils which may be covered by the business
interruption or by the loss of rental income insurance policy whether or not the
same is held by Tenant.
19.2 LANDLORD. Notwithstanding anything to the contrary in this Lease,
whether the loss or damage is due to the negligence of Tenant or Tenant's agents
or employees, or any other cause, Landlord hereby releases Tenant and Tenant's
agents and employees from responsibility for and waives its entire claim of
recovery for (i) any and all loss or damage to the Building and/or to the
personal property of Landlord located in the Building, such property as may be
attached to the Building itself, arising out of any of the perils which are
covered by Landlord's property insurance policy which Landlord is required to
obtain under the applicable provisions of this Lease, whether or not actually
obtained, or (ii) loss resulting from business interruption or loss of rental
income, at the Premises, arising out of any of the perils which may be covered
by the business interruption or by the loss of rental income insurance policy
whether or not the same is held by Landlord.
19.3 CARRIERS. Landlord and Tenant shall each cause its respective
insurance carrier(s) to consent to such waiver of all rights of subrogation
against the other, and to issue an endorsement to all policies of insurance
obtained by such party confirming that the foregoing release and waiver will not
invalidate such policies.
20. INDEMNIFICATION.
20.1 TENANT'S INDEMNITY. Tenant shall indemnify and hold harmless
Landlord, its agents, employees, officers, directors, partners and shareholders
from and against any and all third party liabilities, judgments, demands, causes
of action, claims, losses, damages, costs and expenses, including reasonable
attorneys' fees and costs, asserted against Landlord by third parties or
sustained in connection with any third party claims for injury or death to
persons or damage to property against
42
<PAGE> 43
Landlord, by third parties and arising out of the use, occupancy, conduct, or
operation of the Premises by, or the willful misconduct or negligence of,
Tenant, its officers, contractors, licensees, agents, servants, employees, or
(while within the Premises) its guests or invitees, or caused by any failure of
Tenant to comply with the terms of this Lease. This indemnification shall
survive termination of this Lease. This provision shall not be construed to make
Tenant responsible for loss, damage, liability or expense resulting from
injuries or death to third parties or to the property of third parties to the
extent caused by the negligence or willful misconduct of Landlord, or its
officers, contractors, licensees, agents, employees or invitees.
20.2 LANDLORD'S INDEMNITY. Landlord shall indemnify and hold harmless
Tenant, its agents, employees, officers, directors, partners and shareholders
from and against any and all third party liabilities, judgments, demands, causes
of action, claims, losses, damages, costs and expenses, including reasonable
attorneys' fees and costs, asserted against Tenant by third parties or sustained
by Tenant in connection with any third party claims for injury or death to
persons or damage to property, and arising out of the use, occupancy, conduct,
operation, or management of the Building by, or the willful misconduct or
negligence of, Landlord, its officers, contractors, licensees, agents, servants,
or employees, or caused by any failure of Landlord to comply with the terms of
this Lease. This indemnification shall survive termination of this Lease. This
provision shall not be construed to make Landlord responsible for loss, damage,
liability or expense resulting from injuries or death to third parties or to the
property of third parties to the extent caused by the negligence or willful
misconduct of Tenant, or its officers, contractors, licensees, agents, employees
or invitees, or by the acts or omission of any other tenants or occupants of the
Building.
21. ASSIGNMENT AND SUBLETTING.
21.1 CONSENT REQUIRED. Subject to the terms of this Section 21, Tenant
shall not assign, encumber, mortgage, pledge, license, hypothecate or otherwise
transfer the Premises or this Lease, or sublease all or any part of the
Premises, or permit the use or occupancy of the Premises by any party other than
Tenant, without the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned or delayed as more fully set forth below.
21.2 PROCEDURE.
21.2.1 Tenant must request Landlord's consent to any such
assignment or sublease in writing at least thirty (30) days prior to the
commencement date of the proposed sublease or assignment, which written request
(a "Proposal Notice") must include (1) the name and address of the proposed
assignee or subtenant, (2) the nature and character of the business of the
proposed assignee or subtenant, (3) financial information (including financial
statements) of the proposed assignee or subtenant, (4) the proposed effective
date of the assignment or sublease, which shall be not less than thirty (30)
days thereafter, and (5) a copy of the proposed sublease or assignment
agreement. Tenant shall also provide any additional information Landlord
reasonably requests regarding such proposed assignment or subletting. As
expeditiously as possible but in no event later than thirty (30) days after
Landlord receives Tenant's Proposal Notice (with all required information
included), but subject to Section 21.5, below, Landlord shall have the option
(i) to grant its consent to such proposed assignment or subletting, or (ii) to
deny its consent to such proposed assignment
43
<PAGE> 44
or subletting on a reasonable basis. If Landlord denies its consent to such
proposed assignment or subletting, Landlord shall notify Tenant in writing of
the basis for such denial in reasonable detail. If Landlord does not exercise
one of the above options (or the termination right set forth in Section 21.5,
below) within thirty (30) days after Landlord receives such Proposal Notice,
then Tenant may assign or sublease the Premises upon the terms stated in the
Proposal Notice.
21.2.2 Sections 21.2.1 and 21.5, below, to the contrary
notwithstanding, Tenant shall have the right to sublet up to twenty-five percent
(25%) of the net rentable area of the Premises (in the aggregate), for periods
not in excess of two (2) years, before a proposed sublease triggers Landlord's
right of termination under Section 21.5, but any such sublease(s) shall
nevertheless be subject to Landlord's approval, which shall not be unreasonably
withheld as provided herein.
21.2.3 Without limitation, it shall not be unreasonable for
Landlord to deny its consent to any proposed assignment or sublease if: (1) the
proposed assignee or sublessee has a net worth less than that of Tenant as of
the date of execution of this Lease, or it otherwise appears that the proposed
assignee or subtenant may be unable to meet its financial and other obligations
under this Lease after such assignment or sublease; (2) the proposed assignee or
subtenant proposes to use the Premises for a purpose which is not a general
office or administrative use; (3) the proposed assignee or subtenant has a
history of landlord/tenant, debtor/creditor or other contractual problems (such
as, but not limited to, defaults, evictions, enforcement litigation or other
disputes) with Landlord, other landlords and/or creditors or other contracting
parties; (4) the proposed assignee or subtenant is an existing tenant, or the
affiliate of an existing tenant or any tenant with whom Landlord has been
negotiating with at any time during the preceding one hundred twenty (120) days,
in any building owned or operated by Landlord or any affiliate of Landlord; (5)
the proposed assignee or subtenant is entitled to, or otherwise enjoys,
sovereign or diplomatic immunity; (6) the proposed sublease consists of
twenty-five percent (25%) or more of the net rentable area of the Premises and
involves, in Landlord's reasonable judgment, a portion of the Premises which is
not independently leasable space (which shall be understood to mean that, in
order to satisfy this criteria, the proposed sublease space must have a
proportion of windowed offices relative to the Rentable Area thereof which is
comparable to the floor as a whole, and cannot lack reasonable means of ingress,
egress or access to the Common Areas, common facilities and/or core areas of the
Building located on such floor of the Building, such as access to bathrooms,
telephone and electrical closets, etc.) and/or (7) the proposed rent is
materially below market.
21.3 CONDITIONS. Any subleases and/or assignments hereunder are also
subject to all of the following terms and conditions:
21.3.1 If Landlord approves an assignment or sublease as
herein provided, Tenant shall pay to Landlord, as additional rent due under this
Lease, (i) in the case of an assignment, all sums received by Tenant in
consideration of such assignment, calculated after Tenant has recovered in full
from such consideration its "Transaction Expenses" (as hereafter defined), and
(ii) in the case of a sublease, the amount, if any, by which the rent, any
additional rent and any other sums payable by the subtenant to Tenant under such
sublease, exceeds that portion of the Base Rent plus Costs of Electricity,
Expense Increases and Tax Increases payable by Tenant hereunder which is
allocable to the portion of the Premises which is the subject of such
44
<PAGE> 45
sublease, calculated after Tenant has recovered in full its Transaction Expenses
from such net amount. The term "Transaction Expenses" shall mean all reasonable
and actual out-of-pocket expenses incurred by Tenant in procuring such
assignment or sublease, including broker fees and legal fees (if any) paid by
Tenant, any improvements which Tenant makes to the applicable portion of the
Premises at Tenant's expense in connection with such assignment or sublease, and
any buy out of the assignees or sublessees existing lease paid for by Tenant as
a part of such transaction. The foregoing payments shall be made on not less
than a monthly basis by Tenant (in the case of subleases) and in all cases
within ten (10) business days after Tenant receives the applicable consideration
from the assignee or subtenant.
21.3.2 No consent to any assignment or sublease shall
constitute a further waiver of the provisions of this section, and all
subsequent assignments or subleases may be made only with the prior written
consent of Landlord. In no event shall any consent by Landlord be construed to
permit reassignment or re-subletting by a permitted assignee or sublessee.
21.3.3 The assignee under any assignment of this Lease shall
be fully (and, at landlord's option, directly) liable for all of the obligations
of "Tenant" under this Lease, on a joint and several basis with Tenant. Tenant
shall nevertheless remain fully liable to Landlord for all Lease obligations,
including those accruing after the effective date of such assignment.
21.3.4 Any sublease or assignment shall be subject to the
condition that the sublessee or assignee thereunder shall be bound by all of the
terms, covenants and conditions of this Lease (in the case of a sublease,
insofar as such terms, covenants and conditions relate to the portion of the
Premises subleased and/or the operations and conduct of business by the
sublessee).
21.3.5 Without limitation, any and all guaranties of this
Lease shall be unaffected by such sublease and assignment, and shall remain in
full force and effect for all purposes.
21.3.6 Any assignment or sublease without Landlord's prior
written consent shall be void, and shall, at the option of the Landlord,
constitute a default under this Lease.
21.3.7 Tenant shall pay to Landlord Landlord's reasonable
attorneys fees and out-of-pocket expenses incurred in connection with Landlord's
review of such sublease or assignment hereunder, which amount shall not exceed
One Thousand Five Hundred Dollars ($1,500).
21.4 AFFILIATED ENTITY; SALE OF BUSINESS.
21.4.1 Notwithstanding anything to the contrary in this Lease,
so long as such transfer is not effectuated as part of a transaction or series
of transfers orchestrated in order to effect a transfer of this Lease (or
Tenant's interest herein) in isolation to Tenant's other leasehold interests and
assets, Tenant may assign this Lease or sublease all or any portion of the
Premises to any other entity (the "Successor Entity") (i) which controls or is
controlled by Tenant, or (ii) which is under common control with Tenant, or
(iii) which purchases all or substantially all of the assets of Tenant, or (iv)
which purchases all or substantially all of the stock of Tenant or (v) which
merges with Tenant pursuant to a valid statutory merger; provided, that (1) the
assignee or
45
<PAGE> 46
sublessee is financially able to meet all of its obligations under the proposed
assignment or sublease, and (2) in such event, (a) except in cases of statutory
merger, in which case the surviving entity in the merger shall be liable as the
Tenant under this Lease, Tenant shall continue to remain fully liable under the
Lease, on a joint and several basis with the assignee or acquiror of such assets
or stock, (b) the terms of any guaranty of this Lease shall remain in full force
and effect, unmodified, and (c) following such sublease or assignment, Tenant or
such assignee, as the case may be, shall continue to comply with all of its
obligations under this Lease, including with respect to its Permitted Use of the
Premises, as set forth in Section 4.1, above.
21.4.2 Tenant shall be required to give Landlord at least
thirty (30) days written notice in advance of any sublease or assignment within
the scope of Section 21.4.1, above. Any other transfer of fifty percent (50%) or
more of the ownership interests (including, without limitation, partnership
interests or stock) in Tenant or of operating control over Tenant (whether by
management agreement, stock sale or other means) shall be deemed to constitute
an assignment of this Lease, and shall be subject to Landlord's consent as
aforesaid.
21.4.3 Notwithstanding the last sentence of Section 21.4.1 to
the contrary, Landlord agrees that the offer and sale by Tenant (or any
stockholder of Tenant) of any stock pursuant to an effective registration
statement filed pursuant to the Securities Act of 1933 (including any initial
public offering of registered stock of the Tenant) or pursuant to and in
accordance with the securities laws of any foreign country governing publicly
traded companies and not in violation of U.S. law, shall not constitute an
assignment of this Lease, and shall not require the consent or approval of
Landlord.
21.4.4 Tenant shall not transfer all or substantially all of
its assets to any person or entity unless either (i) this Lease is one of the
assets so transferred to such other person or entity, and the transferee assumes
in writing, for Landlord's benefit, the obligations of Tenant accruing hereunder
from and after the effective date of the transfer, or (ii) the transferee(s)
thereof otherwise delivers to Landlord a written assumption of Tenant's
obligations hereunder.
21.5. RIGHT OF TERMINATION. Except for any assignment or sublease
permitted pursuant to Section 21.4, above, in the event of (i) a proposed
assignment of this Lease, (ii) a proposed sublease in excess of two (2) years or
involving more than twenty-five percent (25%) of the Premises in the aggregate
of the prior subleases consented to by Landlord, Landlord shall have the right,
by notice to Tenant delivered within thirty (30) days after Landlord's receipt
of Tenant's Proposal Notice (and in lieu of the granting or denial of consent
provided for in Section 21.2, above), to terminate this Lease as to all of the
Premises (in the event of an assignment) or as to the proposed subleased portion
of the Premises only (in the event of a sublease), in each case for the balance
of the Term. In the event Landlord shall elect to terminate this Lease in
connection with a proposed assignment or sublease of this Lease as provided
above in whole or in part (as the case may be): (a) this Lease and the term
hereof shall terminate (either as to the Premises as a whole, or only as to the
portion thereof which Tenant is proposing to sublease, as the case may be) as of
the later of (i) the proposed effective date of such assignment or sublease, as
set forth in Tenant's Proposal Notice, or (ii) thirty (30) days after the date
Landlord received Tenant's Proposal Notice; (b) Tenant shall be released from
all liability under the Lease (as to the Premises
46
<PAGE> 47
as a whole, in the case of an assignment, or as to the terminated portion of the
Premises only, in the case of a partial termination due to sublease) with
respect to the period after the date of termination (other than obligations and
indemnities of Tenant which accrued with respect to the applicable portion of
the Premises prior to the effective date of such termination, which obligations
shall expressly survive such termination or partial termination of this Lease);
(c) all Base Rent, additional rent and other charges shall be prorated to the
date of such termination, and appropriately adjusted if there is only a partial
termination; (d) upon such termination date, Tenant shall surrender the Premises
(or the applicable portion thereof) to Landlord in accordance with Section 26
hereof; and (e) in the case of a partial termination of this Lease, Landlord
shall have the right, at Landlord's expense and in a manner which minimizes to
the extent reasonably practicable any material disruption to Tenant's use and
enjoyment of the balance of the Premises, to separate the portion of the
Premises being terminated from the balance of the Premises, including the
erection of a demising wall and, to the extent necessary under the
circumstances, the separation of any applicable Building Systems.
22. ADVERTISING.
22.1 GENERALLY. Except as provided below, Tenant shall not display any
sign, graphics, notice, picture, or poster, or any advertising matter
whatsoever, anywhere in or about the Premises or the Building at places visible
from anywhere outside of or at the entrance to the Premises without first
obtaining Landlord's written consent thereto, which Landlord may grant or
withhold in its sole discretion. All signage, including interior and exterior
signage, shall be at Tenant's sole expense, and subject to compliance with all
applicable laws. Tenant shall be responsible to maintain any permitted signs and
remove the same at Lease termination. In addition, upon the expiration or
earlier of this Lease, all exterior signs identifying Tenant shall be removed by
Tenant at Tenant's sole expense, and the affected portions of the Building shall
be restored by Tenant. If Tenant shall fail to maintain or remove its signs, as
aforesaid, Landlord may do so at Tenant's cost. Tenant shall be responsible to
Landlord for any damage caused by the installation, use, maintenance or removal
of any such signs.
22.2 SIGNAGE PROGRAM/PERMITTED SIGNAGE. Notwithstanding Section 22.1 to
the contrary, lobby and suite identification signage shall be permitted in
accordance with applicable legal requirements and the Landlord's overall signage
program for the Building, subject to Landlord's approval which shall not be
unreasonably withheld (in light of Landlord's overall signage program for the
Building). Generally, Tenant shall be permitted (at Tenant's expense) to install
a standard suite entry sign, and (if applicable) directory identification panels
on that portion of the Building's lobby directory located in the main lobby of
the Building (if any), commensurate with the relative square footage of the
Premises as compared to the square footage of the Building as a whole.
23. LIENS.
Tenant shall keep the Premises and the Building free from any liens
arising out of any work performed, materials ordered or obligations incurred by
or on behalf of Tenant, and Tenant hereby agrees to indemnify and hold Landlord,
its agents, employees, independent contractors, officers, directors, partners,
and shareholders harmless from any liability, cost or expense for such liens.
47
<PAGE> 48
Tenant shall cause any such lien imposed to be released of record by payment or
posting of a bond sufficient to remove such lien from the applicable record
within thirty (30) days after the earlier of notice of intent to impose the lien
or written request by Landlord. If Tenant fails to cause any such lien to be
released or removed of record within the prescribed thirty (30) day period,
Landlord may do so at Tenant's expense, and Tenant shall reimburse Landlord for
such amount, including reasonable attorneys' fees and costs.
24. DEFAULT.
24.1 TENANT'S DEFAULT. A default under this Lease by Tenant shall exist
if any of the following occurs:
24.1.1 If Tenant fails to pay Base Rent, additional rent or
any other sum required to be paid hereunder within ten (10) days after written
notice from Landlord that such payment was due, but was not paid as of the due
date (provided, however, if Landlord has delivered two (2) such notices to
Tenant in any twelve (12) month period, or four (4) such notices over the Term
of this Lease, whichever first occurs, then any subsequent failure to pay Base
Rent, additional rent or any other sum required to be paid to Landlord hereunder
on or before the due date for such payment shall constitute a default by Tenant
without requirement of such ten (10) day notice and opportunity to cure); or
24.1.2 If Tenant fails to perform any term, covenant or
condition of this Lease except those requiring the payment of money to Landlord
as set forth in Section 24.1.1 above, and Tenant fails to cure such breach
within thirty (30) days after written notice from Landlord where such breach
could reasonably be cured within such thirty (30) day period; provided, however,
that where such failure could not reasonably be cured within the thirty (30) day
period, Tenant shall not be considered in default if it commences such
performance within the thirty (30) day period and diligently thereafter
prosecutes the same to completion, such grace period not to exceed a maximum of
ninety (90) days in the aggregate, subject to Force Majeure. If any provisions
of this Lease calls for a shorter or different grace period than that set forth
above, then such other provision shall control over this provision. The
foregoing notice and cure period notwithstanding, Landlord may exercise its
self-help rights hereunder (i.e., Landlord's right to perform any obligation of
Tenant which Tenant has failed to perform hereunder) without any prior notice or
upon such shorter notice as may be reasonable under the circumstances in the
event of any one or more of the following circumstances is present: (i) there
exists a reasonable risk of prosecution of Landlord unless such obligation is
performed sooner than the stated cure period, (ii) there exists an imminent
possibility of danger to the health or safety of the Landlord, the Tenant,
Tenant's invitees, or any other occupants of, or visitors to, the Building,
unless such obligation is performed sooner than the stated cure period, and/or
(iii) the Tenant has failed to obtain insurance required by this Lease, or such
insurance has been canceled by the insurer without being timely replaced by
Tenant, as required herein.
24.1.3 If Tenant or any guarantor of this Lease shall (i) make
an assignment for the benefit of creditors, (ii) acquiesce in a petition in any
court in any bankruptcy, reorganization, composition, extension or insolvency
proceedings, (iii) seek, consent to or acquiesce in the
48
<PAGE> 49
appointment of any trustee, receiver or liquidator of Tenant or of any guarantor
of this Lease and of all or any part of Tenant's or such guarantor's property,
(iv) file a petition seeking an order for relief under the Bankruptcy Code, as
now or hereafter amended or supplemented, or by filing any petition under any
other present or future federal, state or other statute or law for the same or
similar relief, or (v) fail to win the dismissal, discontinuation or vacating of
any involuntary bankruptcy proceeding within ninety (90) days after such
proceeding is initiated.
24.2 REMEDIES. Upon a default, Landlord shall have the following
remedies, in addition to all other rights and remedies provided by law or
otherwise provided in this Lease, any one or more of which Landlord may resort
cumulatively, consecutively, or in the alternative:
24.2.1 Landlord may continue this Lease in full force and
effect, and this Lease shall continue in full force and effect as long as
Landlord does not terminate this Lease, and Landlord shall have the right to
collect Base Rent, additional rent and other charges when due.
24.2.2 Landlord may terminate this Lease, or may terminate
Tenant's right to possession of the Premises, at any time by giving written
notice to that effect, in which event Landlord may (but shall not be obligated
to) relet the Premises or any part thereof. Upon the giving of a notice of the
termination of this Lease, this Lease (and all of Tenant's rights hereunder)
shall immediately terminate, provided that, without limitation, Tenant's
obligation to pay Base Rent, Costs of Electricity, and Tenant's Share of Expense
Increases and Tax Increases (as well as any damages otherwise payable under this
Section 24), shall survive any such termination and shall not be extinguished
thereby. Upon the giving of a notice of the termination of Tenant's right of
possession, all of Tenant's rights in and to possession of the Premises shall
terminate but this Lease shall continue subject to the effect of this Section
24. Upon either such termination, Tenant shall surrender and vacate the Premises
in the condition required by Section 26, and Landlord may re-enter and take
possession of the Premises and all the remaining improvements or property and
eject Tenant or any of the Tenant's subtenants, assignees or other person or
persons claiming any right under or through Tenant or eject some and not others
or eject none. This Lease may also be terminated by a judgment specifically
providing for termination. Any termination under this section shall not release
Tenant from the payment of any sum then due Landlord or from any claim for
damages or Base Rent, additional rent or other sum previously accrued or
thereafter accruing against Tenant, all of which shall expressly survive such
termination. Upon such termination Tenant shall be liable immediately to
Landlord for all costs Landlord incurs in attempting to relet the Premises or
any part thereof, including, without limitation, broker's commissions, expenses
of cleaning and redecorating the Premises required by the reletting and like
costs. Reletting may be for a period shorter or longer than the remaining Lease
Term. No act by Landlord other than giving written notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a constructive or other
termination of Tenant's right to possession or of this Lease, either of which
may be effected solely by an express written notice from Landlord to Tenant. On
termination, Landlord has the right to recover from Tenant as damages:
49
<PAGE> 50
(a) The worth at the time of award of unpaid
Base Rent, additional rent and other sums due and payable which had been earned
at the time of termination; plus
(b) The worth at the time of award of the amount
by which the unpaid Base Rent, additional rent and other sums due and payable
which would have been payable after termination until the time of award exceeds
the amount of such rent and other income received by Landlord in respect of the
Premises during such time period; plus
(c) The worth at the time of award of the amount
by which the unpaid Base Rent, additional rent or other sums due and payable for
the balance of the Lease Term after the time of award exceeds the fair market
rental value of the Premises for such period, taking into account then existing
market conditions, any applicable time reasonably needed to relet the Premises
and to construct leasehold improvements therein for a new tenant, and the costs
associated therewith, and any other factors bearing on the likely net income
which may be derived from a reletting of the Premises (and Tenant shall have the
burden of proof with regard to establishing the fair rental value of the
Premises for such period); plus
(d) Any other amount necessary which is to
compensate Landlord for damages actually incurred as a result of Tenant's
default, including, without limitation, any costs or expenses incurred by
Landlord: (i) in retaking possession of the Premises; (ii) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering or
rehabilitating the Premises or a portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus
(e) At Landlord's election, such other amounts
in addition to or in lieu of the foregoing as may be permitted from time to time
by the laws of the State in which the Premises are located.
The "worth at the time of award" of the amounts
referred to in Sections 24.2.2(a) and (b) is computed by allowing interest at
the Default Rate on the unpaid rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amounts referred to in Sections 24.2.2(c) shall be computed by reducing each
amount determined to present value using a discount rate equal to the average
yield to maturity of United States treasury notes having a maturity most closely
corresponding to such time period, plus 100 basis points, expressed as a
percentage rate. In lieu of the amounts recoverable in a lump sum by Landlord
pursuant to clauses (b) and (c) of this Section 24.2.2, above, but in addition
to the amounts specified in clauses (a), (d), and (e) (or any other portion of
this Section 24), Landlord may, at its sole election, recover "Indemnity
Payments," as defined hereinbelow, from Tenant. For purposes of this Lease
"Indemnity Payments" means an amount equal to the Base Rent, additional rent and
other payments provided for in this Lease which would have become due and owing
thereunder from time to time during the unexpired Lease Term after the effective
date of the termination, but for such termination, less the Base Rent,
additional rent and other payments, if any, actually collected by Landlord and
allocable to the Premises. If Landlord elects to pursue Indemnity Payments in
lieu of the amount recoverable in a lump sum by Landlord under clauses (b) and
(c), above, Tenant shall, on demand, make Indemnity Payments monthly, and
Landlord may sue for all
50
<PAGE> 51
Indemnity Payments at any time after they accrue, either monthly, or at less
frequent intervals. Tenant further agrees that Landlord may bring suit for
Indemnity Payments at or after the end of the Lease Term as originally
contemplated under this Lease, and Tenant agrees that, in such event, Landlord's
cause of action to recover the Indemnity Payments shall be deemed to have
accrued on the last day of the Lease Term as originally contemplated. In seeking
any new tenant for the Premises, Landlord shall be entitled to grant any
concessions it deems reasonably necessary. In no event shall Tenant be entitled
to any excess of any rental obtained by reletting over and above the rental
herein reserved. Tenant waives redemption or relief from forfeiture under any
other present or future law, in the event Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder.
24.2.3 To the extent permitted by law, Landlord may, with or
without terminating this Lease, re-enter the Premises and remove all persons and
property from the Premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant, or, as
otherwise provided in this Lease, shall be deemed abandoned by Tenant, and may
be disposed of by Landlord at Tenant's expense and free from any claim by Tenant
or anyone claiming by, through or under Tenant. No re-entry or taking possession
of the Premises by Landlord pursuant to this Section shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Tenant.
24.2.4 Tenant, on its own behalf and on behalf of all persons
claiming through or under Tenant, including all creditors, does hereby
specifically waive and surrender any and all rights and privileges, so far as is
permitted by law, which Tenant and all such persons might otherwise have under
any present or future law (1) to the service of any notice to quit or of
Landlord's intention to re-enter or to institute legal proceedings, which notice
may otherwise be required to be given, except the foregoing shall not waive any
notices required under Section 24.1, above (if any); (2) to redeem re-enter or
repossess the Premises after Tenant's right of possession has been terminated by
Landlord; or (3) to restore the operation of this Lease, with respect to any
dispossession of Tenant by judgment or warrant of any court or judge, or any
re-entry by Landlord, or any expiration or termination of this Lease, whether
such dispossession, re-entry, expiration or termination shall be by operation of
law or pursuant to the provisions of this Lease.
24.2.5 In the event of termination of this Lease or
repossession of the Premises after a default by Tenant hereunder, Landlord
agrees to use commercially reasonable efforts to mitigate its damages hereunder,
provided that in any such mitigation (i) Landlord shall not be obligated to show
preference for reletting the Premises over any other vacant space in the
Building; (ii) Landlord shall have the right, as Landlord deems appropriate, to
divide the Premises or to consolidate portions of the Premises with other
space(s) to facilitate such reletting; (iii) Landlord shall not be responsible
if it is unable, despite good faith efforts, to relet the Premises (or any
portion thereof) or to collect any rental from such reletting from any tenant
thereunder; (iv) Landlord may relet the whole or any portion of the Premises for
any period, to any tenant, for any use and purpose, and upon such terms as it
deems appropriate, including any rental or other lease concessions that it deems
reasonably advisable under prevailing market conditions, which concessions may
include free rent or other cash allowances; and (v) Tenant shall have the burden
of proof with regard to any claims that Landlord has failed to use commercially
reasonable efforts to mitigate its damages hereunder.
51
<PAGE> 52
25. SUBORDINATION.
25.1 This Lease and any extensions, renewals, replacements or
modifications thereof are and shall at all times be and remain subject and
subordinate to the lien of any mortgage, deed of trust and all other security
documents now or hereafter securing payment of any indebtedness of Landlord with
respect to the Premises, ground lease or underlying lease now or hereafter in
force against the Premises, and to all advances made or hereafter to be made
upon the security thereof and to any increases, renewals, modifications,
substitutions, replacements, consolidations and extensions thereof. Although the
foregoing subordination shall be self-effectuating, Tenant shall execute and
return to Landlord any documentation requested by Landlord consistent with this
Section 25 in order to confirm the foregoing subordination, within five (5)
business days after Landlord's written request. If Tenant fails to provide
Landlord with such subordination documents within five (5) business days after
Landlord's written request, the same shall constitute a default by Tenant
hereunder without requirement of any further notice or right to cure. In the
event any proceedings are brought for foreclosure, or in the event of the
exercise of the power of sale under any mortgage or deed of trust made by
Landlord covering the Premises, Tenant shall attorn to the purchaser at any such
foreclosure, or to the grantee of a deed in lieu of foreclosure, and recognize
such purchaser or grantee as Landlord under this Lease, provided such purchaser
assumes, either expressly or by operation of law, the obligations of Landlord
arising under this Lease after the date title to the Land and Building is
transferred to such purchaser or grantee. Tenant agrees that no mortgagee or
successor to such mortgagee shall be (i) bound by any payment of Base Rent or
additional rent for more than one (1) month in advance, (ii) bound by any
amendment or modification of this Lease made without the consent of Landlord's
mortgagee or such successor in interest, (iii) liable for damages for any
breach, act or omission of any prior landlord (provided that the foregoing shall
not relieve such mortgagee or successor of liability for damages arising out of
any continuation of such breach, act or omission, but solely with respect to the
period after the date such mortgagee or successor takes over title to the
Property, and, provided Tenant was provided with the name and address of such
mortgagee for notice purposes under Section 31, below, such mortgagee was
notified of the applicable claim of breach, act or omission in accordance with
the mortgagee notice provisions of this Lease and/or any SNDA delivered pursuant
hereto, and failed to cure same within the time period provided for herein),
(iv) bound to effect or pay for any construction for Tenant's occupancy, (v)
subject to any claim of offset or defenses that Tenant may have against any
prior landlord and which have accrued prior to the date that such mortgagee or
successor takes legal title to the Land and the Building (provided that the
foregoing shall not relieve such mortgagee or successor of liability for any
offsets or defenses arising out of any breach of this lease to the extent such
breach continues after the date such mortgagee or successor takes over title to
the Property, but solely with to the extent such claims or defenses arise after
the date such mortgagee or successor takes over title to the Property, and,
provided Tenant was provided with the name and address of such mortgagee for
notice purposes under Section 31, below, such mortgagee was notified of the
applicable claim of breach, and failed to cure same within the time period
provided for herein), or (vi) liable for the return of any security deposit,
unless such security deposit has been physically received by such mortgagee. Any
such mortgagee shall have the right, at any time, to subordinate to this Lease
any instrument to which this Lease is otherwise subordinated by operation of
this Section 25.
52
<PAGE> 53
25.2 Tenant agrees to execute and deliver upon execution of
this Lease and Landlord agrees to obtain within thirty (30) days of the
execution of this Lease a "Subordination, Non-Disturbance and Attornment
Agreement" ("SNDA") from its current mortgagee of the Building in the form
attached as EXHIBIT H. Notwithstanding Section 25.1, above, to the contrary,
Landlord agrees that the subordination of this Lease to any future mortgage (or
ground lease) shall be conditioned upon the delivery to Tenant of an SNDA from
such future mortgagee (or ground lessor), in substantially the form attached as
EXHIBIT H hereto or such other form of SNDA which may be required by such
mortgagee (or ground lessor), and which shall provide, inter alia, that so long
as Tenant is not in default hereunder (beyond any applicable notice and cure
period) and attorns to such mortgagee (or ground lessor) or any
successor-in-title thereto due to a foreclosure or deed-in-lieu thereof (or a
termination of such ground lease), Tenant's rights under this Lease, including
its right of possession of the Premises, shall not be disturbed in the event of
a foreclosure of such mortgage or deed of trust (or a termination of such ground
lease).
26. SURRENDER OF POSSESSION.
Upon expiration of the Lease Term, Tenant shall promptly and peacefully
surrender the Premises to Landlord, broom clean and free of all of its
furniture, movable fixtures and equipment and otherwise in as good condition as
when received by Tenant from Landlord or as thereafter improved, reasonable use
and wear and tear and damage by insured casualty excepted, all to the reasonable
satisfaction of Landlord. If the Premises are not surrendered as and when
aforesaid, and in accordance with the terms of this Lease, Tenant shall
indemnify Landlord against all claims, losses, costs, expenses (including
reasonable attorneys' fees) and liabilities resulting from the delay by Tenant
in so surrendering the same, including any claims made by any succeeding
occupant founded on such delay, provided, however, that Tenant's indemnity
hereunder solely with respect to claims for consequential damages made as a
result of Tenant's unauthorized holdover (as defined in Section 28 below) shall
be limited to Five Hundred Thousand Dollars ($500,000). This indemnification
shall survive termination of this Lease.
27. NON-WAIVER.
Waiver by either party of any breach of any term, covenant or condition
herein contained shall not be deemed to be a waiver of such term, covenant, or
condition(s), or any subsequent breach of the same or any other term, covenant
or condition of this Lease. In addition, acceptance of a delinquent payment of
Rent shall constitute only a cure of the specific payment which is accepted, and
shall not constitute or be construed as a waiver of any other breach of the
Lease which is then outstanding (including any breach of a different provision
of the Lease which violation existed prior to the date such payment is accepted,
and which remains outstanding after such Rent payment is accepted).
28. HOLDOVER.
If Tenant shall, without the written consent of Landlord, hold over
after the expiration of the Lease Term (hereinafter, an "unauthorized
holdover"), Tenant shall be deemed to be a tenant at sufferance, which tenancy
may be terminated immediately by Landlord as provided by
53
<PAGE> 54
applicable state law. During any such holdover tenancy, unless Landlord has
otherwise agreed in writing, Tenant agrees to pay to Landlord a per diem
occupancy charge equal to the sum of (A) five percent (5%) of the stated monthly
Base Rent for the last full month of the Lease Term then ending for each day of
the first month of such holdover (or 150% of such monthly Base Rent for the
entire first month), (B) six percent (6%) of the stated monthly Base Rent for
the last full month of the Lease Term then ending for each day of the second
month of such holdover (or 180% of such monthly Base Rent for the entire second
month), (C) seven percent (7%) of the stated monthly Base Rent for that last
full month of the Lease Term then ending for each day of such holdover after the
first two (2) months thereof (but not to exceed 200% of such monthly Base Rent
for each such full month), and (D) one hundred percent (100%) of the additional
rent which would have been payable by Tenant for the period of such holdover,
calculated on a per diem basis using the additional rent which had otherwise
been payable by Tenant for the last full month of the Lease Term then ending.
Such payments shall be made (in arrears) within five (5) days after Landlord's
demand, and in no event less often than once per month. In the case of a
holdover which has been consented to by Landlord, Tenant shall be deemed to be a
month to month tenant upon all of the terms and provisions of this Lease, except
the monthly Base Rent shall be as agreed by Landlord and Tenant with respect to
such consented holdover. Upon expiration of the Lease Term as provided herein,
Tenant shall not be entitled to any notice to quit, the usual notice to quit
being hereby expressly waived under such circumstances, and Tenant shall
surrender the Premises on the last day of the Lease Term as provided in Section
26, above. The foregoing described per diem occupancy charge is in addition to,
and not in lieu of, any other claims for damages which Landlord may have or
assert against Tenant in connection with any unauthorized holdover, including
any claims arising out of Tenant's indemnity under Section 26, above.
29. CONDEMNATION.
29.1 DEFINITIONS. The terms "eminent domain", "condemnation", and
"taken", and the like in this Section 29 include takings for public or
quasi-public use, and sales under threat of condemnation and private purchases
in place of condemnation by any authority authorized to exercise the power of
eminent domain. Any temporary taking for a period in excess of twelve (12)
consecutive months shall be deemed to be a permanent taking within the meaning
of this Section 29.
29.2 TAKING. "Taking" shall mean and refer to the acquisition or taking
of property (or any right, title or interest therein) by any governmental or
quasi-governmental authority acting under power of condemnation or eminent
domain, and shall encompass contested as well as uncontested takings as long as
initiated by the applicable governmental or quasi-governmental authority. If the
whole of the Premises is temporarily taken for a period in excess of thirty (30)
days, or is permanently taken, in either case by virtue of a Taking, this Lease
shall automatically terminate as of the date title vests in the condemning
authority, and Tenant shall pay all Base Rent, additional rent, and other
payments up to that date. If (a) twenty percent (20%) or more of the Premises is
permanently taken by virtue of a Taking, or (b) in the case of a Taking of less
than twenty percent (20%) of the Premises, Tenant is unable to make reasonable
use of the balance of the Premises remaining after the Taking, as determined by
Tenant in its reasonable, good faith discretion, or (c) access to the Building
or Premises by Tenant is, by virtue of a Taking,
54
<PAGE> 55
permanently denied, or (d) if free parking is provided for under this Lease, the
parking ratio for the Building is, by virtue of a Taking of any parking areas
serving the Building, permanently reduced to a ratio which fails to meet
applicable code requirements after taking into account any portion of the
Building taken and any reasonable substitute parking provided by Landlord in
lieu of the parking areas so taken, then Landlord and Tenant shall each have the
right (to be exercised by written notice to the other within sixty (60) days
after receipt of notice of said taking) to terminate this Lease effective upon
the date when possession of the applicable portion of the Land and/or Building
is taken thereunder pursuant to such Taking. If neither party elects to
terminate this Lease, as aforesaid, then Landlord shall diligently, and within a
reasonable time (not to exceed one hundred eighty (180) days subject to Force
Majeure not to exceed thirty (30) days in the aggregate), after title vests in
the condemning authority, repair and restore, at Landlord's expense, the portion
not taken so as to render same into an architectural whole to the extent
reasonably practicable, and, if any portion of the Premises is taken, thereafter
the Base Rent (and Tenant's Share) shall be reduced (on a per square foot basis)
in proportion to the portion of the Premises taken. If there is a temporary
Taking involving the Premises or Building, or if a Taking of other portions of
the Building or Common Areas does not deny Tenant access to the Building and
Premises, or if less than twenty percent (20%) of the Premises is permanently
taken by a Taking and Tenant is able to make reasonable use of the balance of
the Premises as determined by Tenant in its reasonable good faith discretion,
then this Lease shall not terminate, and Landlord shall, as soon as reasonably
practicable thereafter (and in all events within one hundred eighty (180) days
thereafter subject to Force Majeure not to exceed thirty (30) days in the
aggregate), repair and restore, at its own expense, the portion not taken so as
to render same into an architectural whole to the fullest extent reasonably
practicable. If any portion of the Premises was permanently taken, then the Base
Rent (and Tenant's Share) shall be reduced (on a per square foot basis) in
proportion to the portion of the Premises taken, commencing on the date Tenant
is deprived of the use of such portion of the Premises. If any portion of the
Premises was temporarily taken, then the Base Rent (and Tenant's Share) shall be
reduced (on a per square foot basis) in proportion to the portion of the
Premises taken for the period of such temporary taking, that is, from the date
upon which Tenant is deprived of the use of such portion of the Premises until
the date Tenant is restored to the use of such portion of the Premises.
29.3 AWARD. Landlord reserves all rights to damages to the Premises or
the Building, or arising out of the loss of any leasehold interest in the
Building or the Premises created hereby, arising in connection with any partial
or entire taking by eminent domain or condemnation. Tenant hereby assigns to
Landlord any right Tenant may have to such damages or award, and Tenant shall
make no claim against Landlord or the condemning authority for damages for
termination of Tenant's leasehold interest or for interference with Tenant's
business as a result of such taking. The foregoing notwithstanding, Tenant shall
have the right to claim and recover from the condemning authority separate
compensation for any loss which Tenant may incur for Tenant's moving expenses,
business interruption or taking of Tenant's personal property (but specifically
excluding any leasehold interest in the Building or the Premises) under the then
applicable eminent domain code, provided that Tenant shall not make any claim
that will detract from or diminish any award for which Landlord may make a
claim.
55
<PAGE> 56
29.4 MORTGAGEE RIGHTS. Tenant acknowledges that Landlord's right to any
condemnation award may be subject to the rights of Landlord's mortgagee (if any)
in and to such award under the mortgage or deed of trust (if any) which
encumbers the Building and the Premises. Accordingly, Landlord's obligation to
repair and restore, as set forth in Section 29, above, shall be subject to the
procedural requirements of Landlord's mortgagee with regard thereto (including
any requirement that such sums be paid to the mortgagee or to a trustee, to be
held and disbursed only upon Landlord's satisfaction of various disbursement
requirements), and the time within which such obligation must be satisfied shall
be adjusted as reasonably necessary to reflect delays occasioned by the exercise
by the mortgagee of such mortgagee's rights. In the event mortgagee applies all
or any portion of an award made to Landlord in whole or partial satisfaction of
the amounts due under any indebtedness secured by the Building (i) Landlord's
restoration obligation shall continue, but shall be extended as necessary to
account for the need to secure funding of the costs of such restoration, and
(ii) if (A) such condemnation was of a type where Tenant had the right to
terminate this Lease pursuant to Section 29.2(b), above, (B) Tenant declined to
terminate the Lease within the time period provided under Section 29.2(b), (C)
the delay in restoration materially and adversely affects Tenant's use and
enjoyment of the Premises, and (D) such restoration has not commenced within one
hundred eighty (180) days after the date of such condemnation, then Tenant shall
have the right, for a period of thirty (30) days after the expiration of such
one hundred eighty (180) day period to terminate this Lease upon thirty (30)
days prior written notice to Landlord; provided that if Landlord commences such
restoration prior to the end of the thirty (30) day notice period (with
reasonable evidence that funding is available to complete such restoration),
Tenant's notice of termination shall be deemed rescinded and ineffective for all
purposes, and this Lease shall continue in full force and effect.
30. NOTICES.
All notices and demands which may be required or permitted to be given
to either party hereunder shall be in writing, and shall be delivered personally
or sent by United States certified mail, postage prepaid, return receipt
requested, or by Federal Express or other reputable overnight carrier, to the
addresses set out in Section 1.7, and to such other person or place as each
party may from time to time designate in a notice to the other. Notice shall be
deemed given upon the earlier of actual receipt or refusal of delivery.
31. MORTGAGEE PROTECTION.
Tenant agrees to simultaneously give BankBoston, N.A., Landlord's
current mortgagee, by registered mail, a copy of any notice of default or
termination served upon the Landlord at BankBoston, N.A., 100 Federal Street,
Boston, Massachusetts 02110, Attention: Real Estate Division, with a copy to
BankBoston, N.A., 115 Perimeter Center Place, Suite 500, Atlanta, Georgia 30346,
Attention: Jay Johns. Tenant further agrees that if Landlord shall have failed
to cure such default within the time provided for in this Lease, then the
mortgagee(s) and/or trust deed holder(s) shall have an additional thirty (30)
days within which to have the right (but not the obligation) to cure such
default or if such default cannot be cured within that time, then such
additional time as may be necessary if within such thirty (30) days any
mortgagee and/or trust deed holder(s) has commenced and is diligently pursuing
the remedies necessary to cure such default (including but not
56
<PAGE> 57
limited to commencement of foreclosure proceedings, if necessary to effect such
cure), in which event Tenant shall not have the right to pursue any claim
against Landlord, such mortgagee and/or such trust deed holder(s), including but
not limited to any claim of actual or constructive eviction, so long as such
remedies are being so diligently pursued; the foregoing notwithstanding, (i)
Tenant shall not be deprived of its right to perform Landlord's obligations and
to recover the costs associated therewith from Landlord pursuant to Section 34.4
hereof prior to the expiration of the above-noted cure period(s) in cases of
Emergency, as more fully set forth in Section 34.4, below, provided the
mortgagee has been provided with notice of Landlord's default simultaneous with
notice to Landlord and is afforded the same cure rights, if any, to which
Landlord is entitled to under Section 34.4, and (ii) the foregoing cure periods
shall not affect any abatements provided for under Section 8.5 of this Lease,
provided the mortgagee has been provided with notice thereof simultaneous with
notice to Landlord and is afforded the same cure rights, if any, to which
Landlord is entitled to under Section 8.5.
32. COSTS AND ATTORNEYS' FEES.
In any litigation or arbitration between the parties arising out of
this Lease, the prevailing party shall be entitled to an award from the
non-prevailing party of all reasonable expenses, arbitration, and/or court
costs, including reasonable attorneys' fees incurred by the prevailing party in
connection therewith, and arising out of or in relation to such claim or
default, including any such fees or expenses as are incurred by the prevailing
party during any such arbitration, at trial, and/or on appeal. Such attorneys'
fees and costs shall be payable upon demand.
33. BROKERS.
33.1 Tenant represents and warrants to Landlord that neither it nor its
officers or agents, nor anyone acting on its behalf, has dealt with any real
estate broker other than Grubb & Ellis and Spaulding & Slye Services Limited
Partnership (together, the "Broker") in the negotiating or making of this Lease,
and Tenant agrees to indemnify and hold Landlord, its agents, employees,
partners, directors, shareholders and independent contractors harmless from all
liabilities, costs, demands, judgments, settlements, claims and losses,
including reasonable attorneys fees and costs, incurred by Landlord (or such
parties) in conjunction with any such claim or claims of any broker or brokers
other than Broker claiming to have interested Tenant in the Building or the
Premises or claiming to have caused Tenant to enter into this Lease.
33.2 Landlord represents and warrants to Tenant that neither it nor its
officers or agents, nor anyone acting on its behalf, has dealt with any real
estate broker other than Broker in the negotiating or making of this Lease, and
Landlord agrees to indemnify and hold Tenant, its agents, employees, partners,
directors, shareholders and independent contractors harmless from all
liabilities, costs, demands, judgments, settlements, claims and losses,
including reasonable attorneys fees and costs, incurred by Tenant (or such
parties) in conjunction with any such claim or claims of any broker or brokers
other than Broker claiming to have represented Landlord in connection with this
Lease.
57
<PAGE> 58
33.3 Landlord shall pay to Broker any leasing commission due Broker in
connection with this Lease and in accordance with, and subject to the terms,
covenants and conditions of, a separate written commission agreement, if any,
between Landlord and Broker.
34. LANDLORD'S LIABILITY AND DEFAULT.
34.1 NO PERSONAL LIABILITY. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of the Landlord are made and intended not for the purpose of binding Landlord
personally or the assets of Landlord generally, but are made and intended to
bind only the Landlord's interest in the Premises and the Building, as the same
may, from time to time, be encumbered, and no personal liability shall at any
time be asserted or enforceable against Landlord or its stockholders, officers
or partners or their respective heirs, legal representatives, successors and
assigns on account of the Lease or on account of any covenant, undertaking or
agreement of Landlord in this Lease. Accordingly, and notwithstanding any other
provisions of this Lease to the contrary, Tenant shall look solely to Landlord's
interest in the Premises and Building, and not to any other or separate business
or non-business assets of Landlord, or any partner, shareholder, member, officer
or representative of Landlord, for the satisfaction of any claim brought by
Tenant against Landlord, and if Landlord shall fail to perform any covenant,
term or condition of this Lease upon Landlord's part to be performed, and as a
consequence of such default Tenant shall recover a money judgment against
Landlord, such judgment shall be satisfied only (i) out of the proceeds of sale
received upon levy against the right, title and interest of Landlord in the
Building and/or (ii) to the extent not encumbered by a secured creditor, out of
the rents or other incomes receivable by Landlord from the property of which the
Premises are a part.
34.2 NOTICE AND CURE. In no event shall Landlord be in default of this
Lease unless Tenant notifies Landlord of the precise nature of the alleged
breach by Landlord, and Landlord fails to cure such breach within thirty (30)
days after the date of Landlord's receipt of such notice (or such longer period
as may be set forth herein); provided that (i) if the alleged breach is of such
a nature that it cannot reasonably be cured within such thirty (30) day period,
then Landlord shall not be in default if Landlord commences a cure within such
thirty (30) day period and diligently thereafter prosecutes such cure to
completion, such grace period not to exceed a maximum of ninety (90) days in the
aggregate, subject to Force Majeure, and (ii) in the event of (A) an Emergency
or (B) Landlord's failure to perform such maintenance and repairs required under
this Lease which failure materially impairs Tenant's ability to conduct its
business from the Premises for five (5) consecutive business days and Tenant is
unable to and in fact does not conduct its business from the Premises during
such time, such grace or cure period may be shortened as reasonably necessary
given the scope and nature of the Emergency or such failure, provided that such
shortened grace or cure period shall only apply to permit the exercise of
Tenant's self help rights under Section 34.4, below.
34.3 RIGHTS AND REMEDIES - GENERALLY. In the event of a default by
Landlord after expiration of applicable cure periods, Tenant shall be entitled
to pursue all rights and remedies available at law or in equity except as
limited by this Lease, and in all events excluding consequential damages. In
addition, in no event shall Tenant have any right to terminate this
58
<PAGE> 59
Lease by virtue of any uncured default by Landlord, except under circumstances
which amount to a constructive eviction under applicable principles of the law
of the state within which the Premises is located (and with respect to which
Tenant satisfies the requirements for a constructive eviction claim under
applicable law). Tenant shall use commercially reasonable efforts to mitigate
its damages in the event of any default by Landlord hereunder.
34.4 TENANT'S RIGHT TO PERFORM LANDLORD'S OBLIGATIONS AFTER A DEFAULT
BY LANDLORD. Among other remedies permitted to be exercised by Tenant upon a
default by Landlord of its obligations hereunder after expiration of applicable
cure periods, and without waiving or releasing Landlord from any such obligation
of Landlord, Tenant may, but shall not be obligated to, perform any such
obligation of Landlord, and to recover from Landlord the reasonable and actual
costs incurred by Tenant in performing such obligation, which shall be payable
within thirty (30) days after Tenant's written demand accompanied by reasonable
substantiation of the applicable costs. The foregoing right to perform
Landlord's obligations shall only apply after the requisite notice and
opportunity to cure has been afforded to Landlord (including any shortened cure
period permitted in cases of Emergency and the circumstances described in
Section 34.2(ii)(B) above, as long as Tenant notifies Landlord of the needed
repair or other default as soon as possible after Tenant learns of its
existence).
35. ESTOPPEL CERTIFICATES.
Tenant shall, from time to time, within ten (10) business days of
Landlord's written request, execute, acknowledge and deliver to Landlord or its
designee a written statement stating: the date the Lease was executed and the
date it expires; the date the Tenant entered occupancy of the Premises; the
amount of Base Rent, additional rent and other charges due hereunder and the
date to which such amounts have been paid; that this Lease is in full force and
effect and has not been assigned, modified, supplemented or amended in any way
(or specifying the date and terms of any agreement so affecting this Lease);
that this Lease represents the entire agreement between the parties as to this
leasing (or identifying any such other agreements); that all conditions under
this Lease to be performed by the Landlord have been satisfied (or specifying
any such conditions that have not been satisfied); that all required
contributions by Landlord to Tenant on account of Tenant's improvements have
been received (or specifying any such contributions that have not been
received); that on the date of such certificate there are no existing defenses
or offset which the Tenant has against the enforcement of this Lease by the
Landlord (or specifying any such defenses or offsets); that no Rent has been
paid more than one (1) month in advance (or, if so, the amount thereof); that no
security has been deposited with Landlord (or, if so, the amount thereof);
and/or any other matters evidencing the status of the Lease as may be required
either by a lender or prospective lender with respect to any loan to Landlord
secured or to be secured by a deed of trust or mortgage against the Building, or
by a purchaser or prospective purchaser of the Building, Landlord's interest
therein or Landlord's ownership interests, which written statement shall be in
substantially the same form as EXHIBIT G attached hereto and made a part hereof
by this reference. It is intended that any such statement delivered pursuant to
this paragraph may be relied upon by a prospective purchaser of Landlord's
interest or a mortgagee of Landlord's interest or assignee of any mortgage upon
Landlord's interest in the Building. If Tenant fails to respond within ten (10)
business days after receipt by Tenant of a written request by Landlord as herein
provided,
59
<PAGE> 60
Tenant shall be deemed to have executed and delivered such certificate in the
form tendered by Landlord to Tenant for execution.
36. FINANCIAL STATEMENTS.
36.1 Tenant shall within ten (10) days after Landlord's request, which
request may not be made more than once during any fiscal quarter with regard to
quarterly reports or more than once during any fiscal year with regard to annual
reports, Tenant shall deliver to Landlord, Tenant's unaudited quarterly
financial statement for its most recent fiscal quarter and (to the extent not
previously delivered by Tenant to Landlord) Tenant's audited annual financial
statement for its two (2) most recent fiscal years. Such quarterly and annual
financial statements shall include, at a minimum, a balance sheet, an income
statement, and a statement of change in financial position or sources and uses
of cash, together with any accompanying notes. Tenant hereby agrees that
Tenant's annual financial statements shall be completed within ninety (90) days
after Tenant's fiscal year-end and that Tenant's quarterly financial statements
shall be completed within thirty (30) days after Tenant's fiscal quarter-end.
The certified public accountant preparing any such annual financial statement
shall either (a) provide an opinion that such financial statement is complete
and materially accurate and that the same has been prepared in accordance with
generally accepted accounting principles consistently applied or (b) state the
basis upon which such financial statement has been prepared.
36.2 Notwithstanding Section 36.1 to the contrary, for so long as
Tenant is and remains a publicly traded company which meets its obligation to
file financial statements as part of its annual and quarterly reporting to the
United States Securities and Exchange Commission (the "SEC"), Tenant's financial
reporting obligations under this Section 36 shall be suspended and Landlord will
during such period obtain copies of the quarterly and annual financial
statements filed by Tenant with the SEC during the Term of this Lease from
public sources.
37. TRANSFER OF LANDLORD'S INTEREST.
In the event of any transfer(s) of Landlord's interest in the Premises
or the Building, other than a transfer for security purposes only, the
transferor shall be automatically relieved of any and all obligations and
liabilities on the part of Landlord accruing from and after the date of such
transfer, but solely to the extent such obligations are assumed by the
transferee either expressly or by operation of law, and, provided such
obligations are assumed (and this Lease, and Tenant's rights and obligations
hereunder, are recognized by the transferee) either expressly or by operation of
law, Tenant agrees to attorn to the transferee as Landlord hereunder.
38. RIGHT TO PERFORM.
If Tenant shall fail to make any payment or perform any other act on
its part to be performed hereunder, and such failure is not cured within thirty
(30) days after written notice from Landlord (provided that (a) where such
failure cannot reasonably be cured within a thirty (30) day period, Tenant shall
not be in default if it commences such performance promptly after receiving
Landlord's notice of Tenant's failure to perform and diligently thereafter
prosecutes the same to
60
<PAGE> 61
completion, such grace period not to exceed a maximum of ninety (90) days in the
aggregate, subject to Force Majeure, and (b) no such grace or cure period (or
such shorter grace or cure period as is set forth below) shall be required in
the event of Emergency), Landlord may, but shall not be obligated to, perform
any such obligation of Tenant, and to recover from Tenant, as additional rent
hereunder, the reasonable and actual costs incurred by Landlord in performing
such obligation, which costs shall be payable within thirty (30) days after
Landlord's written demand thereof accompanied by reasonable substantiation
thereof. Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and remedies in the event of the nonpayment of sums
due under this section as in the case of default by Tenant in the payment of
Rent. All sums paid by Landlord and all penalties, interest and costs in
connection therewith, shall be due and payable by Tenant together with interest
thereon at the Default Rate, which shall be calculated from the date incurred by
Landlord until the date of payment.
39. INTENTIONALLY DELETED.
40. SALES AND AUCTIONS.
Tenant may not display or sell merchandise outside the exterior walls
and doorways of the Premises and may not use such areas for storage. Tenant
agrees not to install any exterior lighting, amplifiers or similar devices in or
about the Premises. Tenant shall not conduct or permit to be conducted any sale
by auction in, upon or from the Premises whether said auction be voluntary,
involuntary, pursuant to any assignment for the payment of creditors or pursuant
to any bankruptcy or other insolvency proceedings.
41. NO ACCESS TO ROOF.
Except as and solely to the extent expressly set forth in this Lease,
Tenant shall have no right of access to the roof of the Premises or the Building
and shall not install, repair or replace any aerial, fan, air conditioner or
other device on the roof of the Premises or the Building without the prior
written consent of Landlord.
61
<PAGE> 62
42. SECURITY.
Tenant hereby agrees to the exercise by Landlord and its agents and
employees, within their sole discretion, of such security measures as Landlord
deems necessary for the Building, provided such security measures shall not
interfere with Tenant's access to and use of the Premises 24 hours per day,
seven days per week, during the Term of this Lease (it being agreed that the
installation and operation of a security system limiting entry to the Building
during non-business hours to persons in possession of a security key card or
with authorization by Tenant or Landlord to enter the Building shall not
constitute "interference" within the meaning of this Section 42. Tenant may
install a security system within the Premises, provided such system and its
installation (i) shall be subject to Landlord's prior written approval, which
shall not be unreasonably withheld (provided it shall not be unreasonable for
Landlord to deny consent to any system which is not compatible with the
building's overall security and fire safety and life safety systems, or which is
not reasonably usable by any successor tenants in the Premises), (ii) shall be
in accordance with all applicable legal requirements (iii) shall be performed at
Tenant's sole expense, and shall otherwise be installed in accordance with the
provisions governing Alterations under this Lease or the provisions governing
Tenant's Work under EXHIBIT C hereto. Nothing contained in this Section 42 shall
be construed or deemed to obligate Landlord to provide any particular form or
amount of security with respect to the Premises or the Building or on behalf of
Tenant or any other occupant of or visitor to the Premises or the Building.
43. AUTHORITY OF TENANT AND LANDLORD.
43.1 Tenant represents and warrants that it is duly authorized to
execute and deliver this Lease on behalf of Tenant, and that this Lease is
binding upon Tenant.
43.2 Landlord represents and warrants that it is duly authorized to
execute and deliver this Lease on behalf of Landlord, and that this Lease is
binding upon Landlord.
44. NO ACCORD OR SATISFACTION.
No payment by Tenant or receipt by Landlord of a lesser amount than the
Rent and other sums due hereunder shall be deemed to be other than on account of
the earliest rent or other sums due, nor shall any endorsement or statement on
any check or accompanying any check or payment be deemed an accord and
satisfaction; and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or other sum and to pursue
any other remedy provided in this Lease.
45. INTENTIONALLY DELETED.
46. PARKING.
Tenant shall have the right to park in the Building parking facilities
in common with other tenants of the Building upon such terms and conditions as
may be established by Landlord from time to time during the term of this Lease,
but without charge. Tenant agrees not to overburden
62
<PAGE> 63
the parking facilities and agrees to cooperate with Landlord and other tenants
in use of the parking facilities. For purposes of determining whether Tenant is
overburdening the Building's parking facilities, Tenant shall be deemed to have
a parking allocation of 3.4 parking spaces for each one thousand square feet of
net rentable area in the Premises, or 112 parking spaces, and shall have the
right to park in 112 parking spaces regardless of how the remaining parking
spaces are allocated to other tenants of the Building. Subject to such
allocation, Landlord reserves the right in its sole, but reasonable, discretion
to determine whether the parking facilities are becoming overburdened. Landlord
shall have the absolute right (i) to allocate and assign parking spaces among
some or all of the tenants of the Building (and Tenant shall comply with any
such parking assignments), (ii) to reconfigure the parking area, and/or (iii) to
modify the existing ingress to and egress from the parking area as Landlord
shall deem appropriate, as long as access to such area is maintained after such
modification is completed.
47. GENERAL PROVISIONS
47.1 ACCEPTANCE. The delivery of any draft of this Lease, including a
so-called "execution draft", shall not constitute an offer of any kind, and this
Lease shall only become effective and binding upon full execution hereof by
Landlord and Tenant, and delivery of a signed copy by Landlord to Tenant.
47.2 JOINT OBLIGATION. If there be more than one Tenant, the
obligations hereunder imposed shall be joint and several.
47.3 MARGINAL HEADINGS, ETC. The marginal headings, Table of Contents,
lease summary sheet and titles to the sections of this Lease are not a part of
the Lease and shall have no effect upon the construction or interpretation of
any part hereof.
47.4 CHOICE OF LAW. This Lease shall be governed by and construed in
accordance with the laws of the State in which the Premises is located (without
regard to the choice of law and/or conflict of law principles applicable in such
State).
47.5 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, inure to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
47.6 RECORDATION. Except to the extent otherwise required by law,
neither Landlord nor Tenant shall record this Lease, but a short-form memorandum
hereof may be recorded at the request of either party, provided (i) such short
form shall be subject to the reasonable approval of Landlord, and shall contain
no information other than what is statutorily required in order to record a
short form memorandum of lease, (ii) the party requesting such recordation shall
pay all costs, expenses and recordation taxes associated therewith, and (iii) if
recorded, each party covenants to execute and acknowledge (A) a valid release of
such memorandum, in recordable form, effective upon the expiration, or earlier
termination, of this Lease (and which may thereupon be recorded by Landlord),
and (B) an amendment to such memorandum, in recordable form, upon any amendment
63
<PAGE> 64
to this Lease which renders any information set forth within the original
memorandum incorrect in any material respect (and which may thereupon be
recorded by Landlord).
47.7 QUIET POSSESSION. Upon Tenant's paying the Rent reserved hereunder
and observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the Lease Term hereof, free from any disturbance
or molestation by Landlord, or anyone claiming by, through or under Landlord,
but in all events subject to all the provisions of this Lease.
47.8 INABILITY TO PERFORM; FORCE MAJEURE. This Lease and the
obligations of the parties hereunder shall not be affected or impaired because
either party is unable to fulfill any of its obligations hereunder (or is
delayed in doing so) to the extent such inability or delay is caused by reason
of war, civil unrest, strike, labor troubles, unusually inclement weather,
unusual governmental delays, inability to procure services or materials despite
reasonable efforts, third party delays, fire or other casualty, acts of God, or
any other cause(s) beyond the reasonable control of such party (which causes are
referred to collectively herein as "Force Majeure"), provided (i) in no event
shall any monetary obligations, including without limitation the Tenant's
obligation to pay Base Rent or additional rent, be extended due to Force
Majeure, (ii) in no event shall financial inability constitute a cause beyond
the reasonable control of a party, and (iii) in order for any party hereto to
claim the benefit of a delay due to Force Majeure, such party shall be required
to use reasonable efforts to minimize the extent and duration of such delay, and
to notify the other party of the existence and nature of the cause of such delay
within a reasonable time after the such delay first commences. Except as limited
by the foregoing clauses (i), (ii) and (iii), any time specified non-monetary
obligation of a party in this Lease shall be extended one day for each day of
delay suffered by such party as a result of the occurrence of any Force Majeure.
47.9 PARTIAL INVALIDITY. Any provision of this Lease which shall prove
to be invalid, void, or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision(s) shall remain in full force
and effect.
47.10 CUMULATIVE REMEDIES. No remedy or election hereunder shall be
deemed exclusive but shall, whenever possible, be cumulative with all other
remedies at law or in equity.
47.11 ENTIRE AGREEMENT. This Lease contains the entire agreement of the
parties hereto and no representations, inducements, promises, or agreements,
oral or otherwise, between the parties, not embodied herein, shall be of any
force or effect, and any such representations, inducements, promises, and
agreements are hereby merged herein.
47.12 SURVIVAL. All indemnities set forth in this Lease shall survive
the expiration or earlier termination of this Lease.
47.13 CONSENTS. If any provision of this Lease subjects any action,
inaction, activity or other right or obligation of Tenant to the prior consent
or approval of Landlord, Landlord shall be deemed to have the right to exercise
its sole and unfettered discretion in determining whether to grant or deny such
consent or approval, unless the provision in question states that Landlord's
64
<PAGE> 65
consent or approval shall not be unreasonably withheld, in which event
Landlord's consent shall be subject to Landlord's sole, but reasonable,
discretion.
47.14 SAVING CLAUSE. In the event (but solely to the extent) the
limitations on Landlord's liability set forth in Section 8.3 of this Lease would
be held to be unenforceable or void in the absence of a modification holding the
Landlord liable to Tenant or to another person for injury, loss, damage or
liability arising from Landlord's omission, fault, negligence or other
misconduct on or about the Premises, or other areas of the Building appurtenant
thereto or used in connection therewith and not under Tenant's exclusive
control, then such provision shall be deemed modified as and to the extent (but
solely to the extent) necessary to render such provision enforceable under
applicable law. The foregoing shall not affect the application of Section 34 of
this Lease to limit the assets available for execution of any claim against
Landlord.
47.15 RESERVATION. Nothing herein set forth shall be deemed or
construed to restrict Landlord from making any modifications to any of the
parking and/or common areas serving the Building and/or the Premises as of the
date of execution hereof, and Landlord expressly reserves the right to make any
modifications to such areas as Landlord may deem appropriate, including but not
limited to, the addition or deletion of temporary and/or permanent improvements
therein, and/or the conversion of areas now dedicated for the non-exclusive
common use of tenants (including Tenant) to the exclusive use of one (1) or more
tenants or licensees within the Building; provided Landlord shall not exercise
its rights under this Section 47.15 in a manner which shall materially and
adversely affect Tenant's access to, or use or enjoyment of, the Premises, or
which shall reduce the number of parking spaces available to Tenant pursuant to
Section 46.
47.16 KEYS. Landlord shall initially provide Tenant, without charge,
thirty (30) suite keys and thirty (30) security keys (to the extent the Building
has a remote entry security system). The cost of any additional or replacement
suite keys or security keys, which shall be Landlord's actual out-of-pocket cost
without mark-up, shall be reimbursed by Tenant to Landlord upon demand.
47.17 RULE AGAINST PERPETUITIES. In order to ensure the compliance of
this Lease with any rule against perpetuities that may be in force in the state
in which the Premises are located, and without limiting or otherwise affecting
Landlord's and Tenant's rights and obligations under this Lease, as stated in
the other sections hereof, Landlord and Tenant agree that, irrespective of the
reasons therefor in the event Tenant fails to take possession of the Premises
and commence paying Base Rent hereunder within twenty (20) years after the date
of execution of this Lease, then this Lease, and the obligations of the parties
hereunder, shall be deemed to be null and void and of no further force and
effect. Without affecting the specific timing requirements otherwise applicable
thereto under this Lease, any and all options granted to Tenant under this Lease
(including, without limitation, expansion, renewal, right of first refusal,
right of first offer, and like options) must be exercised by Tenant, if at all,
during the term of this Lease. Nothing contained in this Section 47.17 shall be
construed to limit Landlord's right and remedies hereunder or otherwise with
respect to the failure by Tenant to take possession of the Premises and/or
commence paying Rent hereunder.
65
<PAGE> 66
47.18 CERTAIN TERMINOLOGY.
A. The terms "including", "includes" and terms of like import
shall be interpreted to mean "including, but not limited to" and/or "includes,
without limitation".
B. The terms "herein", "hereunder", "hereinbelow", "above"
and/or "below", and any terms of like import, shall be interpreted to mean this
Lease as a whole, and not merely the Section, paragraph or subparagraph within
which such term is set forth.
C. As used in those provisions of this Lease where Tenant is
agreeing to assume responsibility for certain conduct, actions and/or omissions
of Tenant, the term "Tenant" shall be construed to mean Tenant, and Tenant's
agents, employees, contractors, subcontractors, assignees, sublessees, licensees
and, while within the Premises, invitees and business visitors.
D. As used in those provisions of this Lease where Landlord is
agreeing to assume responsibility for certain conduct, actions and/or omissions
of Landlord, the term "Landlord" shall be construed to mean Landlord, and
Landlord's agents, employees, contractors, subcontractors, assignees,
sublessees, and licensees.
E. The term "Emergency" shall mean and refer to any situation
or circumstance where there is an immediate or imminent risk of injury or death
to persons or damage to property unless immediate action is taken to address
such situation or circumstances, as determined by the party invoking such term
in good faith.
48. INTENTIONALLY DELETED.
49. WAIVER OF JURY TRIAL.
LANDLORD AND TENANT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER ON ALL
MATTERS ARISING OUT OF THIS LEASE, OR THE USE AND OCCUPANCY OF THE PREMISES. IF
LANDLORD COMMENCES ANY SUMMARY PROCEEDING FOR NON-PAYMENT OF RENT, TENANT WILL
NOT INTERPOSE (AND WAIVES THE RIGHT TO INTERPOSE) ANY NON-MANDATORY (i.e.,
NON-COMPULSORY) COUNTERCLAIM IN ANY SUCH PROCEEDING, PROVIDED THAT (i) TENANT
WILL NOT BE DEEMED TO HAVE WAIVED THE RIGHT TO ASSERT ANY SUCH NON- MANDATORY
COUNTERCLAIM AS A DIRECT CLAIM AGAINST LANDLORD PROVIDED THE SAME IS ASSERTED IN
A SEPARATE ACTION AGAINST LANDLORD AND IS NOT JOINED IN THE SUMMARY PROCEEDING,
(ii) TENANT SHALL HAVE THE RIGHT TO ASSERT ANY COMPULSORY COUNTERCLAIM IN SUCH
SUMMARY PROCEEDING, AND (iii) TENANT WILL NOT BE DEEMED TO HAVE WAIVED ITS RIGHT
TO ASSERT ANY DEFENSES, INCLUDING AFFIRMATIVE DEFENSES, AGAINST LANDLORD IN SUCH
SUMMARY PROCEEDING.
50. ROOF RIGHTS.
50.1 GENERALLY. Subject to (i) compliance with all rules, regulations,
statutes and codes of any governmental authority having jurisdiction thereover,
(ii) compliance with any covenants, conditions and restrictions applicable to
the Building, and (iii) subject to Landlord's prior written
66
<PAGE> 67
consent, which consent shall not be unreasonably withheld, conditioned or
delayed, Tenant shall have the right of access to and the non-exclusive use of
the roof of the Building for the installation of communication equipment and the
Dedicated HVAC Units (Tenant's "Roof Use"); provided further that such
installation and the Roof Use shall not void any roof or other warranty
applicable to the Building and that all such installations shall be located and
screened in a manner mutually acceptable to both Landlord and Tenant in their
reasonable discretion.
50.2 INSURANCE PREMIUMS. If the rate of any insurance carried by
Landlord is increased as a result of Tenant's Roof Use, then Tenant will pay to
Landlord within thirty (30) days after Landlord delivers to Tenant a certified
statement from Landlord's insurance carrier stating that the rate increase was
caused by Tenant's Roof Use, a sum equal to the difference between the original
premium and the increased premium resulting from the Roof Use.
50.3 NO REPRESENTATIONS. Landlord has not made any representations or
promises pertaining to the suitability of the Building's rooftop for the Roof
Use. Tenant, for the purpose of this paragraph and its right to rooftop access
hereunder, accepts the rooftop in its "as is" condition. The foregoing
notwithstanding, to the extent the Building has not yet been constructed by
Landlord, Landlord agrees to cooperate with Tenant during the design phase of
the Building to design and engineer an area of the roof to be constructed within
which Tenant's Roof Use may be conducted and which will be suitable for such
purpose, provided Tenant provides appropriate specifications to Landlord during
such design process to enable Landlord to cause the design to accommodate such
use.
50.4 COMPLIANCE WITH LEGAL REQUIREMENTS. Tenant will obtain prior to
installation, any and all necessary licenses, approvals, permits, etc.,
necessary for the installation, maintenance and use of any equipment installed
pursuant to this Section 50. Tenant's Roof Use shall not in any way conflict
with any applicable law, statute, ordinance or governmental rules or regulation
now in force or which may hereafter be enacted. Tenant will, at its sole cost
and expense, promptly comply or ensure that the Building complies with all laws,
statutes, ordinances, governmental rules or regulations, or requirements of any
board of fire insurance underwriters or other similar bodies now or hereafter
constituted relating to or affecting Tenant's Roof Use. Tenant shall indemnify
and hold Landlord harmless from and against any and all loss, cost (including
reasonable attorneys' fees incurred in defending Landlord), damage or liability
arising out of any violations of said laws, statutes, ordinances, rules or
regulations.
50.5 ADDITIONAL COVENANTS. Tenant's Roof Use shall be exercised: (1) in
such manner as will not create any hazardous condition or interfere with or
impair the operation of the heating, ventilation, air conditioning, plumbing,
electrical, fire protection, life safety, public utilities or other systems or
facilities in the Building; (2) in compliance with all applicable laws, codes
and regulations; (3) in such a manner as will not directly or indirectly
interfere with, delay, restrict or impose any expense, work or obligation upon
Landlord in the use or operation of the Building; (4) at Tenant's cost,
including the cost of repairing all damage to the Buildings and any personal
injury and/or property damage attributable to the installation, inspection,
adjustment, maintenance, removal or replacement of any equipment or apparatus on
the roofs approved hereunder; and (5) in a manner which will not void or
invalidate any roof warranty then in effect with respect to
67
<PAGE> 68
the roof of the Building. Tenant's Roof Use shall be used solely in the ordinary
course of Tenant's business operations and Tenant may not sublease, license or
otherwise permit third parties to establish communications transmission
facilities as part of Tenant's Roof Use.
51. EXTENSION OPTION
51.1 GENERAL. Provided that (i) both at the time of the exercise of the
option hereinafter set forth and at the time of commencement of the Extension
Term (as hereinafter defined) this Lease is in full force and effect, and
provided further that Tenant is not then in default hereunder beyond the
expiration of any applicable notice and cure period provided for in this Lease
and (ii) Tenant is in occupancy of at least fifty percent (50%) of the Premises
for the purpose of conducting its own business, Tenant is hereby granted the
option to extend the Lease Term for one (1) additional period of sixty (60)
months, subject to Section 52.9 below (the "Extension Term"), such Extension
Term to commence at the expiration of the initial Lease Term. Tenant shall
exercise its option to extend by delivering notice of such election (the
"Extension Notice") to Landlord not less than twelve (12) months nor more than
fifteen (15) months prior to the expiration of the Lease Term, as the same may
have been extended hereunder. In the event that Landlord does not receive the
Extension Notice prior to the expiration of such time period (time being of the
essence with respect thereto), then such option to extend the Lease Term shall,
upon the expiration of such time period, become null and void and be of no
further force or effect and Tenant shall, at the request of Landlord, execute an
instrument in form and substance acceptable to Landlord confirming such facts.
51.2 TERMS. The Extension Term shall be upon the same terms and
conditions of this Lease except that (a) the Base Rent during the Extension Term
shall be at such annual rate as may be determined by the agreement of Landlord
and Tenant or, if Landlord and Tenant are unable to reach agreement within
thirty (30) days after the date of the Extension Notice, at an annual rate equal
to the annual fair market rental rate ("FMR") for extending tenants for space
comparable to the Premises for the Extension Term as determined by the Three
Appraiser Method set forth in Section 51.3 of this Lease; (b) Tenant shall have
no option to extend the Lease Term beyond the expiration of the Extension Term;
and (c) the Premises shall be delivered in their existing condition (on an "as
is" basis) at the time the Extension Term commences.
51.3 THREE APPRAISER METHOD. If the parties are otherwise unable to
agree upon the FMR for comparable space, said rental rate shall be determined by
arbitration in the following manner:
51.3.1 Landlord and Tenant shall each appoint one arbitrator
who shall, by profession, be an M.A.I. real estate appraiser, and who shall have
been active over the five (5) year period ending on the date of the Extension
Notice in the appraisal of office properties in the Needham/Newton/Route 128
area in which the Premises are located. Each such arbitrator shall be appointed
within forty-five (45) days after the date of the Extension Notice.
51.3.2 The two arbitrators so appointed shall, within five (5)
days of the date of the appointment of the last appointed arbitrator, agree upon
and appoint a third arbitrator who
68
<PAGE> 69
shall be qualified based upon the same criteria set forth hereinabove for the
qualification of the initial two arbitrators.
51.3.3 The three arbitrators shall within thirty (30) days of
the appointment of the third arbitrator reach a decision the regarding the
prevailing fair market rental for comparable space in the Needham/Newton/Route
128 area and notify Landlord and Tenant thereof.
51.3.4 The decision of the majority of the three arbitrators
shall be binding upon Landlord and Tenant. Failure of a majority of said
arbitrators to reach agreement shall result in the prevailing fair market rental
for comparable space in the Needham/Newton/Route 128 area being designated by
averaging the appraisals of the three arbitrators, ignoring for the purposes of
such averaging the high and/or low appraisal which is more than ten percent
(10%) in excess of or less than the middle appraisal.
51.3.5 If either Landlord or Tenant fails to appoint an
arbitrator within the time period specified in subparagraph (i) hereinabove, the
arbitrator appointed by one of them shall reach a decision and notify Landlord
and Tenant thereof, and such arbitrator's decision shall be binding upon
Landlord and Tenant.
51.3.6 The cost of arbitration shall be paid by Landlord and
Tenant equally.
51.3.7 In no event shall the Base Rent payable during the
Extension Term be less than the Base Rent payable immediately preceding the
Extension Term.
The term "comparable space" as used herein for the purpose of
determining "market rates" shall mean buildings of the same quality as the
Building and located in the same town as the Building.
51.4 DOCUMENTATION. If Tenant exercises its option to extend pursuant
to this Section 51, Landlord shall prepare and Landlord and Tenant shall execute
an Amendment to this Lease confirming such exercise and incorporating the
applicable terms of this Section 51, including without limitation, the Base Rent
during the Extension Term. These provisions shall be self-operative, and such
Amendment shall merely confirm in a separate written instrument the terms and
provisions set forth herein.
52. RIGHT OF FIRST OFFER
52.1 Subject to the terms and provisions of this Section 52, Landlord
hereby grants to Tenant a right of first offer (the "Right of First Offer"),
exercisable during the period beginning ten (10) months from the date hereof and
ending on the last day of the initial Lease Term, as the same may have been
extended pursuant to this Section 52 through the expiration date of the term for
the FIRST "Leased ROFO Space", defined in Section 52.2 below (the "Exercise
Period"), to lease up to 45,000 square feet of Rentable Area located within the
area designated as "Potential ROFO Space" on EXHIBIT A-1. During the Exercise
Period, Landlord agrees that if, after all of the Potential ROFO Space is
initially leased up, all or any portion of the Potential ROFO Space becomes
available for
69
<PAGE> 70
lease by reason of the expiration or termination of the initial lease therefor,
Landlord shall no earlier than nine (9) months prior to such expiration or
earlier termination provide to Tenant a written notice ("Landlord's Offer
Notice") which shall include (i) a description of the configuration and rentable
area of the space so available (the "Available ROFO Space"), (ii) those business
terms which Landlord, in good faith, believes constitute fair market business
terms for the lease of the Available ROFO Space as of such date for a term
coterminous with the initial Lease Term hereunder (except as provided below in
this Section 52.1), including the applicable rental rates, allowances, other
monetary concessions, and buildout periods, and (iii) the date upon which
Landlord estimates in good faith that the Available ROFO Space will be available
for occupancy. Except as otherwise expressly provided in Section 52.9 below, in
the event that at any time at which Landlord gives a Landlord's Offer Notice to
Tenant there remain less than five (5) Lease Years in the initial Lease Term,
the initial term for which Tenant shall be required to lease the Available ROFO
Space (if Tenant elects to lease the same) shall be five (5) Lease Years and the
business terms set forth in Landlord's Offer Notice shall reflect a 5-year lease
term.
52.2 Provided (a) that both at the time Tenant gives the "Exercise
Notice" (as hereinafter defined) and at the time of commencement of the Term
with respect to the "Leased ROFO Space" (as hereinafter defined), this Lease is
in full force and effect, (b) that Tenant is not then in default hereunder
beyond the expiration of any applicable notice and cure period provided for in
this Lease and (c) Tenant is in occupancy of at least fifty percent (50%) of the
"Initial Premises" (as hereinafter defined in Section 52.5) for the purpose of
conducting its own business, Tenant shall have the right to exercise the Right
of First Offer with respect to the entire Available ROFO Space or such lesser
portion thereof as comprises a multiple of 15,000 rentable square feet as set
forth in Tenant's notice (collectively, the "Leased ROFO Space"), by giving
written notice of exercise (the "Exercise Notice") to Landlord within twenty
(20) days after the receipt of Landlord's Offer Notice (the "Response Period").
In the event that Tenant desires to lease the Leased ROFO Space but disagrees
that any of the terms set forth in Landlord's Offer Notice reflect fair market
business terms therefor, Tenant shall so state in the Exercise Notice and shall
include its good faith estimate of such fair market term. If Tenant fails to
deliver an Exercise Notice within such 20-day period, then Tenant shall be
deemed to have waived the Right of First Offer with respect to the Available
ROFO Space described in Landlord's Offer Notice, but Tenant's Right of First
Offer with respect to the remainder of the Potential ROFO Space shall not be
affected by such waiver except as otherwise provided in Section 52.7 below.
Regardless of whether Tenant's Exercise Notice accepts or disputes any of the
fair market business terms set forth in Landlord's Offer Notice, the timely
giving of an Exercise Notice shall constitute a binding and effective exercise
by Tenant of the Right of First Offer with respect to the Leased ROFO Space.
52.3 In the event that Tenant states in the Exercise Notice its
disagreement with any of the fair market business terms stated in Landlord's
Offer Notice and sets forth therein its good faith estimate of such fair market
business term, and the parties are unable to agree on such fair market business
term within ten (10) business days after Landlord's receipt of the Exercise
Notice, the determination of such fair market business term shall be made by
arbitration in the following manner:
70
<PAGE> 71
52.3.1 Landlord and Tenant shall each appoint one arbitrator
who shall, by profession, be an M.A.I. real estate appraiser, and who shall have
been active over the five (5) year period ending on the date of Landlord's Offer
Notice in the appraisal of office properties in the Needham/Newton/Route 128
area in which the Premises are located. Each such arbitrator shall be appointed
within twenty (20) days after the date of the Exercise Notice.
52.3.2 The two arbitrators so appointed shall, within five (5)
days of the date of the appointment of the last appointed arbitrator, agree upon
and appoint a third arbitrator who shall be qualified based upon the same
criteria set forth hereinabove for the qualification of the initial two
arbitrators.
52.3.3 The three arbitrators, shall within twenty (20) days of
the appointment of the third arbitrator, reach a decision regarding the disputed
fair market business term, based on the terms of arms-length lease transactions
for space of comparable size and use located in comparable buildings in the
Needham/Newton/Route 128 area, and shall notify Landlord and Tenant in writing
thereof. Such decision shall be by a majority of the arbitrators and shall be
binding upon Landlord and Tenant. In making their decision with respect to each
disputed fair market business term, each arbitrator shall be required to select
either Landlord's or Tenant's proposed business term for such disputed business
term, and shall have no power or authority to establish such disputed business
term at any other amount. During such time as the arbitrators are making their
decision with respect to each disputed fair market business term, the Lease
shall continue in full force and effect and if such disputed fair market
business term is the Base Rent to be payable during the term of the Leased ROFO
Space, Tenant shall pay Base Rent for the Leased ROFO Space for which the Base
Rent is being determined by arbitration at the highest contracted Base Rent then
being paid under the Lease until such time as the Base Rent has been determined
by the arbitrators pursuant to this Section 52.3.
52.3.4 If either Landlord or Tenant fails to appoint an
arbitrator within the time period specified in subparagraph 52.3.1 hereinabove,
the arbitrator appointed by one of them within such time shall reach a decision
and notify Landlord and Tenant thereof, and such arbitrator's decision shall be
binding upon Landlord and Tenant.
52.3.5 The cost of arbitration shall be paid by Landlord and
Tenant equally.
52.4 In the event that, in accordance with Section 52.2 above, Tenant
exercises the Right of First Offer with respect to less than all of the
Available ROFO Space identified in Landlord's Exercise Notice, the Leased ROFO
Space so leased by Tenant shall be subject to reasonable configuration and
location by Landlord within the Available ROFO Space, provided that such
configuration and location shall result in each of the Leased ROFO Space and the
remainder of the Available ROFO Space not then leased by Tenant being
independently leasable space (e.g., each must have an equitable proportion of
windows relative to the Rentable Area of the entire Available ROFO Space, and
must have reasonable means of ingress, egress or access to the Common Areas,
common facilities and/or core areas of the Building located on such floor of the
Building, such as bathrooms, telephone and electrical closets, etc., and must
have egress and ingress in accordance with all applicable codes, rules and
regulations).
71
<PAGE> 72
52.5 Once the business terms of Tenant's leasing of the Leased ROFO
Space have been established (whether by Tenant's acceptance of the terms set
forth in Landlord's Offer Notice without objection or by arbitration as provided
above), Landlord shall prepare and Landlord and Tenant shall execute, within ten
(10) days thereafter, an amendment to this Lease, in all events subject to
Section 52.9 below, (i) confirming Tenant's lease of the Leased ROFO Space for a
term of no less than five (5) years, (ii) providing that Tenant's leasehold of
the Leased ROFO Space and of the Initial Premises shall be coterminous (i.e.,
shall be for a term equal to the greater of five (5) years or the then remaining
term for the Initial Premises), (iii) extending Tenant's leasehold of the
Initial Premises to the extent required by the foregoing clauses (i) and (ii)
(such extended period, which shall not take in to account any portion of the
Lease Term that was extended pursuant to Section 51 above, hereinafter referred
to as the "Stub Period"), with the annual rental rate for the Initial Premises
during the Stub Period to be determined in accordance with the provisions of
Section 51.2(a), (iv) subjecting the Leased ROFO Space to the other provisions
of the Lease except as specifically otherwise provided in Landlord's Offer
Notice, Tenant's Exercise Notice and the arbitrators' decision (if any), and (v)
modifying such other terms and conditions of the Lease to the extent necessary
to reflect the addition of the Leased ROFO Space to the Initial Premises and any
increased rental rate therefor, including without limitation, the amount of the
Security Deposit, Tenant's Share, and Tenant's parking rights. Except as
expressly set forth in this Section 52.5, all other terms and conditions of the
Lease shall remain the same. As used in this Section 52, "Initial Premises"
shall mean the Premises as constituted as of the date of the most recent
Exercise Notice. Notwithstanding the provisions of Section 52.5(iii) to the
contrary and provided that Tenant has not previously exercised its right to
extend pursuant to Section 51 above, the annual rental rate for the Initial
Premises during the Stub Period through the expiration date of the term for the
FIRST Leased ROFO Space shall be $27.95 per square foot or $912,986.75 per
annum.
52.6 If Tenant shall fail to give an Exercise Notice within the
applicable Response Period, or if Tenant shall fail to execute and deliver the
lease amendment to Landlord in a timely manner as provided in Section 52.5,
Landlord shall, in either event, be free to lease the Available ROFO Space to
third-party tenants. If Landlord fails to execute a lease therefor with such a
tenant within nine (9) months of the expiration of the Response Period hereunder
with respect to such space, Landlord shall again offer to lease the Available
ROFO Space to Tenant in the aforesaid manner.
52.7 It is the intent of this Section that Tenant be provided with the
opportunity to lease up to 45,000 square feet of Rentable Area (in the
aggregate) of Potential ROFO Space in accordance with the provisions of this
Section 52. From and after the expiration of Tenant's Response Period with
respect to a Landlord's Offer Notice which, either singly or when taken in the
aggregate with all previous Landlord's Offer Notices given to Tenant pursuant to
this Section 52, have offered at least 45,000 square feet of Rentable Area of
Available ROFO Space to Tenant, Tenant's Right of First Offer shall expire and
be of no further force and effect.
52.8 Nothing contained in this Section 52 shall be construed to require
Landlord to offer Available ROFO Space at business terms identical to or
consistent with this Lease, and the rights created by this Section 52 shall not
apply in favor of or be exercisable by any assignee of this Lease or sublessee
of all or any portion of the Premises, other than a Successor Entity.
72
<PAGE> 73
52.9 NOTWITHSTANDING ANYTHING CONTAINED IN THIS LEASE TO THE CONTRARY,
IN NO EVENT SHALL THE LEASE TERM, AS THE SAME MAY BE EXTENDED PURSUANT TO THE
PROVISIONS OF SECTIONS 51 AND 52 HEREOF, EXCEED ONE HUNDRED SIXTY-EIGHT (168)
MONTHS, OR FOURTEEN (14) LEASE YEARS.
53. ADDITIONAL SCHEDULES.
The following additional schedules are attached hereto and made a part
of this Lease:
EXHIBIT A-1 Location and Dimensions of Premises
EXHIBIT A-2 Legal Description of Land
EXHIBIT B Declaration of Lease Commencement
EXHIBIT C Construction Exhibit; Landlord's Work and Tenant Work
EXHIBIT D Approved Form of Letter of Credit
EXHIBIT E Rules and Regulations
EXHIBIT F Janitorial Specifications
EXHIBIT G Form Estoppel Certificate
EXHIBIT H Form of Subordination, Non-Disturbance and Attornment
Agreement
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, in
quadruplicate, as of the day and year first above written.
LANDLORD:
WELLSFORD/WHITEHALL HOLDINGS, L.L.C., a Delaware
limited liability company
By:
--------------------------------
Richard R. Previdi
Authorized Signatory
TENANT:
MCK COMMUNICATIONS, INC.,
a Delaware corporation
By:
--------------------------------
Name:
Title:
73
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data", "Experts" and "Change in Independent Accountants"
and to the use of our report dated July 30, 1999, except for Note 14, as to
which the date is October 8, 1999, in Amendment No. 2 to the Registration
Statement (333-32090) on Form S-1 and related Prospectus of MCK Communications,
Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
April 3, 2000
<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 last paragraph of Note 14, as to which the date is
October 8, 1999, in Amendment No. 2 to the Registration Statement (333-32090) on
Form S-1 and related Prospectus of MCK Communications, Inc. for the registration
of shares of its common stock.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Calgary, Alberta
April 4, 2000
