<PAGE>
As filed with the Securities and Exchange Commission on April 19, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPEECHWORKS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
-----------------
Delaware 8731 04-3239151
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
organization)
SPEECHWORKS INTERNATIONAL, INC.
695 Atlantic Avenue
Boston, Massachusetts 02111
(617) 428-4444
(Address, Including Zip Code, And Telephone Number, Including Area Code, Of
Registrant's Principal Executive Offices)
STUART R. PATTERSON
Chief Executive Officer
SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, Massachusetts 02111
(617) 428-4444
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
Of Agent For Service)
Copies to:
-----------------
Steven P. Rosenthal, Esq. John A. Burgess, Esq.
Michael L. Fantozzi, Esq. William S. Gehrke, Esq.
Mintz, Levin, Cohn, Ferris, Hale and Dorr LLP
Glovsky and Popeo, P.C. 60 State Street
One Financial Center Boston, MA 02109
Boston, MA 02111 (617) 526-6000
(617) 542-6000
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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 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 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
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<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum Amount of
of Securities to be Registered Aggregate Offering Price (1) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par value per share $86,250,000 $22,770
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED , 2000
PROSPECTUS
Shares
[SPEECHWORKS LOGO]
Common Stock
This is an initial public offering of common stock by SpeechWorks
International, Inc. SpeechWorks is selling shares of common stock. The
estimated initial public offering price will be between $ and $ per share.
------------
Prior to this offering, there has been no public market for our common
stock. We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol SPWX.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to SpeechWorks, before expenses........................ $ $
</TABLE>
SpeechWorks has granted the underwriters an option for a period of 30 days
to purchase up to additional shares of common stock.
------------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Chase H&Q
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
, 2000
<PAGE>
There will be a center graphic, which is a montage of images of people
speaking on telephones. The tagline above the image states: your customers will
thank you.
Extending out from the graphic--above and to the sides--are eight straight
lines, each of which point to text about our corporate capabilities. The text
items read:
. International Centers of Excellence
. User Interface Design and Human Factors Teams
. SADL--Proven Process for Application Development
. SpeechSite Package
. SpeechWorks Solution for Custom Applications
. SMARTRecognizer Engine for Continuing Accuracy Improvements
. Easy-to-use DialogModules and Application Tuning Tools
. SpeechWorks Here for Partners and Customers
Extending out from the graphic--below--are three lines that point to text
about the type of applications we provide. Underneath that text are sample
dialogues from applications enabled by SpeechWorks technology. The text is as
follows:
To Communicate
Application: "Say the name of the person or department you want to reach,
or say "Company Information.' "
Caller: "Sales."
To Inform
Application: "Would you like arrival or departure information for that
flight?"
Caller: "Arrival."
Application: "Flight 207 is scheduled to arrive on time at 4:05 p.m. in
San Diego."
To Transact
Application: "Citigroup, symbol C, as of 10am, bid 62 1/2..." [barge-in]
Caller: "Order this."
Application: "For Citigroup, symbol C, would you like to buy or sell?"
Caller: "Buy 200 shares at a limit of 62 and 7/8, good 'til cancelled."
Application: "To confirm, in your account number 123456789, you requested
an order to buy 200 shares of Citigroup at a limit price of 62 and 7/8,
this is a cash transaction and it is good 'til cancelled."
Caller: "Yes."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 12
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 42
Principal Stockholders................................................... 48
Certain Transactions..................................................... 50
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 57
Experts.................................................................. 57
Where You Can Find More Information...................................... 57
Index to Financial Statements............................................ F-1
</TABLE>
SpeechWorks is a registered trademark, and SpeechSite, SpeechWorks Here,
DialogModules, SMARTRecognizer, SpeechCare, SpeechSpot and the SpeechWorks logo
are trademarks of SpeechWorks International, Inc. This prospectus also contains
other trademarks, tradenames and service marks of other companies, which are
the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" beginning on page 5 and our
consolidated financial statements and related notes beginning on page F-1,
before making an investment decision.
SpeechWorks
SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services over any telephone. With our speech
recognition solutions, consumers can direct their own calls, obtain information
and conduct transactions automatically, simply by speaking naturally over any
telephone, anytime. Our e-business solutions are designed to help businesses
build sustainable customer relationships over the telephone, provide improved
and cost-effective customer service systems, increase the returns on their
internet-related investments and capitalize on a variety of new business
opportunities.
We currently offer two speech recognition solutions for over-the-telephone
applications, the SpeechWorks 6 platform and our recently introduced SpeechSite
package. SpeechWorks 6 is a comprehensive set of software tools and core speech
recognition technologies that can be used to build state-of-the-art, speech-
activated services. With our SpeechWorks 6 platform, companies can quickly
design and deploy speech-activated applications, in multiple languages, that
enable their customers to buy travel tickets, trade mutual funds, get health
care referrals, update account records, send messages and conduct a myriad of
other transactions that extend web-based e-business to any telephone.
SpeechSite, which is based on the SpeechWorks 6 platform, is a packaged
application that brings the web model of self-service to the telephone.
SpeechSite answers and directs telephone calls, delivers company information
and provides fax back services. Like a website, SpeechSite can link to other
services and deliver various types of information services to callers. However,
SpeechSite uses a spoken interface rather than a visual browser.
We complement our products with a professional services organization that
offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
believe that our ability to successfully deliver an integrated solution to our
clients that includes both software and professional services provides us with
a significant competitive advantage.
Enterprises are building speech-activated services with our products that
will automate and enhance customer service by making it easier for customers to
retrieve information and conduct transactions without waiting on hold or
speaking to an agent. Examples of phrases that can be understood by
applications enabled by our software are: "What is my checking account
balance?" and "Buy 100 shares of General Electric at the market price." These
services can improve the caller's experience and save expensive customer
service representative providers.
Communication carriers and their partners are building speech-activated
services with our products that we believe have the potential to change the way
people use the telephone for network services. Applications have been built,
and enabled by our software, that can understand phrases such as "Call Mike
Phillips at home," and "Forward this message to Bill O'Farrell." In addition, a
new class of service providers, known as voice or speech portals, is using our
software to build applications that can understand phrases such as: "What is
the weather in Paris?" and "What was the score of the Red Sox game today?"
These services can differentiate one carrier's service offering from another
and increase the ability of carriers to attract and retain users.
1
<PAGE>
Since shipping our first products in 1996, we have received numerous
awards for our product capabilities and our industry leadership, including
Industry Week's Technology of the Year Award and Frost & Sullivan's Market
Strategy Leadership Award. To date, we have licensed SpeechWorks software to
more than 150 clients worldwide in a variety of industries including retail,
financial services, pharmaceuticals, telecommunications, technology,
distribution and travel. Our clients include Amtrak, Apple Computer, BellSouth
IntelliVentures, CellularOne, Continental Airlines, DLJ Direct, E*TRADE,
MapQuest.com, MCI WorldCom, McKessonHBOC, NetByTel.com, Nortel Networks,
Quack.com, SingTel Mobile, United Airlines and Universal Electronics.
Our goal is to become the leading global provider of speech-activated
solutions for e-business. The key elements of our strategy are to:
.maintain our leadership position in the market for speech-enabled e-
business solutions,
.extend our technology lead,
. leverage our professional services capabilities to accelerate
acceptance of our speech-activated solutions,
.expand our international presence,
.expand our sales channels to drive market penetration, and
.build awareness of our brand.
----------------
Our principal executive offices are located at 695 Atlantic Avenue,
Boston, Massachusetts 02111. Our telephone number is 617-428-4444. Our primary
web site is located at www.speechworks.com. The information contained on this
web site is not a part of this prospectus. We were incorporated in
Massachusetts in May 1994 and reincorporated in Delaware in August 1995.
2
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by SpeechWorks........ shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds............................ Primarily for general corporate purposes, including
working capital, marketing, capital expenditures and
potential strategic acquisitions or investments.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol..... SPWX
</TABLE>
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The share amounts in this table are based on shares outstanding as of
April 14, 2000. This table excludes:
. 9,798,633 shares of common stock reserved for issuance under our stock
option plans of which 4,699,315 shares are issuable upon exercise of
stock options outstanding as of April 14, 2000 with a weighted average
exercise price of $1.76 per share,
. 807,237 shares of common stock reserved for issuance upon the exercise
of warrants outstanding as of April 14, 2000 with a weighted average
exercise price of $2.02 per share, and
. shares of common stock reserved for issuance under our employee stock
purchase plan.
---------------
Unless otherwise indicated, all information in this prospectus:
. reflects the automatic conversion of all of our outstanding convertible
preferred stock into 16,415,158 shares of common stock upon the closing
of this offering,
.reflects a three-for-two stock split of shares of our common stock
effected on January 5, 2000,
. assumes the filing of our restated certificate of incorporation and the
adoption of our amended and restated bylaws, each as contemplated to be
in effect as of the closing of this offering, and
.assumes no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Consolidated Financial Data
The table below sets forth summary financial data for the periods
indicated. It is important that you read this information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes for the
years ended December 31, 1997, 1998 and 1999 beginning on page F-1. The pro
forma basic and diluted net loss per common share reflects the assumed
conversion of all outstanding convertible preferred stock into common stock
upon completion of this offering as if such conversion occurred on January 1,
1999 or, if later, the date of original issue.
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1997 1998 1999
------ ------ -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenue........................................ $2,042 $5,850 $14,011
Gross profit......................................... 1,220 2,926 5,880
Loss from operations................................. (2,880) (5,979) (15,739)
Net loss............................................. (2,520) (5,760) (15,463)
Net loss attributable to common stockholders......... (3,053) (6,549) (17,367)
Basic and diluted net loss per common share.......... $(0.83) $(1.44) $ (3.28)
Shares used in computing basic and diluted net loss
per common share.................................... 3,696 4,537 5,298
Pro forma basic and diluted net loss per common
share............................................... $ (0.87)
Shares used in computing pro forma basic and net loss
per common share.................................... 17,686
</TABLE>
The pro forma balance sheet data give effect to the issuance of 2,544,681
shares of series E convertible preferred stock on April 11, 2000 for net
proceeds of $19.9 million and the conversion upon the completion of this
offering of all of our outstanding convertible preferred stock into a total of
16,415,158 shares of common stock. The pro forma as adjusted balance sheet data
further adjust the pro forma data to give effect to the sale by us in this
offering of shares of common stock at an assumed initial offering price of
$ per share (the mid-point of the range set forth on the cover page of this
prospectus) which, after deducting the underwriting discounts and commissions
and estimated offering expenses, results in net proceeds to us of $ million.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................. $11,474 $31,404 $
Working capital....................................... 12,133 32,063
Total assets.......................................... 20,566 40,496
Long-term debt, less current portion.................. 833 833 833
Redeemable convertible preferred stock................ 43,507 -- --
Total stockholders' equity (deficit).................. (28,248) 35,189
</TABLE>
4
<PAGE>
RISK FACTORS
You should consider carefully the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks, as well as other risks and uncertainties that
are not yet identified or that we currently think are immaterial, actually
occur, our business could be adversely affected. In that event, the trading
price of our common stock could decline, and you may lose part or all of your
investment.
Risks Related To Our Business
We have a history of losses and anticipate future losses.
We have accumulated losses of $29.3 million since our inception in May
1994 through December 31, 1999 and we expect to incur net losses for the
foreseeable future. Net losses were $5.8 million for the year ended December
31, 1998 and $15.5 million for the year ended December 31, 1999. We anticipate
continuing to incur significant sales and marketing, research and development
and general and administrative expenses and, as a result, we will need to
generate higher revenues to achieve and sustain profitability. We cannot be
certain we will realize sufficient revenues to achieve profitability. Moreover,
if we were to achieve profitability, we may not be able to sustain or increase
our profitability on a quarterly or annual basis. In addition, any additional
financing that we may require in the future may not be available at all or, if
available, may be on terms unfavorable to us. Any additional financing may
dilute your ownership interest in SpeechWorks.
We expect our quarterly revenues and operating results to fluctuate. If our
quarterly operating results fail to meet the expectations of financial analysts
and investors, the trading price of our common stock may decline.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
. the timing of sales of our products and services, particularly in
light of our dependence on a relatively small number of large orders,
. the timing of product implementations, particularly large client
design projects,
. unexpected delays in introducing new products and services,
. increased expenses, whether related to sales and marketing, product
development or administration,
. deferral of recognition of our revenue in accordance with applicable
accounting principles due to the time required to complete projects,
. the mix of product license and services revenue,
. the mix of domestic and international sales, and
. costs related to possible acquisitions of technology or businesses.
For example, in 1999 our quarterly revenues and operating results were
affected by delays in several large orders and services projects and the timing
of orders for resold hardware and facilities management services, which are
provided only on an as-requested basis, and accordingly are relatively
difficult to predict.
5
<PAGE>
Therefore, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the
results of any one quarter as an indication of our future performance. Because
of the volatility of our quarterly results and the difficulty in predicting our
future performance, our operating results may fall below the expectations of
analysts or investors.
We plan to increase our operating expenses to expand our sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and improve
operational and financial systems. If our revenues do not increase along with
these expenses, our business could be adversely affected and net losses in a
given quarter would be greater than expected.
Our business is dependent on the continued use and growth of speech-activated
solutions for e-business.
Our business would be adversely affected if use of speech-activated, e-
business solutions does not continue to develop, or develops more slowly than
we expect. Our market is relatively new and rapidly evolving. Our future
success depends on the acceptance by current and future clients and their
customers of speech-activated services as an integral part of their businesses.
The size of our market will depend in part on consumer acceptance of automated
speech systems and the actual and perceived quality of these systems. The
adoption of speech-activated services could be hindered by the perceived costs
of this new technology, as well as the reluctance of enterprises that have
invested substantial resources in existing call centers, touch-tone-based
systems or internet-based e-business infrastructures to replace or enhance
their current systems with this new technology. Accordingly, in order to
achieve commercial acceptance, we will have to educate prospective clients,
including large, established telecommunications companies, about the uses and
benefits of speech-activated services in general and our products in
particular. If these efforts fail, or if speech-activated software platforms do
not achieve commercial acceptance, our business could be harmed. In addition,
the continued development of new and evolving wireless technologies using a
visual web browser interface could adversely affect the demand for speech-
activated services.
We currently rely on a limited number of large orders for substantially all of
our revenues. The loss of one or more potential clients could adversely affect
our business.
Due to the nature of our business, in any quarter we are dependent upon a
limited number of orders that are relatively large in relation to our overall
revenues. Our products and services require significant expenditures by our
clients and typically involve lengthy sales cycles. We may spend significant
time and incur substantial expenses educating and providing information to
prospective clients. Any failure to complete a sale to a prospective client
during a quarter could result in revenues and operating results for the quarter
that are lower than expected.
In addition, as a result of the significant time required to deliver or
perform a client order, we may be unable to recognize revenue related to a
client order until well after we receive the order. Our dependence on large
client orders and the delay in recognizing revenue relating to these orders
make it difficult to forecast quarterly operating results. This could cause our
stock price to be volatile or to decline.
We must respond to rapid technological advances.
Our success will depend, in part, on our ability to keep pace with:
. rapidly changing technology,
. evolving industry standards and practices,
6
<PAGE>
. frequent new service and product introductions and enhancements, and
. changing client requirements and preferences.
Any delay or failure on our part in responding quickly, cost-effectively
and sufficiently to these developments could render our existing products and
services obsolete and have an adverse effect on our business. We may have to
incur substantial expenditures to modify or adapt our products and services to
respond to technological changes. We must stay abreast of cutting-edge
technological developments and evolving service offerings to remain
competitive, increase the utility of our services and attract and retain
qualified employees. We must be able to incorporate new technologies into the
speech-activated e-business solutions we design and develop to address the
increasingly complex and varied needs of our client base.
We have potential liability to clients who are dissatisfied with our services.
We design, develop and implement complex speech-activated e-business
solutions that are crucial to the operation of our clients' businesses. Defects
in the solutions we develop could result in delayed or lost revenue, adverse
client reaction and negative publicity about us or our products and services or
require expensive corrections, any of which could have an adverse effect on our
business. Also, due to the developing nature of speech recognition technology,
speech-recognition products are not currently and may never be accurate in
every instance. In addition, third party technology that is included in our
products could contain errors or defects. Clients who are not satisfied with
our products or services, could bring claims against us for substantial
damages, which, even if unsuccessful, would likely be time consuming and could
result in costly litigation and payment of damages.
Our current and potential competitors, some of whom have greater resources and
experience than we do, may offer products and services that may cause demand
for, and the prices of, our products to decline.
A number of companies have developed, or are expected to develop, products
and services that compete with our products and services. Competitors in the
speech-activated, e-business solutions market include IBM, Lernout and Hauspie
Speech Products, Locus Dialogue, Lucent Technologies, Nuance Communications,
Philips Electronics and Phonetic Systems. We expect additional competition from
other companies such as Microsoft, which recently acquired a voice interface
technology company. Furthermore, our competitors may combine with each other,
and other companies may enter our markets by acquiring or entering into
strategic relationships with our competitors. Current and potential competitors
have established, or may establish, cooperative relationships among themselves
or with third parties to increase the abilities of their advanced speech and
language technology products to address the needs of our prospective customers.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition or larger client bases than we
do. Our present or future competitors may be able to develop products and
services comparable or superior to those we offer, adapt more quickly than we
do to new technologies, evolving industry trends and standards or client
requirements, or devote greater resources to the development, promotion and
sale of their products and services than we do. Accordingly, we may not be able
to compete effectively in our markets, competition may intensify and future
competition may harm our business.
7
<PAGE>
If the standards we have selected to support are not adopted as the standards
for speech-activated software, businesses might not use our speech-activated
software platform for delivery of applications and services.
The market for speech-activated services software is new and emerging and
industry standards have not yet been established. We may not be competitive
unless our products support changing industry standards. The emergence of
industry standards, whether through adoption by official standards committees
or widespread usage, could require costly and time consuming redesign of our
products. If these standards become widespread and our products do not support
them, our clients and potential clients may not purchase our products. Multiple
standards in the marketplace could also make it difficult for us to design our
products to support all applicable standards, which could in turn result in
decreased sales of our products.
Our international operations and expansion involve financial and operational
risk.
Our international sales represented 2.6% of our revenue in 1999. We have
recently expanded our direct and indirect international sales force and expect
international revenues to increase. We are subject to a variety of risks
associated with conducting business internationally, any of which could harm
our business. These risks include:
. difficulties and costs of staffing and managing foreign operations,
. difficulties in establishing and maintaining an effective
international reseller network,
. the burden of complying with a wide variety of foreign laws,
particularly with respect to intellectual property and license
requirements,
. political and economic instability outside the United States,
. import or export licensing and product certification requirements,
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries,
. potential adverse tax consequences, including higher marginal rates,
. unfavorable fluctuations in currency exchange rates, and
. limited ability to enforce agreements, intellectual property rights
and other rights in some foreign countries.
We have limited experience in international operations and international
product and service sales, and there can be no assurance we will be successful
in growing our international business.
In order to increase our international sales, we must develop localized
versions of our products. If we are unable to do so, we may be unable to grow
our revenue and execute our business strategy.
We intend to expand our international sales, which requires us to invest
significant resources to create and refine different recognition models for
each particular language or dialect. These recognition models are required to
create versions of our products that allow end users to speak the local
language or dialect and be understood. If we fail to develop localized versions
of our products, our ability to address international market opportunities and
to grow our business will be limited. In addition, we are required to invest
resources to develop these versions of our products in advance of the receipt
of revenues. We may be unable to recognize revenues sufficient to render these
products profitable.
We may have difficulties successfully managing our growth, which may reduce our
chances of achieving profitability.
From December 31, 1998 to April 14, 2000, our number of employees
increased from 86 to 216. We intend to continue to expand our business
operations significantly in the future. We will need to expand our
8
<PAGE>
management, operational, financial and human resources, as well as management
information systems and controls, to support our anticipated future growth. If
we are not able to manage our growth successfully, we will not grow as planned
and our business could be adversely affected.
Our inability to guarantee protection of our intellectual property rights or
maintain our rights to use licensed intellectual property could adversely
affect our business.
We believe our success depends, in part, on protecting our internally
developed technologies and other intellectual property which we seek to protect
through a combination of patent, copyright, trademark and trade secret laws, as
well as confidentiality, assignment of rights to inventions, and/or license
agreements with our employees, consultants and corporate or strategic partners.
These legal protections afford only limited protection and may be time-
consuming and expensive to obtain and maintain. Further, despite our efforts,
we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property. The inability to guarantee
protection of our intellectual property in a meaningful manner could have an
adverse effect on our business.
Our products may infringe the intellectual property rights of others, and
resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.
Currently, in the software industry there are frequent assertions of
patent infringement by owners of patents, and assertions of other violations of
intellectual property rights such as trademarks, copyrights, and trade secrets.
In addition, there are a large number of patents in the speech recognition
area. Despite our efforts to avoid patent infringement or other violations of
the intellectual property rights of others, we may be subjected to allegations
of patent infringement or other violations of intellectual property rights,
including trademarks, copyrights, and trade secrets. These allegations can be
costly to defend, even if lacking in merit and even if successfully defended,
in both money and human resources. Such allegations may also result in costly
damage awards or injunctions inhibiting or preventing us from selling our
products or services.
We are dependent upon technology we license from others. Any inability to
maintain these licenses could have a material adverse effect on our business.
Some of the technology included in or operating in conjunction with our
products is licensed by us from others. If for any reason these license
agreements terminate, we may be required to seek alternative vendors and may be
unable to obtain similar technology on favorable terms or at all. If we are
unable to obtain alternative license agreements, we could be required to modify
some features of our products. Any of these occurrences could have an adverse
effect on our business.
We rely on resellers and original equipment manufacturers for a portion of our
sales. The loss of one or more significant resellers or original equipment
manufacturers could limit our ability to sustain and grow our revenues.
In 1999, 14.3% of our sales were attributable to our resellers and
original equipment manufacturers, or OEMs, especially InterVoice-BRITE which
accounted for 10.9% of our sales in 1999. We intend to increase our sales
through resellers in the future. As a result, we are in part dependent upon the
continued success and viability of our resellers and OEMs, as well as their
continued interest in selling our products. The loss of a key reseller or OEM
or our failure to develop and sustain new reseller and OEM relationships could
limit our ability to sustain and grow our revenues.
Our contracts with our resellers and OEMs generally do not require them to
purchase our products. Our resellers and OEMs are independent companies over
which we have limited control. Our resellers and OEMs could cease to market our
products or devote significant resources to the sale of our products. Any
failure of our resellers or OEMs to successfully market and sell our products
could result in revenues that are lower than anticipated. In addition, our
resellers and OEMs possess confidential information concerning
9
<PAGE>
our products and operations. Although we have nondisclosure agreements with our
resellers and OEMs, a reseller or OEM could use our confidential information in
competition with us, which could adversely affect our competitive position and
revenues.
We may not be able to hire and retain the personnel we need to sustain our
business.
We rely upon the continued service and performance of a relatively small
number of senior management and key technical personnel. Our future success
depends on our retention of these key employees, such as Stuart R. Patterson,
our President and Chief Executive Officer, and Michael S. Phillips, our Chief
Technology Officer and our co-founder. We do not have key person life insurance
policies covering any of our employees. The loss of services of any of our
executive officers or key personnel could have an adverse effect on our
business.
We need to attract and retain managerial and highly-skilled technical
personnel for whom there is intense competition. If we are unable to attract
and retain managerial and qualified technical personnel, our results of
operations could suffer and we may never achieve profitability.
Our financial success depends to a large degree on the ability of our
direct sales force to increase sales. Therefore, our ability to increase
revenue in the future depends considerably upon our success in recruiting,
training and retaining additional direct sales personnel and the success of the
direct sales force. Also, it may take a new salesperson a number of months
before he or she becomes a productive member of our direct sales force. Our
business will be harmed if we fail to hire or retain qualified sales personnel,
or if newly hired salespeople fail to develop the necessary sales skills or
develop these skills more slowly than we anticipate.
Risks Related To This Offering
Our share price is likely to be highly volatile and could drop unexpectedly.
Following this offering, the price for our common stock could be highly
volatile and subject to wide fluctuations in response to the following factors:
. quarterly variations in our operating results due to prolonged sales
cycles, project delays and deviations between actual and expected
sales,
. announcements of technical innovations, new products or services by us
or our competitors,
. changes in investor perception of us or the market for our products
and services,
. changes in financial estimates by securities analysts, and
. changes in general economic and market conditions.
The stocks of many technology companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. Declines in the market price of our common
stock could also adversely affect employee morale and retention, our access to
capital and other aspects of our business.
If our share price is volatile, we may become subject to securities litigation,
which is expensive and could divert our resources.
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many companies in the software industry have been subject to this type of
litigation. If the market value of our common stock experiences adverse
fluctuations, and we become involved in this type of litigation, regardless of
the outcome, we could incur substantial legal costs and our management's
attention could be diverted, causing our business to suffer.
10
<PAGE>
No public market has existed for our common stock and an active trading market
may not develop or be sustained.
Before this offering, there has been no public market for our common
stock. We cannot assure you that an active trading market will develop or be
sustained after this offering. You may not be able to resell your shares at or
above the initial public offering price. The initial public offering price will
be determined through negotiations between the underwriters and us and may not
be indicative of the market price for our common stock after this offering.
The sale of a substantial number of shares of our common stock after this
offering may affect our share price.
The market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market after the closing of
this offering or the perception that substantial sales could occur. These sales
also might make it difficult for us to sell equity securities in the future at
a time and at a price that we deem appropriate.
After this offering, we will have shares of common stock outstanding.
Of these shares:
. shares will be eligible for immediate sale in the public market,
. shares will be eligible for sale upon the expiration of lock-up
agreements beginning 180 days after the date of this offering, and
. shares, and shares subject to outstanding options and warrants,
will be eligible for sale in the public market at various time upon
the satisfaction of applicable vesting provisions or Rule 144 holding
period requirements.
Investors will incur immediate dilution and may experience further dilution.
If you purchase shares of common stock in this offering, you will
experience immediate and substantial dilution of $ in pro forma net tangible
book value per share based on our book value as of December 31, 1999 and an
assumed initial public offering price of $ per share. We also have a large
number of stock options and warrants to purchase common stock outstanding with
exercise prices significantly below the initial public offering price of the
common stock. To the extent these options and warrants are exercised, there
will be further dilution. We intend to continue to grant stock options to our
employees as part of our general compensation practices.
Our executive officers, directors and principal stockholders control us and may
make decisions that you do not consider to be in your best interest.
Immediately after this offering, our executive officers, directors and
principal stockholders will, in the aggregate, hold approximately % of our
outstanding common stock. Accordingly, these stockholders will be able to
control us through their ability to determine the outcome of the election of
our directors, amend our certificate of incorporation and bylaws and take other
actions requiring the vote or consent of stockholders, including mergers, going
private transactions and other extraordinary transactions and the terms of any
of these transactions. The ownership position of these stockholders may have
the effect of delaying, deterring or preventing a change in control or a change
in the composition of our board of directors.
Our charter and bylaws and Delaware law contain provisions that may delay or
prevent a change of control.
Provisions of our charter and bylaws may make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
control of the Company. These provisions could limit
11
<PAGE>
the price that investors might be willing to pay in the future for shares of
our common stock. These provisions include:
. the division of the board of directors into three separate classes,
. prohibitions on our stockholders from acting by written consent and
calling special meetings,
. procedures for advance notification of stockholder nominations and
proposals, and
. the ability of the board of directors to alter our bylaws without
stockholder approval.
In addition, our board of directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our stockholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or for other corporate purposes, could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.
Upon completion of this offering, we will be subject to the antitakeover
provisions of the Delaware General Corporation Law, including Section 203 which
may deter potential acquisition bids for our company. Under Delaware law, a
corporation may opt out of Section 203. We do not intend to opt out of the
provisions of Section 203.
We may use the proceeds from this offering in ways with which you may not
agree.
We have significant flexibility in applying the proceeds we receive in
this offering. We are not required to allocate the proceeds we receive in this
offering to any specific investment or transaction. Therefore, you must rely on
our management's judgment with only limited information about its specific
intentions regarding the use of proceeds.
We do not intend to pay dividends on our common stock.
We currently intend to retain any future earnings for funding growth and
do not anticipate paying any dividends in the foreseeable future. Therefore,
you will need to sell shares in order to realize a return on your investment,
if any. The payment of dividends may be limited by financing agreements that we
may enter into in the future.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ significantly
from those expressed, implied or forecasted in the forward-looking statements.
These risks and uncertainties include, among others, those described in "Risk
Factors" and elsewhere in this prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus. Except as required by
law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
12
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $ million from the sale
of the shares of common stock in this offering, assuming an initial public
offering price of $ per share (the mid-point of the range set forth on the
cover page of this prospectus) and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters
exercise their over-allotment option in full, we estimate that our net proceeds
will be $ million.
We expect to use the net proceeds for general corporate purposes,
including working capital, marketing, advertising and capital expenditures. A
portion of the net proceeds may also be used to acquire or invest in businesses
or technologies that are complementary to our business. However, we have not
targeted any particular technology or business for acquisition. We have no
current agreements or commitments nor are we negotiating with any other party
with respect to any acquisitions or investments. Our management will have broad
discretion concerning the use of the net proceeds of the offering. Pending
these uses, we intend to invest the net proceeds of this offering in
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends in the past and do not intend to pay
cash dividends on our common stock for the foreseeable future. Instead, we
intend to retain all earnings for use in the operation and expansion of our
business. The payment of dividends may be limited by financing agreements that
we may enter into in the future.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis,
. on a pro forma basis to give effect to the issuance of 2,544,681
shares of our series E convertible preferred stock on April 11, 2000
for net proceeds of $19.9 million, the automatic conversion of all of
our outstanding convertible preferred stock into a total of 16,415,158
shares of common stock upon the completion of this offering, and the
filing of our restated certificate of incorporation in connection with
the effectiveness of this offering increasing our authorized shares of
common stock to 100,000,000 and preferred stock to 10,000,000 shares,
and
. on a pro forma as adjusted basis to further adjust the pro forma
information to give effect to the sale by us in this offering of
shares of common stock at an assumed initial public offering price of
$ per share (the mid-point of the range set forth on the cover page
of this prospectus), after deducting the underwriting discounts and
commissions and estimated offering expenses, and the application of
the net proceeds from this offering.
This information should be read in conjunction with our consolidated
financial statements and the related notes to those statements included in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ------------ --------------
(in thousands, except share amounts)
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 11,474 $ 31,404 $
=========== ============ ============
Current portion of notes payable
and capital lease obligations..... $ 683 $ 683 $ 683
=========== ============ ============
Notes payable, net of current
portion........................... $ 833 $ 833 $ 833
----------- ------------ ------------
Redeemable convertible preferred
stock, $0.001 par value:
Series E; no shares authorized,
issued and outstanding--actual,
pro forma and pro forma as
adjusted........................ -- -- --
Series D; 2,800,000 shares
authorized, 2,671,389 shares
issued and outstanding--actual;
no shares authorized, issued and
outstanding--pro forma and pro
forma as adjusted............... 24,761 -- --
Series C; 1,626,092 shares
authorized, issued and
outstanding--actual; no shares
authorized, issued and
outstanding--pro forma and pro
forma as adjusted............... 7,560 -- --
Series B; 2,474,500 shares
authorized, issued and
outstanding--actual; no shares
authorized, issued and
outstanding--pro forma and pro
forma as adjusted............... 8,073 -- --
Series A; 2,475,000 shares
authorized, issued and
outstanding--actual; no shares
authorized, issued and
outstanding--pro forma and pro
forma as adjusted............... 3,113 -- --
----------- ------------ ------------
Total redeemable convertible
preferred stock................... 43,507 -- --
----------- ------------ ------------
Stockholders equity (deficit):
Preferred stock, $0.001 par value;
no shares authorized, issued or
outstanding--actual; 10,000,000
shares authorized, no shares
issued and outstanding--pro forma
and pro forma as adjusted......... -- -- --
Common stock, $0.001 par value;
22,000,000, 100,000,000 and
100,000,000 shares authorized--
actual, pro forma and pro forma as
adjusted, respectively; 5,584,775,
21,999,933 and shares issued
and outstanding--actual, pro forma
and pro forma as adjusted,
respectively;..................... 6 19
Additional paid-in capital......... 5,978 69,402
Deferred stock compensation........ (4,905) (4,905) (4,905)
Accumulated deficit................ (29,327) (29,327) (29,327)
----------- ------------ ------------
Total stockholders' equity
(deficit)......................... (28,248) 35,189
----------- ------------ ------------
Total capitalization............... $ 16,092 $ 36,022 $
=========== ============ ============
</TABLE>
14
<PAGE>
The preceding capitalization table excludes:
. 9,798,633 shares of common stock reserved for issuance under our stock
option plans of which 4,836,202 shares are issuable upon exercise of
stock options outstanding as of December 31, 1999 with a weighted
average exercise price of $1.51 per share,
. 248,799 shares of common stock, net of cancellations, subject to stock
options granted after December 31, 1999 with a weighted average
exercise price of $3.52,
. 807,237 shares of common stock reserved for issuance upon the exercise
of warrants outstanding as of December 31, 1999 with a weighted
average exercise price of $2.02 per share, and
. shares of common stock reserved for issuance under our employee
stock purchase plan.
15
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $35.2
million, or $1.60 per share of common stock. Pro forma net tangible book value
per share represents the amount of total tangible assets less total
liabilities, divided by the number of outstanding shares of common stock, after
giving effect to the sale of our series E convertible preferred stock in April
2000 and the automatic conversion of all of our convertible preferred stock
into common stock upon completion of this offering. Assuming the sale by us of
shares of common stock in this offering at an assumed public offering price
of $ per share, after deducting the estimated underwriting discounts and
commissions and the estimated expenses relating to this offering, our pro forma
net tangible book value as of December 31, 1999 would have been $ , or $ per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $ per share to our existing stockholders and an
immediate dilution in pro forma net tangible book value of $ per share to new
investors purchasing shares in this offering. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value per share as of December
31, 1999.................................................... $1.60
Increase attributable to new investors.......................
-----
Pro forma net tangible book value per share after this offering
----
Dilution per share to new investors............................ $
====
</TABLE>
If the underwriters exercise their option to purchase additional shares in
the offering the pro forma net tangible book value per share offer the offering
would be $ per share, the increase in pro forma net tangible book value per
share to existing stockholders would be $ per share and the dilution to new
investors purchasing shares in this offering would be $ per share.
The following table summarizes as of December 31, 1999, on the pro forma
basis described above the total number of shares of common stock purchased from
us, the total consideration paid to us and the average consideration paid per
share by existing stockholders and by new investors purchasing shares in this
offering before deducting estimated underwriting discounts and commissions and
related offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... 21,999,933 % $60,591,000 % $2.75
New investors...........
---------- --- ----------- ---
Total................. 100% $ 100%
========== === =========== ===
</TABLE>
The share amounts in the tables above are based on shares outstanding as
of December 31, 1999. The tables exclude:
. 9,798,633 shares of common stock reserved for issuance under our
stock option plans, of which 4,836,202 shares were subject to
outstanding options at December 31, 1999 with a weighted average
exercise price of $1.51 per share,
. 248,799 shares of common stock, net of cancellations, subject to
stock options granted after December 31, 1999 with a weighted average
exercise price of $3.52,
. 807,237 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $2.02 per share,
and
. shares of common stock reserved for issuance under our employee
stock purchase plan.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 have been
derived from our audited consolidated financial statements appearing elsewhere
in this prospectus. The consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our audited consolidated
financial statements not included in this prospectus. There is no difference
between historical basic and diluted net loss per common share since potential
shares of common stock from the conversion of preferred stock and the exercise
of options and warrants are anti-dilutive for all periods presented. The pro
forma basic and diluted net loss into per common share reflects the automatic
conversion of all our outstanding convertible preferred stock into common stock
upon completion of this offering as if converted on January 1, 1999 or, if
later, the date of original issue.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
Product license............ $ 325 $ 542 $ 949 $ 1,567 $ 3,680
Professional services...... 65 172 982 2,873 5,944
Other revenue.............. 13 137 111 1,410 4,387
------ ------- ------- -------- ---------
Total revenue............ 403 851 2,042 5,850 14,011
------ ------- ------- -------- ---------
Cost of revenue:
Cost of product licenses... 212 166 54 52 153
Cost of professional
services................... 65 218 678 1,982 4,991
Cost of other revenue...... 13 65 90 890 2,987
------ ------- ------- -------- ---------
Total cost of revenue.... 290 449 822 2,924 8,131
------ ------- ------- -------- ---------
Gross profit............. 113 402 1,220 2,926 5,880
------ ------- ------- -------- ---------
Operating expenses:
Selling and marketing...... 72 387 1,074 3,867 9,254
Research and development... 275 942 1,969 1,881 5,164
General and
administrative............. 263 507 1,057 3,157 6,693
Stock compensation......... -- -- -- -- 508
------ ------- ------- -------- ---------
Total operating
expenses................. 610 1,836 4,100 8,905 21,619
------ ------- ------- -------- ---------
Loss from operations..... (497) (1,434) (2,880) (5,979) (15,739)
Interest and other income
(expense), net............... 37 99 360 219 276
------ ------- ------- -------- ---------
Net loss...................... (460) (1,335) (2,520) (5,760) (15,463)
Accretion on redeemable
convertible preferred
stockholders................. (203) (532) (533) (789) (1,904)
------ ------- ------- -------- ---------
Net loss attributable to
common stock holders......... $ (663) $(1,867) $(3,053) $ (6,549) $ (17,367)
====== ======= ======= ======== =========
Basic and diluted net loss per
common share................. $(0.18) $ (0.51) $ (0.83) $ (1.44) $ (3.28)
Shares used in computing
basic and diluted net loss
per common share........... 3,612 3,695 3,696 4,537 5,298
Pro forma basic and diluted
net loss per common share
(unaudited).................. $ (0.87)
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited)................ 17,686
<CAPTION>
December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents..... $ 717 $ 1,008 $ 426 $ 4,486 $ 11,474
Working capital............... 1,702 4,897 4,764 5,156 12,133
Total assets.................. 2,000 5,786 6,437 9,162 20,566
Long-term debt, net of current
portion...................... -- 199 414 161 833
Redeemable convertible
preferred stock.............. 2,173 6,942 9,974 17,749 43,507
Total stockholders' equity
(deficit).................... (315) (1,881) (4,948) (11,457) (28,248)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the related notes that are included in
this prospectus.
Overview
SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services over any telephone. We currently offer two
speech recognition solutions for over-the-telephone applications, SpeechWorks 6
and our recently introduced SpeechSite. We complement our products with a
professional services organization that offers a range of services including
application development and project management.
Revenue. We derive our revenue from three sources. We sell product
licenses, either directly to clients or through third-party distribution
channels. To support the sale, installation and operation of our products, we
also provide professional services, consisting of developing custom software
applications, user interface design consulting, training and maintenance and
technical support. We resell hardware products made by third parties, including
products such as voice-processing equipment that run our software, as well as
facilities management services that are provided by third-party call-centers.
We expect the resale component of our total revenues to decrease as a
percentage of our total revenues over time. We only resell hardware or
facilities management services when clients expressly request that we do so and
therefore, such revenue is considered other revenue.
We recognize revenue from the licensing of software in three ways,
provided that no significant obligations remain, evidence of the arrangement
exists, the fees are fixed or determinable, and collectibility is probable:
. When we license our software and do not provide any professional
services, we recognize the license revenue when we ship the software
to the client provided that no significant obligations remain.
. When original equipment manufacturers, or OEM's, license our software,
we receive a royalty. We recognize the revenue from these royalties
upon delivery to the third party when such information is available,
or when we are notified by the OEM of the sale.
. When we license software in connection with custom software
applications developed by us, we recognize the revenue over the life
of the development project, concurrent with the related services fees
as described below.
We recognize the revenue from professional services in three ways,
provided that evidence of the arrangement exists, the fees are fixed or
determinable and collectibility is probable. When we provide professional
services for a fixed fee, we recognize revenue from the fees for such services
and any related software licenses as we complete the project using the
percentage of completion method. We determine the percentage of the project
that we have completed by comparing the labor hours we have incurred to date to
our estimate of the total labor hours required to complete the project. When we
provide services on a time and materials basis, we recognize revenue as we
perform the services. When we provide support and maintenance services, we
recognize the revenue ratably over the term of the related contracts, typically
one year.
When we resell hardware, we recognize the revenue when we deliver the
hardware. We recognize the revenue from resold facilities management services
in the period that the services are provided.
We market our products and services primarily in North America, Europe,
and AsiaPacific. We sell our products and professional services to our clients
through our direct sales force, value-added resellers and OEMs. We currently
have relationships with 36 value-added resellers and OEMs. We are aggressively
18
<PAGE>
expanding both our direct sales force and our reseller and OEM relationships.
Sales to our resellers and OEMs accounted for 9.7% of our total revenue for
1998 and 14.3% of our total revenue for 1999. We expect that revenue derived
from sales to resellers and OEMs will continue to increase as a percentage of
our total revenue for the foreseeable future as we focus on and expand our
distribution channels.
In 1999, United Airlines represented 33.7% of our total revenue and
InterVoice-BRITE represented 10.9% of our total revenue.
We began selling our products and services to clients outside the United
States in 1999, and these sales accounted for 2.6% of our total revenue for
1999. We expect the portion of our total revenue derived from sales to clients
outside the United States to increase as we expand our international sales
efforts and distribution channels.
Cost of revenue. Our cost of revenue consists of the cost of our product
licenses, cost of professional services and cost of resold hardware and
services. Cost of product licenses consists of a royalty that we pay to
Massachusetts Institute of Technology, or MIT, that is equal to a percentage of
our product license revenue. This percentage was 3.3% in 1998 and 4.2% in 1999.
Our license with MIT provides that the royalty decreases to 1% of our product
license revenue once our cumulative product license revenue exceeds $6 million.
Cost of professional services revenue consists of our direct labor and related
benefits costs, taxes and project-specific travel expenses. Cost of resold
hardware and facilities management services consists of the cost of third-party
hardware which we resell and payments to the third-party providers of
outsourced facilities management services.
Operating expenses. Our selling and marketing expenses consist primarily
of compensation and related expenses, sales commissions and travel expenses,
along with other marketing expenses, including advertising, trade shows, public
relations, direct mail campaigns, seminars and other promotional expenses. Our
research and development expenses consist primarily of compensation and related
expenses for our personnel and, to a lesser extent, independent contractors,
who work on new products, enhancements to existing products and the
implementation of our products in new languages. Our general and administrative
expenses consist primarily of compensation for our administrative, financial
and information technology personnel, occupancy and overhead expense, and
company-wide professional fees, including recruiting, legal and accounting
fees, as well as bad debts. Our stock compensation expenses result from noncash
charges for options issued with exercise prices that are less than the fair
market value of our common stock on the date of grant.
Interest and other income (expense), net. We receive interest income by
investing the proceeds that we raised in our prior equity financings. Interest
expense is generated primarily from amounts we owe under our line of credit and
capital lease lines of credit.
Income taxes. Due to our operating losses, we have recorded no provision
or benefit for income taxes for any period since our inception. As of December
31, 1999, we had $23.4 million of net operating loss carryforwards for federal
income tax purposes, which expire beginning in 2011. Our use of these net
operating losses may be limited in future periods.
19
<PAGE>
Results Of Operations
The following table sets forth consolidated financial data for the periods
indicated as a percentage of our total revenue.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenue:
Product licenses................................ 47% 27% 27%
Professional services........................... 48 49 42
Other revenue................................... 5 24 31
------- ------- -------
Total revenue................................... 100% 100% 100%
======= ======= =======
Cost of revenue:
Cost of product licenses........................ 3% 1% 1%
Cost of professional services................... 33 34 36
Cost of other revenue........................... 4 15 21
------- ------- -------
Total cost of revenue........................... 40 50 58
------- ------- -------
Gross profit ................................... 60 50 42
------- ------- -------
Operating expenses:
Selling and marketing........................... 53 66 66
Research and development........................ 96 32 37
General and administrative...................... 52 54 48
Stock compensation.............................. 0 0 3
------- ------- -------
Total operating expenses........................ 201 152 154
------- ------- -------
Loss from operations.............................. (141) (102) (112)
Interest and other income (expense), net.......... 18 4 2
------- ------- -------
Net loss.......................................... (123)% (98)% (110)%
======= ======= =======
</TABLE>
Comparison of Years Ended December 31, 1997, 1998 and 1999
Total revenue. Our total revenue increased by 186.5% from $2.0 million in
1997 to $5.9 million in 1998 and increased 139.5% to $14.0 million in 1999.
Revenue from international sales commenced in 1999 with total revenue of
$362,000. We had no revenue from international sales prior to 1999.
Revenue from product licenses. Revenue from the sale of software licenses
increased 65.1% from $949,000 in 1997 to $1.57 million in 1998 and increased
134.8% to $3.7 million in 1999. This growth in software revenue from 1997 to
1999 resulted from increased sales volume reflecting growing market acceptance
of our solutions, our expanded sales and marketing efforts and the improved
productivity of our distribution channels, primarily OEMs. We expect that
revenue from product licenses will represent more than 50% of our total revenue
by 2002.
Revenue from professional services. Revenue from fees we receive for
professional services increased 192.6% from $982,000 in 1997 to $2.9 million in
1998 and increased 106.9% to $5.9 million in 1999. The growth in revenue from
professional services resulted primarily from the increased demand for custom
speech applications from existing and new clients over these years.
Other revenue. Other revenue accounted for 5.4% of total revenue in 1997,
24.1% of total revenue in 1998 and 31.3% of total revenue in 1999. The increase
in other revenue resulted primarily from several clients which requested that
we also provide the hardware to host our software products sold to them. We
anticipate that resold hardware and facilities management revenue will decline
significantly as a percentage of total revenue in the future.
20
<PAGE>
Cost of product licenses revenue. Cost of product licenses revenue
decreased 3.7% from $54,000 in 1997 to $52,000 in 1998 and increased 194.2% to
$153,000 in 1999. This cost represented 5.7% of product license revenue in
1997, 3.3% in 1998 and 4.2% in 1999. The decrease in amount from 1997 to 1998
resulted from a reduction in the MIT royalty percentage based on achieving the
first milestone of cumulative product license sales. The increase from 1998 to
1999 resulted from increased product license sales. Also, in 1999, cost of
product licenses revenue included a $60,000 payment to a client as a royalty
for our resale of an application originally developed for that client.
Cost of professional services revenue. Cost of professional services
revenue increased 192.3% from $678,000 in 1997 to $2.0 million in 1998 and
increased 151.8% to $5.0 million in 1999. The increases from 1997 to 1999 are
due primarily to the hiring of additional project managers, developers, user
interface designers, speech scientists and technical support staff to expand
our professional services organization. This cost represented 69.0% of
professional services revenue in 1997, 69.0% in 1998 and 84.0% in 1999. The
higher cost of professional services as a percent of related revenue in 1999
reflects costs associated with significant hiring in anticipation of revenue
growth in late 1999 and 2000 and client delays on several large fixed-fee
projects.
Cost of other revenue. Cost of resold hardware and resold facilities
management services increased 888.9% from $90,000 in 1997 to $890,000 in 1998
and increased 235.6% to $3.0 million in 1999. The cost of other revenue as a
percent of other revenue decreased from 81.1% in 1997 to 63.1% in 1998,
reflecting our increased reseller's discount at higher volume levels, and
increased to 68.1% in 1999, reflecting the weighted average impact of lower
margin on resold facilities management services being sold to one client under
a special arrangement.
Total operating expenses. Our total operating expenses increased 117.2%
from $4.1 million in 1997 to $8.9 million in 1998 and increased 142.8% to $21.6
million in 1999. These increases occurred in all categories of operating
expense over the three-year period as we grew our organization. These
investments included the addition of 50 employees in 1998 and 112 employees in
1999. As a percentage of total revenue, our operating expenses were 200.8% in
1997, 152.2% in 1998 and 154.3% in 1999.
Selling and marketing expenses. Selling and marketing expenses increased
260.1% from $1.1 million in 1997 to $3.9 million in 1998 and increased 139.3%
to $9.3 million in 1999. The increases in selling and marketing expenses from
1997 to 1999 resulted primarily from our investment in sales and marketing
personnel. This investment included additional North American field sales
offices in 1997, 1998 and 1999. During this period, the number of sales
representatives in North America increased from two to 16. In addition, the
costs associated with time spent by engineers on technical sales support is
reflected as a selling expense, and such time has increased steadily with
increased sales. The increase in selling and marketing expenses also reflects
increased marketing activities, including advertisements, tradeshows, public
relations activities and educational seminars during these years.
Research and development expenses. Research and development expenses
decreased by 4.5% from $2.0 million in 1997 to $1.9 million in 1998 and
increased 174.5% to $5.2 million in 1999. The modest decrease in research and
development expenses from 1997 to 1998 reflected the temporary movement of
engineering resources into professional services to deliver client projects.
The increase from 1998 to 1999 was driven by the increased hiring of software
developers, quality assurance and testing personnel and speech scientists to
develop and enhance our products.
General and administrative expenses. General and administrative expenses
increased 198.7% from $1.1 million in 1997 to $3.2 million in 1998 and
increased 112.0% to $6.7 million in 1999. The increases from 1997 to 1999 were
primarily due to additional infrastructure necessary to support our growing
operations in the United States and internationally, as well as the addition of
senior level management to lead our growth and increased recruiting costs.
Stock compensation. In connection with the grant of stock options during
the year ended December 31, 1999, we recorded deferred stock compensation
charges of $5.4 million. Stock compensation charges represent the difference
between the deemed fair value for financial reporting purposes of our common
stock on the date of grant and the exercise price of options granted to
employees to acquire our
21
<PAGE>
common stock during this period, multiplied by the number of option shares. We
expect to record additional deferred stock compensation charges of
approximately $ million during 2000. Deferred stock compensation is amortized
to expense ratably over the vesting period of the options granted, which is
typically four years. During 1999, we recorded amortization of deferred stock
compensation of $508,000. No deferred stock compensation was recorded during
the years ended December 31, 1997 and 1998. We will continue to amortize the
deferred stock compensation over the next four years as options granted at
below the deemed fair value of our common stock continue to vest. We expect the
amortization of deferred stock compensation to be approximately $ million
per year through 2002 and decreasing thereafter through 2004.
Interest and other income (expense), net. Interest income was $349,000 in
1997, $299,000 in 1998 and $549,000 in 1999. Interest expense was $49,000 in
1997, $72,000 in 1998 and $113,000 in 1999. The decrease in interest income
from 1997 to 1998 was the result of decreasing cash balances due to cash being
used to fund operations. The increase in interest income from 1998 to 1999 is a
result of net increasing cash balances, due to the preferred stock financing
raised in early 1999, partially offset by cash being used to fund operations.
The increase in interest expense is primarily due to increases in debt payable
under our line of credit and capital equipment leases. Other expenses include
other non-operating costs.
Quarterly Results of Operations
The following table sets forth unaudited quarterly consolidated statement
of operations data for each of the eight quarters in the period ended December
31, 1999. In the opinion of management, the unaudited interim financial results
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of our results of operations for those
periods. The quarterly data should be read in conjunction with the consolidated
financial statements and related notes thereto appearing elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product licenses............ $ 132 $ 678 $ 407 $ 350 $ 341 $ 1,053 $ 733 $ 1,553
Professional services....... 434 692 626 1,121 1,099 1,637 1,303 1,905
Other revenue............... 24 7 9 1,370 1,850 1,114 522 901
------- ----- ------- ------- ------- ------- ------- -------
Total revenue................ 590 1,377 1,042 2,841 3,290 3,804 2,558 4,359
------- ----- ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of product licenses.... 6 26 20 -- 9 32 19 93
Cost of professional
services................... 382 406 555 639 974 1,265 1,312 1,440
Cost of other revenue....... (2) 3 2 887 1,239 814 215 719
------- ----- ------- ------- ------- ------- ------- -------
Total cost of revenue........ 386 435 577 1,526 2,222 2,111 1,546 2,252
------- ----- ------- ------- ------- ------- ------- -------
Gross profit................. 204 942 465 1,315 1,068 1,693 1,012 2,107
------- ----- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling and marketing....... 549 675 1,088 1,555 1,547 2,135 1,913 3,659
Research and development.... 408 422 520 531 898 965 1,447 1,854
General and administrative.. 431 544 942 1,240 1,086 1,338 1,504 2,765
Stock compensation.......... -- -- -- -- 12 42 129 325
------- ----- ------- ------- ------- ------- ------- -------
Total operating expenses..... 1,388 1,641 2,550 3,326 3,543 4,480 4,993 8,603
------- ----- ------- ------- ------- ------- ------- -------
Loss from operations......... (1,184) (699) (2,085) (2,011) (2,475) (2,787) (3,981) (6,496)
Interest and other income
(expense), net.............. 37 60 79 43 15 107 193 (39)
------- ----- ------- ------- ------- ------- ------- -------
Net loss..................... $(1,147) $(639) $(2,006) $(1,968) $(2,460) $(2,680) $(3,788) $(6,535)
======= ===== ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(as a percentage of total revenue)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product licenses...... 22% 49% 39% 12% 10% 28% 29% 36%
Professional servic-
es................... 74 50 60 40 34 43 51 44
Other revenue......... 4 1 1 48 56 29 20 20
---- --- ---- --- --- --- ---- ----
Total revenue........... 100% 100% 100% 100% 100% 100% 100% 100%
==== === ==== === === === ==== ====
Cost of revenue:
Cost of product li-
censes............... 1% 2% 2% --% --% 1% 1% 2%
Cost of professional
services............. 64 30 53 23 30 33 51 33
Cost of other reve-
nue.................. -- -- -- 31 38 21 8 17
---- --- ---- --- --- --- ---- ----
Total cost of revenue... 65 32 55 54 68 55 60 52
---- --- ---- --- --- --- ---- ----
Gross profit............ 35 68 45 46 32 45 40 48
---- --- ---- --- --- --- ---- ----
Operating expenses:
Selling and market-
ing.................. 93 49 105 55 47 56 75 84
Research and develop-
ment................. 69 31 50 19 28 26 57 43
General and adminis-
trative.............. 73 39 90 44 33 35 59 63
Stock compensation.... -- -- -- -- -- 1 5 7
---- --- ---- --- --- --- ---- ----
Total operating ex-
penses................. 235 119 245 118 108 118 196 197
---- --- ---- --- --- --- ---- ----
Loss from operations.... (200) (51) (200) (72) (76) (73) (156) (149)
Interest and other in-
come
(expense, net)......... 6 4 8 2 -- 3 8 (1)
---- --- ---- --- --- --- ---- ----
Net loss................ (194)% (47)% (192)% (70)% (76)% (70)% (148)% (150)%
==== === ==== === === === ==== ====
</TABLE>
Our revenue and operating results are difficult to forecast and will
fluctuate. We believe that period-to-period results will not necessarily be
meaningful. As a result, you should not rely on them as an indication of our
future performance.
Product license revenue. Our revenue from product licenses has fluctuated
from quarter to quarter. The variability in product license revenue in the past
has been driven primarily by large orders from resellers, OEM's, or follow-on
orders from existing clients which are unpredictable. We expect this
variability to continue for the foreseeable future.
Professional services revenue. Our professional services revenue has
fluctuated from quarter to quarter primarily as a result of the uneven nature
of project-oriented work.
Other Revenue. Our other revenue has fluctuated from quarter to quarter.
Since reselling hardware and facilities management services is only done at the
request of customers, it is difficult to predict when such orders will be
received.
Cost of Product Licenses. Cost of product license revenue has fluctuated
from quarter to quarter with product license revenues. In addition to changes
due solely to the amount of product license revenue, the percentage of product
license revenue due to MIT in the form of royalties has decreased over time.
Our license with MIT provides that the royalty decreases to 1% of our product
license revenues once our cumulative product license revenues exceed $6
million. We expect to reach this cumulative milestone in 2000.
23
<PAGE>
Cost of professional services. Cost of professional services revenue has
generally increased steadily quarter to quarter during the last eight quarters,
mainly due to the addition of new employees devoted to professional services.
We expect professional services revenue to continue to fluctuate for the
foreseeable future.
Cost of other revenue. Cost of other revenue has fluctuated from quarter
to quarter with other revenue. As the percentage of our business represented by
resales decreases in the future, this source of variability should be reduced.
Operating expenses. Our total operating expenses have increased in each of
the last eight quarters. We have increased our spending in every functional
area of the organization as we have steadily added employees in our services
organization, research and development, sales, marketing, and administration.
We anticipate that our operating expenses will increase for the foreseeable
future as we continue to invest in our sales and marketing efforts to build
market and brand awareness, enlarge our North American and international client
base, invest in research and development critical to maintaining our
technological leadership, and expand our administrative infrastructure to
support our growth. Our investments in these activities could significantly
precede any revenue generated by the increased spending. If we do not
experience significantly increased revenue from these efforts, our business
could be adversely affected.
Liquidity and Capital Resources
Since 1995, we have funded our operations primarily through the private
placement of convertible preferred stock totaling $40.0 million through
December 31, 1999, and to a lesser extent, through bank borrowings and capital
equipment lease financing. As of December 31, 1999, we had cash and cash
equivalents of $11.5 million and $1.3 million available under our revolving
line of credit. Our operating activities resulted in net cash outflows of $2.3
million in 1997, $6.4 million in 1998 and $14.6 million in 1999. The operating
cash outflows for these periods resulted primarily from our significant
investment in research and development, sales and marketing and infrastructure.
To date, our investing activities have consisted primarily of purchases
and maturities of short-term investments and capital expenditures for property
and equipment, including $479,000 of capital expenditures in 1997, $926,000 in
1998 and $3.1 million in 1999. The significant increase in our capital
expenditures in 1999 was the result of building our infrastructure and
expanding operations into new locations in the United States, Canada,
Singapore, the United Kingdom and Mexico. These capital expenditures have
consisted primarily of computer hardware, software and furniture and fixtures
for our growing employee base. We anticipate that investment in capital
equipment will continue, though not at the rate of increase seen between 1998
and 1999. Total investing activities used cash of $1.1 million in 1997,
generated net cash of $3.7 million in 1998, and used cash of $3.5 million in
1999.
At December 31, 1999, we had $1.3 million available under our revolving
line of credit. The revolving line of credit terminated on March 31, 2000. We
are currently negotiating to extend the term of our revolving line of credit to
March 31, 2001 and to increase the amount available under the line to $2
million.
We had an equipment line of credit which we converted into a term loan in
the amount of $1.5 million. The term loan bears interest at an annual rate of
prime plus 0.75% (8.50% at December 31, 1999), and principal and interest under
the term loan are payable in 36 monthly installments through September 2002.
Our financing activities generated cash of $2.9 million, $6.7 million, and
$25.0 million in 1997, 1998 and 1999, respectively. Of these financing
activities, the issuance of convertible preferred stock and common stock
generated net proceeds of $2.5 million, $6.9 million, and $23.8 million in the
same respective years. We had proceeds from bank borrowing of $0, $0, and $1.5
million during the same respective years. Repayment of bank borrowings and
capital leases during the same periods was $126,000, $222,000 and $398,000,
respectively.
24
<PAGE>
On April 11, 2000, we closed an additional round of private financing in
which we raised net proceeds of $19.9 million through the issuance of our
series E convertible preferred stock. Unless otherwise indicated, the cash and
equity impact of this transaction is not reflected in this prospectus since the
closing occurred after March 31, 2000. Because the deemed fair market value of
our common stock for financial reporting purposes was greater than the issuance
price of the series E convertible preferred stock, we will record a beneficial
conversion feature of $5.2 million on the series E convertible preferred stock,
which will be treated as a preferred stock dividend as of the date of issue.
We believe that the net proceeds of this offering, together with existing
cash and cash equivalents, will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. See "Use of
Proceeds" for more information regarding our use of proceeds.
We may need to raise additional funds in order to fund more rapid
expansion, including significant increases in personnel and office facilities,
to develop new or enhance existing products or respond to competitive
pressures. We cannot assure you that additional financing will be available at
all or that, if available, will be on terms favorable to us or that any
additional financing will not dilute your ownership interest in SpeechWorks.
Recent Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. SOP 98-9
is effective for transactions entered into during years beginning after March
15, 1999 (year 2000 for us), however, early adoption is permitted. We have
adopted SOP 98-9.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133,
as recently amended by SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
is effective for fiscal years beginning after June 15, 2000. Because we do not
currently hold any derivative instruments and do not currently engage in
hedging activities, the adoption of SFAS No. 133 will not have a material
impact on our financial position or operating results.
Quantitative and Qualitative Disclosures about Market Risk
A portion of our business is conducted outside the United States through
our foreign subsidiaries and branches. We have foreign currency exposure
related to our operations in international markets where we transact business
in foreign currencies and accordingly are subject to exposure from adverse
movements in foreign currency exchange rates. Our foreign subsidiaries maintain
their accounting records in their local currencies. Consequently, changes in
currency exchange rates may impact the translation of foreign statements of
operations into U.S. dollars, which may in turn affect our consolidated
statements of operations. Our functional currency is the U.S. dollar for all of
our foreign subsidiaries and branches, and therefore, translation gains and
losses are included as a component of net income or loss. Substantially all of
our revenues are invoiced and collected in U.S. dollars.
25
<PAGE>
BUSINESS
Overview
SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services over any telephone. With our speech
recognition solutions, consumers can direct their own calls, obtain information
and conduct transactions automatically, simply by speaking naturally over any
telephone, anytime. Our e-business solutions are designed to help businesses
build sustainable customer relationships over the telephone, provide improved
and cost-effective customer service systems, increase the returns on their
internet-related investments and capitalize on a variety of new business
opportunities.
We currently offer two speech recognition solutions for over-the-telephone
applications, the SpeechWorks 6 platform and our recently introduced SpeechSite
package. We complement our products with a professional services organization
that offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
believe that our ability to successfully deliver an integrated solution to our
clients provides us with a significant competitive advantage.
Since shipping our first products in 1996, we have received numerous
awards for our product capabilities and our industry leadership, including
Industry Week's Technology of the Year Award and Frost & Sullivan's Market
Strategy Leadership Award. To date, we have licensed SpeechWorks software to
more than 150 clients worldwide in a variety of industries including retail,
financial services, pharmaceuticals, telecommunications, technology,
distribution and travel. Our clients include Amtrak, Apple Computer, BellSouth
IntelliVentures, CellularOne, Continental Airlines, DLJ Direct E*TRADE,
MapQuest.com, MCI WorldCom, McKessonHBOC, NetByTel.com, Nortel Networks,
Quack.com, SingTel Mobile, United Airlines and Universal Electronics.
Industry Background
Businesses and consumers today share a common vision of e-business as a
means of communicating information and completing transactions anywhere,
anytime, through any communications device. This vision has been fueled by the
growth of the internet and the recent rapid growth in wireless communications
technologies and services. In order to take advantage of these communications
channels and to reach the widest population possible, businesses have made
significant investments in their e-business infrastructures. Businesses are now
seeking to maximize the return on their e-business investments, improve their
customer service responsiveness, and capitalize on the substantial growth of
the wireless telephone network as a new distribution channel.
The Internet and e-Business
In the past decade, the internet has emerged as a global communications
network and channel for business and has fundamentally changed the way
consumers and businesses obtain information, communicate, purchase goods and
transact business. Many businesses now define their strategy and assess their
ability to compete based on the quality and diversity of the information,
products or services they offer online. Increasingly, consumers are retrieving
information from online databases and buying goods and services - a ticket,
stock, a book - without going to a business in person or even speaking with a
customer service representative over the telephone. International Data
Corporation, or IDC, estimates that the internet will continue to grow as a
medium for commerce, with over $1.3 trillion in sales being initiated over the
internet by the end of 2003.
26
<PAGE>
The Telephone and e-Business
Despite the internet's growing acceptance, the telephone network is a more
widely and readily accessible. Telephones are simple to operate and use the
most natural form of communication, the human voice. IDC estimates that in 1999
there were over 931 million telephone lines installed worldwide as compared to
approximately 196 million internet users worldwide in 1999. IDC also estimates
that in the same year there were over 426 million wireless telephone
subscribers worldwide and projects this number will grow to over one billion
subscribers worldwide by 2003.
To manage the growth in telephone-based interactions, businesses have made
significant investments in customer service infrastructures such as call
centers staffed with customer service representatives. IDC estimates that
worldwide spending on customer relationship management services, which includes
expenditures on call centers, exceeded $40 billion in 1999. The Purdue
University Research Foundation estimates that in the same year approximately
56% of call center budgets were allocated to human resources.
In addition, new technologies are being used, primarily by communications
service providers, to provide internet information services such as e-mail,
news, stock quotes, weather and sports information to wireless subscribers.
With these technologies, businesses are looking to extend access to their e-
business infrastructure to cellular telephones and other wireless handheld
devices such as personal digital assistants.
Need for Enhanced Access to e-Business
The growth of the internet as a global medium for communications and
commerce has been driven, in part, by the increased availability of personal
computers and easy to use, visual web browser interfaces. Access to the
internet over a personal computer is limited because consumers must have access
to a computer and a working internet connection. Further, using a web browser
on a personal computer can be difficult and slow. Wireless access to the
internet over cellular telephones and other handheld devices has the potential
to resolve the mobility and internet connectivity issues presented by internet
access over a personal computer. However, while the number of these devices has
increased in recent years, display screens on these devices are small and the
ability to input information using portable keyboards is constrained, limiting
the usability and convenience of this solution. Therefore, the goal of anytime,
anywhere access to a wide variety of information services has not yet been
fully realized.
Access to businesses and information over the telephone is somewhat easier
than access over the internet because of the greater availability of landline
and wireless telephones. Although businesses have made significant investments
in staffed call centers, consumers are frequently required to wait on hold for
extended periods due to the lack of call center capacity or are unable to speak
to a customer service representative due to the high cost of having customer
service representatives available around the clock. Businesses have attempted
to alleviate this problem by automating call center services using touch-tone
technologies. However, the range of services that can be automated using touch-
tone is limited, and the interface itself can be frustrating for users. Touch-
tone menus can be difficult to follow and callers often choose to dial "0" to
wait for a human operator or hang up rather than use such a system.
Speech-Activated Solutions for e-Business
To conduct e-business in a truly mobile, device-independent fashion, the
ability to communicate and conduct transactions in a hands-free manner is
essential. Speech recognition technology allows businesses to leverage their
investment in their e-business infrastructure to offer their customers quick
and easy access to information and services over the most readily available
communications device, the telephone. For example, businesses can offer their
customers the ability to obtain information and complete transactions using
words and natural sentences such as:
"I'd like to transfer $5,000 from my checking account to my savings account."
27
<PAGE>
"Is the 5 o'clock flight from New York to Boston on time?"
"When will my shipment be delivered?"
Speech recognition technology allows callers who would otherwise have to
wait for a live call center agent to be serviced automatically and those who
might otherwise be frustrated by having to choose from many touch-tone options
to speak directly to the e-business application. Speech recognition technology
also provides a key differentiator for companies seeking to provide a
convenient, flexible and robust interface for customers to conduct internet
transactions through a medium other than a personal computer or personal
digital assistant.
Although basic speech recognition technology has existed for decades, it
has not been widely used in telephone applications due to a number of
technical and commercial limitations. In order to provide high-quality speech-
activated services to callers, businesses require a solution that:
.recognizes a large vocabulary with low error rates,
.allows users to speak in natural phrases or sentences and to interrupt
when they are ready,
.provides high-level development and operations tools that are integrated
in accepted platforms,
.includes professional services to assist in one or more phases of the
deployment lifecycle, and
.is sufficiently cost-effective and scalable that it promises an
attractive return on investment.
The SpeechWorks Solution
SpeechWorks is a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services. Complementing the self-service model of
e-business, our speech recognition solutions, including the packaged solution
known as SpeechSite, let consumers direct their own calls, obtain information
and complete transactions automatically, simply by speaking naturally over any
telephone, anytime. Our speech recognition technology enables our clients to
extend the reach of their e-business solutions beyond the web and beyond
screen-based interfaces to anyone with access to a wireless or landline
telephone.
Enterprises are building speech-activated services with our products that
will automate and enhance customer service by making it easier for customers
to retrieve information and conduct transactions without waiting on hold or
speaking to an agent. Examples of phrases that can be understood by
applications enabled by our software are: "What is my checking account
balance?" and "Buy 100 shares of General Electric at the market price." These
services can improve the caller's experience and save expensive customer
service representative time.
Communication carriers and their partners are building speech-activated
services with our products that we believe have the potential to change the
way people use the telephone for network services. Applications have been
built, and enabled by our software, that can understand phrases such as "Call
Mike Phillips at home," and "Forward this message to Bill O'Farrell." In
addition, a new class of service providers known as voice or speech portals,
is using our software to build applications that can understand phrases such
as: "What is the weather in Paris?" and "What was the score of the Red Sox
game today?" These services can differentiate one carrier's service offering
from another and increase the ability of carriers to attract and retain users.
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Examples of Speech-Activated Services Enabled by SpeechWorks
<TABLE>
<CAPTION>
Network Services
Customer Services Provided by a
Provided by an Enterprise Communications Carrier
- --------------------------------------------------------------------------------
<S> <C> <C>
Information Retrieval Price quotes Weather
Order/account status/update Traffic
Product information Horoscopes
Directions News and sports
- --------------------------------------------------------------------------------
Communications Automated attendant/operator Speech-activated dialing
Management Internal call routing Network call routing
Voice/unified messaging Voice portals
- --------------------------------------------------------------------------------
Transaction Processing Flight booking Call completion
Restaurant reservations Cellular bill payment
Product purchase or sale Hosted services
</TABLE>
We complement our products with a professional services organization that
offers a range of services including application development and project
management. We have designed these services to shorten time-to-market, reduce
project implementation risk and improve our clients' competitive position. We
are focused on developing and extending our products and services to provide
our clients with a comprehensive means for building, managing and delivering
sophisticated e-business applications and services that can be accessed over
the telephone.
Our solutions are designed to provide the following benefits to our
clients:
Increased revenues. Companies that implement speech recognition solutions
can use the additional, ubiquitous access to their online services to
differentiate their e-business offering from their competition and thereby
increase customer loyalty and reduce customer turnover. Many e-business
applications that were difficult to use with touch-tone technology, such as
stock trading and flight booking, can be more readily provided over the
telephone with our speech solutions. Online brokerages, for example, have used
our products to extend their automated services to new users who are not online
and to enable existing online subscribers to conduct trades when they are
unable to access the web with an internet browser. Increased automation of
incoming calls can free up call center agents to take on cross-selling and
other revenue-generating activities. Using our products, communications
carriers can offer new, revenue-generating services to wireless or landline
telephone users, such as speech-activated dialing and voice access to instant
messaging and information or voice portals.
Increased customer satisfaction and retention. Our speech-activated
services provide our clients' customers with a variety of services that are
accessible from any telephone, 24 hours-a-day, seven days-a-week. A caller is
generally not required to wait on hold or navigate complex touch-tone menus.
Our clients can personalize an application's dialog to match their callers'
needs, for example "Would you like to ticket your regular trip to Chicago, Mrs.
Jones?" Our speech-activated solutions also include barge-in technology that
enables callers to interrupt an application with responses or new queries,
thereby completing the transaction more efficiently. Customers that are
becoming accustomed to accessing account or other information on the web can
now benefit from easy telephone access to the same information or services.
Customers are ultimately given more control if they can choose how - web
browser, mobile device, or telephone - and when to retrieve information or
conduct transactions.
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Lower operational costs. Our clients can decrease their telephone expense
by shortening the average customer call length and by answering common customer
questions with a speech application rather than requiring callers to hold for a
live agent or employee. Speech-enabled call routing, such as that provided by
our recently launched SpeechSite product, can increase customer service
efficiency by classifying call types and collecting pertinent information prior
to transferring calls to an appropriate representative. This means that the
same number of customer service representatives are able to answer a higher
volume of calls. We believe that off-loading repetitive calls to a speech
application and routing the more challenging transactions to highly trained
customer service representatives can also increase employee job satisfaction
and decrease staff turnover. Our solutions can support multiple languages on a
single system, thereby reducing the number of platforms and telephone numbers
required. We believe our efficient speech recognition engine and our single
system architecture obviate the need for dedicated recognition servers which
results in a lower total cost of ownership than many other alternative
architectures.
Superior technology and architecture. Our recognition technology allows
our clients' applications to recognize spoken words and phrases based in part
on a self-learning feedback loop that can be configured to automatically adapt
the system to user characteristics such as accents and pronunciations. Natural
language processing capabilities allow callers to speak in complete phrases and
sentences and can be configured to provide hints that alert novice or first-
time users to these capabilities. Taking advantage of dramatic increases in
host processing power, SpeechWorks offers speech recognition solutions that
operate in one integrated system and do not require a separate and potentially
costly server in order to function. These elements of our technology,
integration and architecture enable our clients to develop and deploy speech-
activated applications reliably and cost-effectively.
High level tools for rapid time to market. We offer high-level building
blocks, known as DialogModules, that make it easy for developers to build
speech applications with proven and consistent call flows and user interfaces.
The availability of DialogModules tailored for specific situations gives our
clients the ability to more easily create and maintain applications and achieve
significant reductions in development cycle time and cost per deployed
application. DialogModules have been tightly integrated into well-known
toolkits from leading vendors such as InterVoice-BRITE, Aspect Communications,
Comverse Technology, Lucent Technologies and Intel so that developers can
become effective quickly. SpeechWorks also offers operations and tuning tools
that enable our clients to evaluate and improve deployed applications, based on
actual caller experiences, quickly and easily.
High quality professional services. We complement our products with a high
quality professional services organization that offers a wide range of
services. Our professional services organization supports our partners and our
clients with business and systems consulting, project management and
application development assistance. We have designed these professional
services to shorten time-to-market, reduce project implementation risk and
improve our clients' competitive position. We believe that our ability to
successfully deliver an integrated solution to our clients provides us with a
significant competitive advantage in the market for speech-activated solutions
for e-business.
The SpeechWorks Strategy
Our goal is to become the leading global provider of speech-activated
solutions for e-business. The key elements of our strategy are to:
Maintain market leadership. Our industry-leading solutions for speech-
enabled applications allow enterprises to build and rapidly deploy speech-
activated services. The SpeechWorks platform allows businesses to develop
applications quickly and efficiently while maintaining a consistent user
interface design, thereby increasing caller satisfaction rates and
strengthening customer loyalty. The SpeechSite package includes easily
deployed, enterprise applications that enable businesses of any size to
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transform the way that they respond to incoming telephone calls. We intend to
maintain our leadership position by enhancing our existing products and
developing a variety of new products and services that make it easy for
businesses to use speech recognition technology to improve customer
satisfaction, generate new revenue opportunities and reduce operational costs.
Extend technology lead. We have focused our research and development
efforts on tightly integrated e-business solutions that are reliable, scalable
and flexible. We currently have three U.S. patents, 13 U.S. patents pending and
12 international patents pending. By investing in advanced research and
development, we continually improve recognition accuracy, cost-effectiveness
and ease of use. We continue to devote significant resources to technical
innovation and plan to improve the usability of our tools and technologies and
to customize our applications to meet specific client needs. Concurrently, we
evaluate emerging technologies and industry standards and update our technology
in response to changes in the market. We believe that these efforts will allow
us to anticipate and accommodate changing client needs.
Leverage professional services capabilities. We have established
successful relationships with our clients and partners by advising and
assisting them in the development and deployment of speech-activated
applications. We offer our clients and partners ongoing training in our speech
application development lifecycle and access to the resources in our rapid
prototyping center. We intend to continue our focus on shortening development
lifecycles and making it easy for new clients and partners to become educated
and effective users of our speech-activated solutions. In addition, we offer
high-quality professional services capabilities through third-party alliances.
By offering our clients a full range of professional services, we believe we
can accelerate acceptance of our speech-activated solutions for e-business and
create opportunities to sell new or enhanced products to clients.
Expand international presence. We currently have more than 40 non-U.S.
based clients and partners in Europe, Asia, and Latin America. Our SpeechWorks
platform currently supports the following languages and dialects: Australian
English, Brazilian Portuguese, Canadian French, Cantonese, European French,
German, Japanese, Korean, Latin American Spanish, Mandarin, Singapore English,
U.K. English and U.S. English. We have opened sales and development offices in
England, Singapore, Mexico and Canada and we have sales representatives in
France, Germany and Australia. We intend to continue our expansion in those
regions where businesses and other institutional clients value the addition of
speech access to their e-business services.
Expand sales channels to drive market penetration. We currently have 26
sales representatives and have established 47 partner relationships in 12
countries. We are working to increase client adoption of our solutions by
expanding our direct sales force and our indirect sales channels through
additional relationships and strategic alliances with key systems integrators,
value-added resellers and original equipment manufacturers. We believe that by
establishing and strengthening relationships with our key partners around the
world, we can target a broader client base and accelerate adoption of our
solutions.
Build brand awareness. We plan to expand awareness of SpeechWorks as a
leading provider of speech-enabled e-business solutions. We have implemented
several "SpeechWorks Here" programs to brand our solution as the enabler behind
our clients' speech-activated, e-business efforts. We use a variety of
strategic marketing programs including advertising, trade shows and web
seminars. We intend to continue to expand our traditional and online marketing
activities to build awareness of our brand.
Products
We offer two speech recognition products for over-the-telephone
applications:
. SpeechWorks 6, a comprehensive set of software tools and core speech
recognition technology that can be used to build state-of-the-art,
speech-activated services and
. SpeechSite, a packaged application that answers and directs telephone
calls, delivers company information and provides fax back services.
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[CHART APPEARS HERE]
SpeechWorks 6. SpeechWorks 6 is the current release of our software
platform for developing and deploying customized speech applications in a
variety of languages. SpeechWorks 6 runs on Windows NT- and UNIX-based
operating systems and supports multiple telephony interfaces.
SpeechWorks 6 includes our:
. SMARTRecognizer core recognition engine,
. DialogModule building blocks,
. natural language tools for building and maintaining grammars,
vocabularies and pronunciations, and
. operations and tuning tools for monitoring and improving deployed
applications.
SMARTRecognizer. The SMARTRecognizer provides advanced technology for
speech recognition over the telephone. It can recognize more than 65,000
different words or phrase at a time, including customized vocabularies. It can
also recognize complete phrases and sentences such as, "I'd like to transfer
$500 from checking to savings today." The SMARTRecognizer can understand
different speakers without user training and it supports continuous speech,
allowing callers to speak at a normal rate without pausing between words.
DialogModules. DialogModules are pre-packaged software building blocks
that enable our clients to build speech applications quickly and easily. Each
DialogModule performs a particular task within an application, ranging from
simple tasks such as capturing a yes/no response or a telephone number from a
caller, to more complex tasks such as selecting an item from a large vocabulary
list. DialogModules include pre-built grammars, user interface design, call
flow and error recovery routines to provide developers with easily configurable
functionality. To further aid the development of speech applications,
SpeechWorks DialogModules have been integrated as graphical icons in a number
of application development toolkits provided by our distribution partners.
Natural language tools. Natural language tools include a vocabulary editor
that enables developers to generate and maintain large vocabulary lists of
words that are recognized at specific times during a call. Developers can add
new words by typing them in or pointing to a text database. SpeechWorks 6
generates
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the pronunciations automatically using either its built-in dictionary of
250,000 words or by following standard phonetic rules. The vocabulary editor
also allows the developer to specify synonyms and alternative pronunciations
for each of the vocabulary items. A grammar editor enables developers to build
and test complex natural language grammars. Another SpeechWorks tool, the
pronunciation editor, allows the developer to edit pronunciations of each
vocabulary item.
Operations and tuning tools. Operations and tuning tools enable developers
to review application performance data in an easily understood graphical form.
These tuning tools provide detailed reports regarding recognition performance
and user interface effectiveness, peak usage times and call duration, execution
results for DialogModules and potential problem areas.
SpeechWorks 6 includes patented barge-in technology that enables callers
to interrupt an application with responses or new queries.
We expect to release SpeechWorks 6.5 in the second half of 2000.
SpeechWorks 6.5 will offer improvements in recognition accuracy and performance
and additional features, including plug-n-play DialogModules and languages, an
Address DialogModule, a Verification DialogModule and natural language
enhancements. Plug-n-play DialogModules and languages provide additional
flexibility for adding new DialogModules and languages. The Address
DialogModule encapsulates mechanisms for interacting with a caller to solicit
and recognize U.S. residential, post office box and rural route addresses. The
Verification DialogModule supports integration with third-party speaker
verification algorithms to perform authentication of callers by matching their
voices to previously enrolled "voiceprints" or templates. The natural language
enhancements provide capabilities for handling more complex natural language
grammars through improved modeling and more detailed confidence score
interpretation.
SpeechSite. Our recently launched SpeechSite product is a packaged
application solution that is built on our SpeechWorks 6 platform and is
designed to bring the web model of self-service to the telephone. SpeechSite
can provide callers with a wide variety of company information, direct calls,
provide fax back services and support custom built transactions using spoken
words.
We offer SpeechSite as a turnkey solution using content supplied by our
client. Our pre-packaged SpeechSite applications are designed to be deployed
and fully functional in less than two weeks. Our SpeechSite solution includes
all required hardware, software and professional services, including
configuration of the system, professional recordings of corporate information,
and implementation and training at the client's facility.
The hardware platform for a SpeechSite currently consists of a Dell PC
running Windows NT utilizing Intel's Dialogic cards. SpeechSite software
consists of two major components: a SpeechSite engine and a SpeechSite
administration function. The SpeechSite engine is responsible for executing the
speech interface and connecting with the telephony system, while the SpeechSite
administration component is responsible for all configurations, reporting and
monitoring interfaces. In addition, SpeechSite uses Artsoft's Visual Voice Pro
as well as other complementary applications to provide enhanced features and
functionality. These complementary applications include text-to-speech software
from Lucent and WinFax Pro and pcAnywhere from Symantec.
SpeechSpot. SpeechSpot is a speech-based advertising placement program
which is designed to develop a revenue stream comparable to the banner
advertisement revenue available to internet sites. We are currently conducting
SpeechSpot research and concept testing and are designing and developing
support for SpeechSpot placements in three client applications. We intend to
create a SpeechSpot DialogModule to facilitate the delivery of SpeechSpot
placements in future client applications.
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Solutions and Support Services
We recognize that many clients want more than a software-only solution.
Consequently, we offer our clients a range of consulting and implementation
services through our solution services group as well as a rapid prototyping
center to help clients get started. These solution services are provided by
staff located in Boston, New York and San Francisco as well as in our
international centers of excellence in Canada, Mexico, the United Kingdom and
Singapore. We provide dedicated teams of professionals who follow our speech
application development lifecycle to help our clients and partners get their
speech applications working as quickly as possible and achieve maximum caller
satisfaction.
Rapid prototyping center. We offer a rapid prototyping center that allows
potential clients to explore quickly and cost effectively the capabilities of
over-the-telephone, speech-activated applications. In our rapid prototyping
center, clients can experiment with speech recognition technology, user
interfaces and the tools required to build speech-activated services. An
application prototype helps potential clients experience real-world caller
interactions and can serve as the foundation for a full-scale production
system.
Speech application development lifecycle. We have created a proprietary
speech application development lifecycle, or SADL, which is a disciplined
project management process to ensure successful implementation of our
solutions. Our lifecycle approach is based on three primary phases:
specification, development and deployment. In the specification phase, we
assess the functional, design and integration requirements of the system and
prepare a preliminary user interface specification. During the development and
deployment phases, developers are trained to pay particular attention to the
iterative testing and tuning of the application's user interface. In addition,
this approach supports parallel development of database and telephony system
integration requirements ensuring efficient and timely deployments. We believe
that our speech application development lifecycle has been an important reason
for our success with major client deployments to date.
User interface design. We employ a team of user interface engineers and
human factors experts who study how people interact with computers to design
the most effective interface for a client's specific application. This team
follows a three-phase process: research, design and testing. In the research
phase, our engineers seek to understand the needs and desires of our clients
and their callers. In order to help make a callers' experience effective and
enjoyable, in the design phase, our engineers consider the implications that
our interface design may have on callers taking into account call flow,
functionality, and the application's personality. Then our interface engineers
conduct usability tests and periodically monitor and improve call flow,
prompts, and recognition accuracy.
Training. We offer training programs that provide clients with a review of
our products and services and an introduction to the process of building speech
applications. Our lectures and interactive workshops provide instruction on
embedding our software in a production-quality, runtime environment and
developing state-of-the-art natural language recognition capabilities.
Maintenance and support. We also offer our clients and partners a range of
maintenance and support programs. These support programs include telephone and
e-mail support, web access to knowledge databases, technical support, software
patches and upgrades, and varying service level options. Application
consulting, user interface design and tuning services are also available to our
clients and partners.
SpeechCare. We provide our SpeechSite clients with a technical support and
services package, SpeechCare, which consists of three services: voice prompt
recording and management, operations and technical support and software
maintenance, patches and updates.
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Technology
We have developed and/or enhanced and extended distinguishing technologies
in our products. These include:
. Segment-based statistical models. Our recognition system is based on
work on segmental systems performed for many years at MIT and other
research groups. The segmental approach, unlike the frame-based,
Hidden Markov Model approach, is able to take into account the entire
phonetic segment. This allows our product to better account for the
static and dynamic properties of individual speech sounds which
increases accuracy and reduces the overall amount of computation
needed for a given recognition task.
. Barge-in. Barge-in technology allows callers to interrupt the outgoing
prompts by speaking over them and allows our recognizer to understand
what the user said when interrupting. We have developed patented
technologies to provide state-of-the-art barge-in performance. We
believe that clients using our technology were the first to support
barge-in functionality in large scale, production applications.
. Dynamic vocabularies. Many traditional speech recognition engines
require that the recognition vocabulary be defined and compiled at
application development time. However, there are many applications
where the necessary vocabulary must be generated while the application
is running. We have therefore engineered our speech recognition engine
to allow rapid, dynamic updates of recognition vocabularies.
. Automatic adaptation. We have incorporated a process to support
automatic adaptation of the recognition models of our engine. The
result is that, through a fully automated process, the SpeechWorks
engine is able to reduce error rates by 30-60% over time as it is used
for some applications.
Platform integration. A key factor in the success of our products has been
the tight integration of these products on many of the leading interactive
voice response, or IVR, platforms. These platforms consist of a combination of
hardware and software, and provide robust scalable environments for building
speech applications. On some platforms, our DialogModules are used to write
applications directly in code, such as C, Java and Visual Basic. On platforms
with existing application development environments, the DialogModules are
integrated into the development environments to allow seamless development of
speech applications within the framework of the existing platform environment.
Software architecture. Our products are built using well-defined layers of
functionality with module interfaces. These layers are built using a
combination of C and C++. DialogModules can be utilized through a number of
standard interface technologies, such as Microsoft's Component Object Module.
Platform integration is accomplished through a number of well-defined
application programming interfaces, or APIs, along with software that can be
replaced to match the needed functionality of a particular platform.
Standards. We have been helping to drive evolving standards in a number of
areas in the telephone-based speech recognition industry. This includes
participation in the Enterprise Computer Telephony Forum, or ECTF, to define
the S.100 and S.300 APIs for speech recognition along with driving development
of standards for Dialog Application Components in the ECTF architecture. We
have also been an active participant in the World Wide Web Consortium, or W3C,
Voice Browser working group, which is developing standards for speech
applications and interfaces using web-based programming methods.
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Clients
Our clients comprise a diverse international group of organizations in a
variety of fields. The following is a representative list of our clients who
have purchased over $50,000 of our software and/or services either directly
from us or through our resellers.
Communications
Travel
BellSouth IntelliVentures
CellularOne Amtrak
MCI WorldCom Continental Airlines
United Airlines
NEXTLINK Interactive
SingTel Mobile
Pharmaceuticals
McKessonHBOC
Technology/Manufacturing
Apple Computer Speech Portals
Nortel Networks AudioPoint, Inc.
Universal Electronics
HeyAnita.com
Quack.com
Finance/Brokerage
Bidwell & Company Speech Application Service
DLJ Direct Providers
DMG & Partners Securities
E*TRADE everypath.com
Singapore Stock Exchange NetByTel.com
IT Solutions Price Interactive
Lim & Tan Securities !hey Software
StockTrade Insurance
The Guardian Life
Insurance of America
Dot.coms
Anyday.com
foodline.com
MapQuest.com
Synapse.com
XYPOINT Corporation
Finance/Banking
CIBC
We intend to expand our client base by, among other things, adding new
distribution and development partners and leveraging their capabilities to sell
and deploy our products, increasing our co-marketing activities with our
partners, increasing the size of our direct sales force and increasing our
market and brand awareness.
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Case Studies
United Airlines Flight Information
1.800.824.6200
Company Description: United Airlines is the largest air carrier in the
world and the largest majority employee-owned company, offering nearly 2,400
flights a day to 138 destinations in 26 countries and two U.S. territories.
United is also an industry innovator with breakthroughs such as E-Ticket
Service, United Connection, Airport Gate Reader, United Shuttle, and now its
two speech-activated systems.
The Challenge: As a leader in travel technology, United Airlines wanted to
upgrade its Flight Information System with a self-service system to better
serve its customers.
The Solution: Within five months of the project start date, United
replaced its automated touch-tone system with a new speech recognition
application that provides callers with fast access to valuable flight
information, such as departure and arrival times, through its toll-free flight
information telephone number. The system allows people to call United anytime
and speak naturally into a telephone to check the status and gate information
of any of United's nearly 2,400 daily flights. The system receives more than
80,000 calls on a typical high-traffic day. After a brief introduction, the
automated attendant will say, "Please say the United flight number," and if the
caller responds, "I don't know it," the automated operator will break down the
inquiry into smaller pieces the caller can answer such as arrival and departure
cities. The system seeks out and works with the information the caller has.
MapQuest.com
Company Description: MapQuest.com is a leader in online, voice and
wireless destination information solutions and digital mapping services.
MapQuest.com provides mapping, proximity searching, real-time traffic reporting
and directions to the end user anytime, anywhere. MapQuest.com licenses its
technology to more than 1,100 business partners. Through these licensing
agreements, MapQuest.com helps businesses integrate maps and driving directions
into their internet, intranet, call centers, voice and wireless applications
for improved marketing and customer service functions.
The Challenge: MapQuest.com wanted to expand its market reach beyond the
desktop by offering access to its internet-based destination information and
services to consumers by the telephone.
The Solution: The 1-800-MapQuest application will use SpeechWorks'
platform to provide callers with access to MapQuest driving directions by
dialing a toll-free number and talking over the telephone. The service will
prompt callers to provide their locations and destinations by saying, "Where
are you coming from?" and "Where are you going?" The system will transmit the
callers' spoken answers to the on-line MapQuest.com engine and provide an audio
response. The user will be able to control the output with voice commands such
as "repeat" and "next." Other MapQuest services to be extended through the
toll-free number will include Real-time Traffic Reports and a Biz Locator.
Using SpeechWorks, MapQuest.com will leverage its online web engine through
another channel of access - the telephone.
BellSouth IntelliVentures
1.404.633.TALK
Company Description: BellSouth is a $25 billion communications services
company that provides telecommunications, wireless communications, cable and
digital TV, directory advertising and publishing, and internet and data
services to more than 37 million customers in 19 countries worldwide. BellSouth
IntelliVentures produces new, multimedia products for BellSouth, including The
Real Yellow Pages ONLINE, The Real White Pages ONLINE, BellSouth AdReach
Service and BellSouth Info by Voice.
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The Challenge: In an effort to expand its leadership position in the
highly competitive telecommunications market, BellSouth wanted to enhance its
local information service offerings by providing callers with a variety of
automated information, 24 hours-a-day, seven days-a-week, over the telephone
but without relying on touch-tone input.
The Solution: BellSouth worked with SpeechWorks to create a public
information service known as Info By Voice, or IBV, in Atlanta. IBV is the
first local speech portal implemented by a major U.S. telecommunications
carrier and, was based in part on experience gained in BellSouth's first voice-
activated link system which was just deployed, using SpeechWorks' technology,
as a trial in Florida in 1997. Callers can speak naturally over the telephone
in complete phrases and sentences to request a variety of information such as
news, sports, weather, stock quotes, horoscopes, and various yellow page
restaurant listings. For example, a caller can say: "What's the weather in
Atlanta?" and the system will respond with the up-to-date weather report.
E*TRADE
1.800.STOCKS1
Company Description: E*TRADE, a leading provider of online investing
services, allows independent investors to trade stocks, options and mutual
funds at low commission rates. E*TRADE also provides portfolio tracking, news
and real-time market commentary.
The Challenge: E*TRADE wanted to expand its market by extending its
internet-based transaction services to any user of a telephone.
The Solution: Based in part on SpeechWorks technology, E*TRADE deployed
the first, fully speech-enabled telephone investing service, TELE*MASTER, in
1997. TELE*MASTER allows E*TRADE customers to obtain information and make
transactions from a telephone. The system supports quotes and trading for
stocks, options and mutual funds and understands statements such as, "Buy 100
shares at a limit price of $100, good for the day." TELE*MASTER offers advanced
speech access to a wide range of E*TRADE services, providing many of the same
functions and offers much of the same information as is found on E*TRADE's web
site.
foodline.com
1.212.222.MENU
Company Description: foodline.com is an internet and telephone service
devoted exclusively to restaurant information, reviews and reservations in New
York City and Boston. At foodline.com, people can make reservations online in
real-time after they have searched for restaurants by name, cuisine, location,
price range or special features such as HotSpots. foodline.com also offers the
first and only speech-activated telephone restaurant guide to more than 2,000
New York City restaurants.
The Challenge: foodline.com wanted to complement its web service by
expanding its market reach to all users of a telephone.
The Solution: foodline.com engaged SpeechWorks to develop a speech-
activated restaurant service. Initially launched in New York City on 212-222-
MENU, foodline.com helps callers search for restaurants 24 hours-a-day, seven
days-a-week over the telephone using such criteria as location, cuisine or
price range. In addition, callers may ask to hear reviews, obtain addresses and
be transferred directly to a restaurant to make reservations. "Do you know the
name of the restaurant?" is the first question the automated attendant will ask
the caller. If the caller responds "no," the automated attendant will offer
categories of restaurants from which the caller may choose to hear critiques
and other information.
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Sales and Marketing
Sales
We sell our products and services both directly through a sales force and
indirectly through third-party value added resellers and system integrators.
Direct Sales Force. We have a direct sales force in the United States
which consists of three vice presidents, four regional sales directors, six
sales engineers, and 18 sales representatives located in nine states. This
sales force represents our products and services to enterprises, channel
partners and communications carriers in North America. We support the sales
efforts of our value added resellers and system integrators around the world
with an international direct sales force which consists of one vice president
and three general managers located in Europe, Mexico and Asia Pacific. We also
have sales representatives in the United Kingdom, Germany, France, Mexico,
Singapore and Australia. The Canadian market is currently supported from our
headquarters in Boston.
Resellers. We have a network of 36 resellers located in the United States,
Canada, South Africa, United Kingdom, France, Germany, South Korea, Australia
and Singapore that distribute and implement our solutions around the globe. Our
value added resellers and system integrators have experience in interactive
voice response platforms, system integration of communication applications or
hosting expertise for interactive voice response applications. Our resellers
increase our coverage of global markets and fulfill the diverse application and
service opportunities for our software and services.
Marketing
Our marketing strategy is focused on building brand awareness of
SpeechWorks as a leading provider of software products and professional
services that enable enterprises and communications carriers to offer
automated, speech-activated services. In March 2000, our marketing efforts were
formally recognized with a Marketing Leadership Award and designation as U.S.
market share leader in the telephony-based speech technology industry by the
Frost & Sullivan research firm. The Marketing Leadership Award acknowledges
leadership in marketing campaigns, educational programs and customer programs
like the SpeechWorks Here Guarantee, which we believe is the industry's first
results assurance program for customers.
Our strategic advertising campaigns use both traditional and online media.
Our print advertising focuses on targeted trade and business publications,
including e-business, telecommunications and other categories. We conduct both
live seminars and web seminars and participate in a number of trade shows and
other industry events. We also provide speakers from our company to represent
us at a number of industry forums.
Our marketing strategy also includes aggressive public relations efforts
designed to convey our message to appropriate audiences. We reinforce this
through our ongoing communications with a number of key industry analysts and
press representatives.
Competition
A number of companies have developed, or are expected to develop, products
that compete with our products. Competitors in the speech recognition software
market include IBM, Lernout and Hauspie Speech Products, Locus Dialogue, Lucent
Technologies, Nuance Communications, Philips Electronics and Phonetic Systems.
We expect additional competition from other companies such as Microsoft, which
has recently made investments in and acquired a speech recognition technology
company. Furthermore, our competitors may combine with each other, and other
companies may enter our markets by acquiring or entering into strategic
relationships with our competitors. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to increase the abilities of their advanced speech and
language technology products to address the needs of our prospective clients.
39
<PAGE>
We believe that the principal competitive factors affecting our market
include the breadth and depth of solutions, product quality and performance,
core technology, product scalability and reliability, product features, client
service, the ability to implement solutions, the value of a given solution, the
creation of a base of referenceable clients and the strength and breadth of
reseller and developer relationships. Although we believe that our solutions
currently compete favorably with respect to these factors, particularly with
respect to product quality and performance, our market is relatively new and is
evolving rapidly.
Research and Development
We have made substantial investments in research and development through
both internal development and technology licenses. The majority of our research
and development activity has been directed towards feature extensions to our
family of products. This development consists primarily of adding new
competitive product features and additional tools and products as we expand
into new markets.
Our research and development expenditures for 1997, 1998 and 1999 were
$2.0 million, $1.9 million, and $5.2 million, respectively. We expect that we
will continue to commit significant resources to research and development in
the future. All research and development expenses have been expensed as
incurred.
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. The
introduction of products incorporating new technologies and the emergence of
new industry standards could render existing products obsolete and
unmarketable. Our future success will depend in part on our ability to
anticipate changes, enhance our current products, develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of our clients.
Intellectual Property and Other Proprietary Rights
We regard our patents, copyrights, service marks, trademarks, trade
secrets and other intellectual property as important to our success. We rely on
a combination of patent, trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with our employees, consultants,
clients, partners and others to protect our proprietary rights. All of our
employees have executed confidentiality and assignment of invention agreements.
Prior to disclosing confidential information to third parties, we generally
require them to sign confidentiality or other agreements restricting the use
and disclosure of our confidential information.
To date we have obtained three issued U.S. patents, and have 13 pending
U.S. patent applications, three pending patent applications under the Patent
Cooperation Treaty, two pending patent applications in each of the European
Patent Office and Canada, and one pending patent application in each of China,
Taiwan, Australia, Singapore, and Hong Kong. Additionally, we pursue
registration of our key trademarks and service marks in the U.S. and, in many
cases, internationally. However, effective trademark, service mark, copyright
and trade secret protection may not be available or sought by us in every
country in which our products and services are sold.
We license software technology from MIT under a nonexclusive license
agreement. This license agreement will terminate upon the expiration of MIT's
copyrights related to such technology. We do not anticipate that this will
restrict our ability to use or license the software technology or any
derivative works in any way. We also currently own a number of internet domain
names, including speechworks.com.
40
<PAGE>
Employees
As of April 14, 2000, we had 216 employees worldwide, including 58 in
research and development, 78 in service and support, 52 in sales and marketing
and 28 in finance and administration. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Facilities
Our principal offices are located at 695 Atlantic Avenue, in Boston,
Massachusetts, where we lease approximately 53,600 square feet under leases
that expires in September 2004. We also maintain regional sales and development
offices in New York, San Francisco, Montreal, Puebla (Mexico), Singapore and
Staines (England), as well as regional sales offices in Chicago, Atlanta, and
Dallas. The leases for the regional offices are short-term. We believe that our
existing facilities are adequate for our current needs.
Legal Proceedings
We are not engaged in any legal proceeding that we expect to have a
material adverse effect on our business.
41
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning our
directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stuart R. Patterson ........ 43 President, Chief Executive Officer and Director
Richard J. Westelman........ 42 Chief Financial Officer
Mark A. Holthouse........... 45 Senior Vice President of Operations
Michael S. Phillips......... 38 Chief Technology Officer and Director
William Ledingham........... 38 Vice President of Product Development
Joseph Murphy............... 44 Vice President of Sales
Stephen Adams............... 50 Vice President of International
Steven Chambers............. 37 Vice President of Worldwide Marketing
Rick Olin................... 42 Vice President and General Counsel
William J. O'Farrell ....... 37 Chairman of the Board
Axel Bichara ............... 36 Director
Richard Burnes ............. 59 Director
Robert Finch................ 42 Director
John C. Freker, Jr.......... 42 Director
</TABLE>
- ----------
Stuart R. Patterson has served as our President since September 1997, our
Chief Executive Officer since May 1998 and as a director since May 1998. Prior
to joining us, from May 1997 to September 1997, he served on the board of BBG
New Media, Inc., a developer of high-end web sites, which was bought by Think
New Ideas, Inc., now AnswerThink Consulting Group, in September 1997. From May
1996 to March 1997, he served as Vice President and Line of Business Manager at
Voxware, Inc., a developer of digital speech and audio technologies and
solutions. Previously, from August 1994 to May 1996, he served on the Advisory
Board of Voxware. From September 1987 to April 1996, he co-founded and served
as the chief executive officer of Vicorp Interactive Systems, Inc., a developer
of large-scale voice and data applications based on open systems tools and
platforms.
Richard J. Westelman has served as our Chief Financial Officer since
August 1998. Prior to joining us, from June 1996 to August 1998, he served as
Chief Financial Officer and Director of Dove Associates, a strategy consulting
firm. From January 1994 to June 1996, he served as Chief Financial Officer of
Vicorp Interactive Systems, Inc.
Mark A. Holthouse has served as our Senior Vice President of Operations
since March 1996. In 1987, he co-founded Vicorp Interactive Systems, Inc., a
developer of large-scale voice and data applications based on open systems
tools and platforms. He served as Managing Director of Technology and
Operations of Vicorp from April 1987 to March 1996.
Michael S. Phillips co-founded SpeechWorks and has served as our Chief
Technology Officer since September 1994 and as a director since May 1994. From
May 1987 to August 1994, he served as a research scientist in the Spoken
Language Systems Group at the Massachusetts Institute of Technology, a non-
profit think-tank dedicated to the development of a conversational interface
between computers and human spoken words.
William Ledingham has served as our Vice President of Product Development
since July 1995. From 1989 to 1994, he held a number of marketing management
positions at Stratus Computer.
Joseph Murphy has served as our Vice President of Sales since August 1999.
From July 1998 to August 1999, he was Vice President of Sales at Rubric, Inc.,
a web-based marketing vendor. From
42
<PAGE>
August 1996 to June 1998, he was Director of Sales at Genesys
Telecommunications, Inc., a computer telephony integration and enterprise
interaction management software company. From January 1995 to April 1996, he
served as Vice President of Worldwide Sales for GeoTel Communications, a
software company.
Stephen Adams has served as our Vice President of International since
October 1998. From August 1997 to October 1998, he served as Vice President of
Worldwide Sales at Gradient Technologies, Inc., a provider of security services
for network computing. From March 1996 to August 1997, he served as Vice
President of International Sales at Segue Software, Inc., a company
specializing in the development of management and testing of electronic
business applications software. From April 1993 to March 1996, he served as
Director of International Sales at Rational Software Corporation, a software
development company.
Steven Chambers has served as our Vice President of Worldwide Marketing
since September 1999. From October 1998 to July 1999, he served as Vice
President of Marketing at Arbortext, Inc., an XML-based information solutions
company. From October 1997 to October 1998, he was the Vice President of
Marketing for VDOnet, a company specializing in streaming media over the
internet. From November 1991 to October 1997, he served as Vice President of
Worldwide Marketing at PictureTel Corporation, a visual communications company.
Rick Olin joined us in March 1999 and has served as our General Counsel
since January 2000. From October 1996 until February 1999, he was Deputy Legal
Counsel at Open Market, Inc., an internet commerce software company. From May
1995 until September 1996, he was Vice President and General Counsel of Long
Term Care Services, Inc., a regional health care company. Prior to that he was
an attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
William J. O'Farrell co-founded SpeechWorks and has served as our Chairman
of the Board since May 1994. Mr. O'Farrell also served as our Chief Executive
Officer from May 1994 to May 1998. Since March 1999, Mr. O'Farrell has served
as Chairman of the Board and Chief Executive Officer of OpenAir.com (formerly
TimeBills.com), an online time and expense tracking and invoicing service
company.
Axel Bichara has served as director of SpeechWorks since August 1995. Mr.
Bichara joined Atlas Venture, a venture capital firm, in 1993 and is currently
a Senior Principal.
Richard Burnes has served as director of SpeechWorks since October 1997.
Since November 1970, Mr. Burnes has served as General Partner of Charles River
Ventures of which he is a co-founder.
Robert Finch has served as a director of SpeechWorks since April 2000.
Since February 2000, Mr. Finch has served as Vice President, Operations for
BroadBand Office, Inc., a provider of technology and communications solutions
to businesses. From 1988 through February 2000, he served in a variety of vice
president-level engineering, operations and corporate development roles for MCI
WorldCom and predecessor companies including LDDS WorldCom and Advanced
Telecommunications Corporation. Most recently, Mr. Finch served as Vice
President, Strategic Development from January 1998 to February 2000.
John C. Freker, Jr. has served as a director of SpeechWorks since April
2000. Since November 1997 Mr. Freker has served as President of the Custom
Solutions Group of Convergys Corporation, a customer service and marketing
company. From December 1994 to November 1997, he served as President of MATRIXX
Marketing, Inc., a customer service and marketing company.
Classified Board of Directors
Our board of directors is divided into three classes as nearly equal in
number as possible. Each year the stockholders elect the members of one of the
three classes to a three-year term of office. and serve in the class
whose term expires in 2001; and serve in the class whose term expires in
2002; and , and serve in the class whose term expires in 2003.
43
<PAGE>
Committees of the Board of Directors
Our board of directors has a compensation committee, which reviews,
approves and makes recommendations concerning salaries and incentive
compensation for our employees and consultants, establishes and approves
salaries and incentive compensation for our executive officers, and administers
our stock plans. The compensation committee also administers and reviews
general policies relating to compensation and employee benefits. The members of
the compensation committee are and . Our board of directors also
has an audit committee, which oversees the engagement of our independent public
accountants and reviews the results and scope of annual audits and other
services provided by our independent public accountants. The members of the
audit committee are and .
Compensation of Directors
Our directors do not receive an annual retainer or any fees for attending
regular meetings of the board of directors. Non-employee directors are
reimbursed for travel costs and other reasonable out-of-pocket expenses
incurred in connection with attending meetings of the board of directors or any
committee thereof. In addition, non-employee directors are eligible to receive
grants of non-qualified stock options under our stock option plan, and we have
granted to each of Messrs. Freker and Finch options to purchase 30,000 shares
of our common stock in exchange for each of them agreeing to join our board of
directors. In the future, we may grant additional such options to non-employee
directors as an incentive to join or remain on our board of directors.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee.
Executive Compensation
Summary Compensation. The following table sets forth the total
compensation paid or accrued during the year ended December 31, 1999 to our
chief executive officer and our four other most highly compensated executive
officers who earned more than $100,000 during the year ended December 31, 1999,
who we refer to as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- --------------
Securities
Underlying
Options
Name and Principal Position Salary Bonus (#)
- --------------------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Stuart R. Patterson...................... $ 172,500 $ 42,000 75,000
President and Chief Executive Officer
Richard J. Westelman..................... 157,500 12,750 45,000
Chief Financial Officer
Mark A. Holthouse........................ 156,250 30,000 45,000
Senior Vice President of Operations
Michael S. Phillips...................... 143,750 20,000 45,000
Chief Technology Officer................
William Ledingham........................ 126,500 20,000 30,000
Vice President, Product Development
</TABLE>
44
<PAGE>
Option Grants in 1999
The following table contains information as to stock options granted
during the year ended December 31, 1999 to each of the named executive
officers. Each of the option grants listed below vests equally over 36 months
from the date of grant. In accordance with the rules of the Securities and
Exchange Commission, or SEC, also shown below are hypothetical gains that could
be achieved for the respective options if exercised immediately prior to the
end of the option term, assuming that the stock price on the date of grant
appreciates at the specified annual rates of appreciation, compounded annually
over the term of the options. The assumed annual rates of compounded stock
price appreciation are mandated by the rules of the SEC and do not represent an
estimate or projection of our future common stock prices. Actual gains, if any,
on stock option exercises will depend on the future performance of our common
stock.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Exercise Annual Rates of Stock
Shares Total or Base Price Appreciation for
Underlying Options Price Option Term
Options Granted to Per Expiration ----------------------- ---
Name Granted Employees Share Date 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stuart R. Patterson..... 75,000 2.7% $4.13 4/1/09 $ $
Richard J. Westelman.... 45,000 1.6 4.13 4/1/09
Mark A. Holthouse....... 45,000 1.6 4.13 4/1/09
Michael S. Phillips..... 45,000 1.6 4.13 4/1/09
William Ledingham....... 30,000 1.1 4.13 4/1/09
</TABLE>
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. The potential realizable values at 5% and 10%
appreciation are calculated by:
. multiplying the number of shares of common stock under the option by
the assumed initial public offering price of $ per share,
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options, and
. subtracting from that result the aggregate option exercise price.
Percentages shown under "Percent of Total Options Granted to Employees"
are based on an aggregate of 2,795,000 options granted to our employees under
our stock option plans during 1999.
For information relating to the acceleration of options granted to the
named executive officers, see "Change of Control Agreements."
Aggregate Option Exercises in 1999 and Year-End Option Values
The following table sets forth certain information with respect to option
exercises and the total value of options held by each named executive officer
as of December 31, 1999. Because there was no public trading market for the
common stock as of December 31, 1999, the value realized upon the exercise of
options and the value of the unexercised in-the-money options at year-end have
been calculated on the basis of the assumed initial public offering price of
$ per share minus the applicable per share exercise price.
45
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired Options at Year-End Year-End
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stuart R. Patterson..... -- $ 417,447 370,053 $ $
Richard J. Westelman.... -- 73,750 151,250
Mark A. Holthouse....... 137,813 10,000 35,000
Michael S. Phillips..... -- 10,000 35,000
William Ledingham....... 139,515 6,666 23,334
</TABLE>
Employment Agreement
On September 2, 1997, we entered into an employment agreement with Mr.
Patterson, our President and Chief Executive Officer. The employment agreement
provides for an initial term of three years. Under the terms of the agreement,
Mr. Patterson is entitled to receive an annual base salary of $150,000, which
has been adjusted to $172,500, and is eligible to receive an annual performance
bonus of up to $50,000. Additionally, we granted Mr. Patterson options to
purchase up to 712,500 shares of our common stock at an exercise price of $0.33
per share. 25% of these options vest after one year and the remainder vest
equally over the following 36 months. These options are subject to vesting upon
change of control as described below. Also under the agreement, we must pay for
up to $1,000,000 in life insurance and long-term disability insurance for Mr.
Patterson. If Mr. Patterson is terminated without cause or if we fail to enter
into a new employment agreement with Mr. Patterson by September 2, 2000, we
must pay Mr. Patterson a $75,000 severance payment. Mr. Patterson's employment
agreement also contains one year post termination non-compete and non-
solicitation provisions.
Change of Control Agreements
We have entered into an agreement with each of the named executive
officers, pursuant to which 50% of his unvested options to purchase our common
stock will vest and become immediately exercisable upon the effective date of
an acquisition or merger involving SpeechWorks in which we are not the
surviving company.
Stock Plans
Amended and Restated 1995 Stock Option Plan. Our Amended and Restated 1995
Stock Option Plan was approved by our board of directors and our stockholders
in December 1997. Under this plan we may grant incentive stock options,
nonqualified stock options and restricted and unrestricted stock awards. As of
April 14, 2000, options to purchase a total of 4,699,315 shares of common stock
are outstanding under this plan, 2,276,794 shares have been issued pursuant to
options granted under this plan, and 1,099,318 shares are available for future
grant.
2000 Employee, Director and Consultant Stock Option Plan. Our 2000
Employee, Director and Consultant Stock Option Plan was approved by our board
of directors in April 2000 and we anticipate that it will be approved by our
stockholders in May 2000. Under this plan we may grant incentive stock options
and nonqualified stock options. As of April 14, 2000, a total of 4,000,000
shares of common stock have been reserved for issuance under this plan. No
shares have been issued pursuant to options granted under this plan, no shares
are subject to outstanding options and 4,000,000 shares are available for
future grant.
The compensation committee will determine the terms of options granted
pursuant to the 2000 Employee, Director and Consultant Stock Option Plan,
including:
. the determination of which employees, directors and consultant will be
granted options,
. the exercise price and the number of shares subject to each option,
. the vesting schedule for options, and
. the termination or cancellation provisions applicable to options.
46
<PAGE>
Upon completion of this offering, each of these stock option plans will
continue to be administered by our compensation committee. The maximum term of
options granted under our plans is ten years. If we are acquired, the
compensation committee will provide that outstanding options under our plans
shall be:
. assumed by the successor or acquiring company,
. exercised within a specified number of days or the options will
terminate, or
. terminated in exchange for a cash payment equal to the value of the
option at the time we are acquired.
If we are acquired, the compensation committee may also provide that all
outstanding options fully vest.
2000 Employee Stock Purchase Plan. In 2000 our board of directors
adopted the 2000 Employee Stock Purchase Plan which authorizes the issuance, to
participating employees through the grant of nontransferable options, of a
maximum of shares of common stock. We anticipate that the 2000 Employee
Stock Purchase Plan will be approved by our stockholders in 2000.
The 2000 Employee Stock Purchase Plan is administered by our board's
compensation committee. All employees working hours or more per week, who
have been continuously employed by SpeechWorks for at least months as of the
offering date are eligible to participate. Any employee who would own more than
5% of our stock, immediately after the grant, under the plan may not
participate in the 2000 Employee Stock Purchase Plan. To participate, an
employee authorizes a deduction from his or her pay, not to exceed $25,000 per
year, beginning on the first day of a designated three-month offering period.
On the last day of each offering period, each outstanding option granted under
the plan is automatically exercised using funds withheld from each employee's
compensation as of that date. A participating employee may withdraw from the
2000 Employee Stock Purchase Plan at any time prior to the exercise date of the
offering period.
Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law.
Our certificate of incorporation and bylaws also provide that we will
indemnify any of our directors and officers who, by reason of the fact that he
or she is one of our officers or directors, is involved in a legal proceeding
of any nature. We will repay certain expenses incurred by a director or officer
in connection with any civil or criminal action or proceeding, specifically
including actions by us or in our name. Such indemnifiable expenses include, to
the maximum extent permitted by law, attorney's fees, judgments, civil or
criminal fines, settlement amounts and other expenses customarily incurred in
connection with legal proceedings. A director or officer will not receive
indemnification if he or she is found not to have acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, our best
interest. In addition, we intend to obtain directors' and officers' insurance
providing indemnification for our directors and officers for certain
liabilities, including liabilities under the Securities Act of 1933.
Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding shares of common stock as of April 14, 2000 by:
. the named executive officers,
. each of our directors,
. all of our current directors and executive officers as a group, and
. each stockholder known by us to own beneficially more than 5% of our
common stock. Beneficial ownership is determined in accordance with the
rules of the SEC and includes voting or investment power with respect
to the securities.
Shares of common stock that may be acquired by an individual or group
within 60 days of April 14, 2000, pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown in the table. Except as indicated in footnotes to this table, we
believe that the stockholders named in this table have sole voting and
investment power with respect to all shares of common stock shown to be
beneficially owned by them based on information provided to us by such
stockholders. Percentage of ownership is based on 22,385,625 shares of common
stock outstanding on April 14, 2000 and shares of common stock outstanding
after the completion of this offering. The address for each stockholder who
beneficially owns more than 5% of our common stock, other than a director or
executive officer, as listed below. The address for any director or executive
officer who beneficially owns more than 5% of our common stock is: c/o
SpeechWorks International, Inc., 695 Atlantic Avenue, Boston, Massachusetts
02111.
The following table assumes the conversion of all outstanding shares of
our convertible preferred stock.
<TABLE>
<CAPTION>
Percentage
Beneficially Owned
----------------------
Number of Shares Prior to After
Beneficial Owner Beneficially Owned Offering Offering
- ---------------- ------------------ --------- ---------
<S> <C> <C> <C>
Five Percent Stockholders:
Atlas Venture Fund II, L.P.......... 2,723,031 12.2%
222 Berkeley Street
Boston, MA 02116
Charles River Partnership VII....... 2,723,031 12.2
1000 Winter Street, Suite 3300
Waltham, MA 02154
Bank of America Ventures(1)......... 2,510,472 11.2
950 Tower Lane, Suite 700
Foster City, CA 94404
QuestMark Partners, L.P............. 2,364,216 10.6
One South Street, Suite 800
Baltimore, MD 21202
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Percentage
Beneficially Owned
----------------------
Number of Shares Prior to After
Beneficial Owner Beneficially Owned Offering Offering
- ---------------- ------------------ --------- ---------
<S> <C> <C> <C>
Directors and Executive Offi-
cers:
Stuart R. Patterson(2).......... 519,010 2.3%
William J. O'Farrell(3)......... 1,203,217 5.4
Michael S. Phillips(4).......... 1,623,681 7.3
Axel Bichara(5)................. 2,723,031 12.2
Richard Burnes(6)............... 2,723,031 12.2
Robert Finch(7)................. 4,500 *
John Freker(8).................. 4,500 *
Richard J. Westelman(9)......... 100,000 *
Mark A. Holthouse(10)........... 983,211 4.4
William Ledingham(11)........... 687,582 3.1
All Executive Officers and
Directors as a Group (14
persons)(12)................... 10,672,023 46.2
</TABLE>
- ------------------
* Represents beneficial ownership of less than 1% of the shares of common
stock.
(1) Includes 251,045 shares of common stock owned by BA Venture Partners III,
a fund affiliated with Bank of America Ventures.
(2) Includes 494,010 shares of common stock subject to options held by Mr.
Patterson that are exercisable within 60 days of April 14, 2000. Does not
include an additional 268,490 shares of common stock subject to options
held by Mr. Patterson that are not exercisable within 60 days of April 14,
2000.
(3) Includes 7,500 shares of common stock held by Mr. O'Farrell's wife.
Excludes 180,000 shares of common stock owned by trusts for the benefit of
Mr. O'Farrell's children.
(4) Includes 17,500 shares of common stock subject to options held by Mr.
Phillips that are exercisable within 60 days of April 14, 2000. Does not
include an additional 27,500 shares of common stock subject to options
held by Mr. Phillips that are not exercisable within 60 days of April 14,
2000.
(5) Consists of 2,723,031 shares of common stock owned by Atlas Venture Fund
II, L.P. The general partner of Atlas Venture Fund II, L.P. is Atlas
Venture Associates II, L.P which has sole voting and investment power with
respect to these shares. Mr. Bichara is a limited partner of Atlas Venture
Associates II, L.P. and expressly disclaims ownership of these shares,
except to the extent of his pecuniary interest therein.
(6) Consists of 2,723,031 shares of common stock owned by Charles River
Partnership VII. Charles River VII GP Limited Partnership is the general
partner of Charles River Partnership VII and has sole voting and
investment power with request to these shares. Mr. Burnes is a general
partner of Charles River VII GP Limited Partnership and expressly
disclaims ownership of these shares, except to the extent of his pecuniary
interest therein.
(7) Consists of 4,500 shares of common stock subject to options held by Mr.
Finch that are exercisable within 60 days of April 14, 2000. Does not
include an additional 25,500 shares of common stock subject to options
held by Mr. Finch that are not exercisable within 60 days of April 14,
2000.
(8) Consists of 4,500 shares of common stock subject to options held by Mr.
Freker that are exercisable within 60 days of April 14, 2000. Does not
include an additional 25,500 shares of common stock subject to options
held by Mr. Freker that are not exercisable within 60 days of April 14,
2000.
(9) Consists of 100,000 shares of common stock subject to options held by Mr.
Westelman that are exercisable within 60 days of April 14, 2000. Does not
include an additional 125,000 shares of common stock subject to options
held by Mr. Westelman that are not exercisable within 60 days of April 14,
2000.
(10) Includes 17,500 shares of common stock subject to options held by Mr.
Holthouse that are exercisable within 60 days of April 14, 2000. Does not
include an additional 27,500 shares of common stock subject to options
held by Mr. Holthouse that are not exercisable within 60 days of April
14, 2000.
(11) Includes 1,667 shares of common stock subject to options held by Mr.
Ledingham that are exercisable within 60 days of April 14, 2000. Does not
include an additional 18,333 shares of common stock subject to options
held by Mr. Ledingham that are not exercisable within 60 days of April
14, 2000.
(12) Includes 40,417 shares of common stock subject to options held by Mr.
Adams that are exercisable within 60 days of April 14, 2000, and 22,343
shares of common stock subject to options held by Mr. Olin that are
exercisable within 60 days of April 14, 2000. See also footnotes (2)
through (11) above.
49
<PAGE>
CERTAIN TRANSACTIONS
Preferred Stock Investments
During the last three years and through April 14, 2000, we have issued
convertible preferred shares in private placement transactions as follows:
. 2,474,500 shares of series B convertible preferred stock at $2.75 per
share on September 30, 1996, February 14, 1997 and April 22, 1998, for
an aggregate purchase price of $6,804,875,
. 1,626,092 shares of series C convertible preferred stock at $4.25 per
share on May 8, 1998 and January 9, 1999, for an aggregate purchase
price of $6,910,891,
. 2,671,389 shares of series D convertible preferred stock at $8.92 per
share on April 29, June 21 and June 29, 1999, for an aggregate
purchase price of $23,828,790, and
. 2,544,681 shares of series E convertible preferred stock at $7.86 per
share on April 11, 2000, for an aggregate purchase price of
$20,001,193.
Each share of our series B, series C and series D convertible preferred
stock will automatically convert into 1.5 shares of our common stock upon the
closing of this offering. Each share of our series E convertible preferred
stock will automatically convert into one share of our common stock upon the
closing of this offering.
The following table summarizes the shares of convertible preferred stock
purchased in private placement transactions during the last three years and
through April 14, 2000 by our stockholders who beneficially own more than 5% of
our common stock:
<TABLE>
<CAPTION>
Shares of Shares of Shares of Shares of
Series B Series C Series D Series E
Preferred Preferred Preferred Preferred
Investor Stock Stock Stock Stock
- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Atlas Venture Fund II, L.P.............. 363,636 141,176 162,334 203,562
Charles River Partnership VII........... 363,636 141,176 162,334 203,562
Bank of America Ventures (1)............ 909,091 352,941 378,112 50,255
QuestMark Partners, L.P................. -- -- 1,457,399 178,177
</TABLE>
- ------------------
(1) Includes 251,045 shares purchased by BA Venture Partners III, a fund
affiliated with Bank of America Ventures.
MIT License Agreement
We have entered into a nonexclusive software license agreement with MIT,
pursuant to which we pay royalties to MIT. Under MIT's policies, 8.3% of the
royalties paid by us to MIT are paid to Michael S. Phillips, one of our
founders and our chief technology officer, due to his affiliation with the
Spoken Language Systems Group at MIT at the time that the license agreement was
entered into. Royalties paid by MIT to Mr. Phillips pursuant to this agreement
for the years ending December 31, 1997, 1998 and 1999 were $3,726, $3,903 and
$7,056, respectively.
Directors
Our director Richard Burnes, is a General Partner of Charles River
Ventures. Axel Bichara, another of our directors, is a Senior Principal of
Atlas Venture. Each of Messrs. Burnes and Bichara was elected to our board of
directors pursuant to our stockholders agreement. The stockholders agreement
will terminate upon the closing of this offering.
Registration Rights
We have granted registration right to some of our warrantholders and
holders of our convertible preferred stock. See "Description of Capital Stock-
Registration Rights."
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 100,000,000 shares of common stock, $0.001 par
value per share, and 10,000,000 shares of preferred stock, $0.001 par value per
share. Upon completion of this offering, there will be shares of common stock
and no shares of preferred stock outstanding. As of April 14, 2000, we had
22,385,625 shares of common stock outstanding held of record by 125
stockholders. In addition, as of April 14, 2000 there were outstanding options
and warrants to purchase 807,237 shares of common stock.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
our board of directors out of funds legally available for dividend payments.
All outstanding shares of common stock are fully paid and nonassessable, and
the holders of common stock have no preferences or rights of conversion,
exchange or pre-emption. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share
ratably in our assets that are remaining after payment or provision for payment
of all of our debts and obligations and after liquidation payments to holders
of outstanding shares of preferred stock, if any.
Preferred Stock
Our board of directors has the authority, without further stockholder
authorization, to issue from time to time shares of preferred stock in one or
more series and to fix the terms, limitations, relative rights and preferences
and variations of each series. Although we have no present plans to issue any
shares of preferred stock, the issuance of shares of preferred stock, or the
issuance of rights to purchase such shares, could decrease the amount of
earnings and assets available for distribution to the holders of common stock,
could adversely affect the rights and powers, including voting rights, of the
common stock, and could have the effect of delaying, deterring or preventing a
change in control of SpeechWorks or an unsolicited acquisition proposal. The
preferred stock, if issued, could have priority over the common stock with
respect to dividends and other distributions, including the distribution of
assets upon liquidation.
Registration Rights
The following registration rights are subject to certain conditions and
limitations, including the right of the underwriters of an offering to limit
the number of shares included in any offering under certain circumstances. We
are obligated to pay the costs associated with all registrations.
Demand Rights. At any time at least six months after completion of this
offering, our stockholders that previously held our convertible preferred stock
prior to this offering and some of our warrantholders are entitled to demand
that we register up to 19,266,600 of their shares. These demand rights may be
exercised on two occasions upon initiation by holders of at least 37.5% of
these shares of common stock. If these stockholders request us to register less
than all of their shares of common stock held at that time, then we are only
required to register their shares if the anticipated aggregate offering price
exceeds $5,000,000.
Beginning one year after the date of this prospectus, stockholders with
registration rights may require us to file additional registration statements
on Form S-3, subject to conditions and limitations. We may be required to
effect two such registrations in any twelve month period.
Piggyback Rights. Our stockholders that previously held our convertible
preferred stock prior to this offering and two of our warrantholders also have
piggyback registration rights for an aggregate of 22,007,837 shares covering
future offerings by us. These piggyback rights mean that the holders may
include any shares of common stock that they hold in registration statements
that we file. These stockholders and warrantholders have waived their piggyback
registration rights with respect to this offering or such rights do not apply
to this offering.
51
<PAGE>
Delaware Law and Certain Charter and By-law Provisions
The provisions of Delaware law and of our certificate of incorporation and
bylaws discussed below could discourage or make it more difficult to accomplish
a proxy contest or other change in our management or the acquisition of control
by a holder of a substantial amount of our voting stock. It is possible that
these provisions could make it more difficult to accomplish, or could deter,
transactions that stockholders may otherwise consider to be in their best
interests or the best interests of SpeechWorks.
Delaware Statutory Business Combinations Provision. We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporations
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our bylaws provide that, for nominations to the board
of directors or for other business to be properly brought by a stockholder
before a meeting of stockholders, the stockholder must first have given timely
notice of the proposal in writing to our Secretary. For an annual meeting, a
stockholder's notice generally must be delivered not less than 45 days nor more
than 75 days prior to the anniversary of the mailing date of the proxy
statement for the previous year's annual meeting. For a special meeting, the
notice must generally be delivered by the later of 90 days prior to the special
meeting or ten days following the day on which public announcement of the
meeting is first made. Detailed requirements as to the form of the notice and
information required in the notice are specified in the bylaws. If it is
determined that business was not properly brought before a meeting in
accordance with our by-law provisions, such business will not be conducted at
the meeting.
Special Meetings of Stockholders. Special meetings of the stockholders may
be called only by our board of directors pursuant to a resolution adopted by a
majority of the total number of directors.
No Stockholder Action by Written Consent. Our certificate of incorporation
does not permit our stockholders to act by written consent. As a result, any
action to be effected by our stockholders must be effected at a duly called
annual or special meeting of the stockholders.
Super-Majority Stockholder Vote required for Certain Actions. The Delaware
General Corporation Law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless the corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least two-thirds of our outstanding voting stock to amend or
repeal any of the provisions discussed in this section of this prospectus
entitled "Delaware Law and Certain Charter and By-law Provisions" or to reduce
the number of authorized shares of common stock or preferred stock. This two-
thirds stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. A two-thirds vote is also required for any
amendment to, or repeal of, our bylaws by the stockholders. Our bylaws may be
amended or repealed by a simple majority vote of the board of directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be American
Stock Transfer & Trust Company.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our
common stock, and no prediction can be made as to the effect, if any, that
sales of shares of common stock or the availability of shares of common stock
for sale will have on the market price of the common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of our common stock and could impair our future ability
to raise capital through the sale of our equity securities.
Summary of Shares Eligible for Future Sale. Upon the completion of this
offering, we will have a total of shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of options or warrants outstanding at April 14, 2000. Of the outstanding
shares, the shares sold in this offering will be freely tradable, except
that any shares purchased by our "affiliates" (as that term is defined in Rule
144 promulgated under the Securities Act) may be sold only in compliance with
the limitations described below. The remaining shares of common stock will be
deemed "restricted securities" as defined under Rule 144 and may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. Our directors,
executive officers and substantially all of our other stockholders, holding
total shares, have agreed that they will not sell, directly or indirectly, any
shares of common stock without the prior written consent of Chase Securities
Inc. for a period of 180 days from the date of this prospectus. However, Chase
Securities Inc. may, in its sole discretion, and at any time or from time to
time, without notice, release all or any portion of the securities subject to
the lock-up agreements.
The shares of common stock outstanding upon the completion of this
offering will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
pproximateA
Number of
Shares Description
- ----------- -----------
<S> <C>
After the date of this prospectus, freely tradable shares sold in this
offering, and shares freely saleable under Rule 144(k) that are not subject to
the 180-day lock-up.
Upon the filing of a registration statement to register shares of common stock
issued upon the exercise of stock options, shares that are not subject to the
lock-up.
After 180 days from the date of this prospectus, the 180-day lock-up is
released and these shares are saleable under Rule 144 (subject, in some cases,
to volume limitations), Rule 144(k), or pursuant to a registration statement to
register shares of common stock issued upon the exercise of stock options.
At various times after 180 days from the date of this prospectus, restricted
shares that will become saleable under Rule 144 upon being held for one year.
</TABLE>
Rule 144. In general, under Rule 144, as currently in effect, commencing
90 days after the date of this prospectus, a person, including an affiliate of
ours, who has beneficially owned shares for at least one year is entitled to
sell, within any three-month period , a number of shares that does not exceed
the greater of (a) 1% of the then outstanding shares of common stock
(approximately shares immediately after this offering) or (b) the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of such sale is filed. In addition, a person
who is not deemed to have been an affiliate of ours at any time during the 90
days preceding the sale and who has beneficially owned the shares proposed to
be sold for at least two years would be entitled to sell those shares freely
under Rule 144(k) without regard to the volume limitation described above.
53
<PAGE>
Registration of Option Shares. As of April 14, 2000, options to purchase a
total of 4,699,315 shares of common stock were outstanding, of which 1,343,734
were exercisable. Upon the completion of this offering, we intend to file a
registration statement to register the 9,798,633 shares of common stock
reserved for issuance under our stock plans. That registration statement will
become effective immediately upon filing. Accordingly, shares covered by that
registration statement, other than shares held by our affiliates, will be
available for immediate resale in the open market. Holders of options to
purchase shares of common stock have entered into 180-day lock-up
agreements.
Issuance of Additional Shares. We have agreed not to sell or otherwise
dispose of any shares of common stock during the 180-day period following the
date of the prospectus, except we may issue, and grant options to purchase,
shares of common stock under our stock plans.
54
<PAGE>
UNDERWRITING
Chase Securities Inc., J.P. Morgan Securities Inc., and U.S. Bancorp Piper
Jaffray Inc. are the representatives of the underwriters. Subject to the terms
and conditions of the underwriting agreement, the underwriters named below,
through their representatives, have severally agreed to purchase from us the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Chase Securities Inc. ..........................................
J.P. Morgan Securities Inc. ....................................
U.S. Bancorp Piper Jaffray Inc. ................................
----
Total..........................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the common shares
offered by us if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
Underwriting Discounts and Commissions
<TABLE>
<CAPTION>
Without With
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share .................................. $ $
Total....................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may re-
allow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the underwriters. The representatives have
advised us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered in this offering.
We have granted to the underwriters a 30-day option to purchase up to
additional shares of common stock at the initial public offering price, less
the underwriting discount set forth 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
thereof which the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
hereby. We will be obligated, pursuant to this option, to sell shares to the
underwriters to the extent the options are exercised. The underwriters may
exercise these options only to cover over-allotments made in connection with
the sale of shares of common stock offered by us.
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
55
<PAGE>
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 these liabilities.
Substantially all of our security holders and all of our executive
officers and directors have agreed or will agree prior to completion of this
offering, that they will not, without the prior written consent of Chase
Securities Inc., offer, sell or otherwise dispose of any shares of capital
stock, options or warrants to acquire shares of capital stock or securities
exchangeable for or convertible into shares of capital stock owned by them for
a period of 180 days following the date of this prospectus. We have agreed that
we will not, without the prior written consent of Chase Securities Inc., offer,
sell or otherwise dispose of any shares of capital stock, options or warrants
to acquire shares of capital stock or securities exchangeable for or
convertible into shares of capital stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options and warrants granted prior to the date hereof. We may also grant
additional options or other awards under our stock option plans. Without the
prior written consent of Chase Securities Inc., any additional options granted
shall not be exercisable during this 180-day period.
The representatives of the underwriters participating in this offering may
over-allot or effect transactions which stabilize, maintain or otherwise affect
the market price of the common shares at levels above those which might
otherwise prevail in the open market, including by entering stabilizing bids,
effecting 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 shares of 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 common shares sold by
the syndicate member are 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.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price for the common shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
In addition, at our request, the underwriters have reserved up to
shares of common stock for sale at the initial public offering price to our
directors, business associates and related persons. The number of common shares
available for sale to the general public will be reduced if such persons
purchase the reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.
In connection with this offering, certain underwriters and selling group
members, if any, who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common shares on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
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.
We have applied for listing of our shares of common stock on the Nasdaq
National Market under the symbol SPWX.
56
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for SpeechWorks by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
Boston, Massachusetts. Attorneys of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. collectively own 12,784 shares of our common stock and Mintz Levin
Investments LLC owns 19,175 shares of our common stock. Certain matters will be
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered by this prospectus.
This prospectus, which is part of the registration statement, omits certain
information, exhibits, schedules and undertakings set forth in the registration
statement. For further information pertaining to us and our common stock,
reference is made to such registration statement and the exhibits and schedules
to the registration statement. Statements contained in this prospectus as to
the contents or provisions of any documents referred to in this prospectus are
not necessarily complete, and in each instance where a copy of the document has
been filed as an exhibit to the registration statement, reference is made to
the exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC
at prescribed rates from the Public Reference Room of the SEC at such address,
and at the SEC's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, registration statements and
certain other filings made with the SEC electronically are publicly available
through the SEC's web site at www.sec.gov. The registration statement,
including all exhibits and amendments to the registration statement, has been
filed electronically with the SEC.
57
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheet as of December 31, 1998 and 1999............... F-3
Consolidated Statement of Operations for the years ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated Statement of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the years ended December 31,
1997, 1998 and 1999...................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1998 and 1999...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SpeechWorks International, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in redeemable
convertible preferred stock and stockholders' equity (deficit), and of cash
flows present fairly, in all material respects, the financial position of
SpeechWorks International, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 4, 2000, except for
Note 13 for which the date
is April 14, 2000
F-2
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, 1999
------------------ (Note 2)
1998 1999 (unaudited)
-------- -------- -----------------
(in thousands, except share data)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 4,486 $ 11,474 $ 11,474
Short-term investments................ 200 -- --
Accounts receivable, net of allowance
for doubtful accounts of $75 and $60
at December 31, 1998 and 1999,
respectively......................... 3,002 4,097 4,097
Prepaid expenses and other current
assets............................... 177 463 463
Restricted investments................ -- 573 573
-------- -------- --------
Total current assets................. 7,865 16,607 16,607
Fixed assets, net...................... 1,093 3,408 3,408
Other assets........................... 204 551 551
-------- -------- --------
Total assets......................... $ 9,162 $ 20,566 $ 20,566
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 1,402 $ 845 $ 845
Accrued expenses...................... 810 2,092 2,092
Deferred revenue...................... 244 854 854
Current portion of capital lease
obligations.......................... 253 183 183
Current portion of notes payable...... -- 500 500
-------- -------- --------
Total current liabilities............ 2,709 4,474 4,474
Capital lease obligations, net of
current portion....................... 161 -- --
Notes payable, net of current portion.. -- 833 833
-------- -------- --------
Total liabilities.................... 2,870 5,307 5,307
-------- -------- --------
Commitments (Note 8)
Redeemable convertible preferred stock:
Redeemable convertible preferred
stock, $0.001 par value; 7,049,500,
9,375,592 and 0 shares authorized;
6,569,710, 9,246,989 and 0 shares
issued and outstanding, at December
31, 1998, 1999 and pro forma December
31, 1999 (unaudited), respectively... 17,749 43,507 --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value;
16,000,000, 22,000,000 and
100,000,000 shares authorized;
4,784,280, 5,584,775 and 19,455,252
shares issued and outstanding, at
December 31, 1998, 1999 and pro forma
December 31, 1999 (unaudited),
respectively......................... 5 6 19
Additional paid-in capital............. 486 5,978 49,472
Deferred stock compensation............ -- (4,905) (4,905)
Notes receivable from stockholders..... (12) -- --
Accumulated deficit.................... (11,936) (29,327) (29,327)
-------- -------- --------
Total stockholders' equity
(deficit)........................... (11,457) (28,248) 15,259
-------- -------- --------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit)...... $ 9,162 $ 20,566 $ 20,566
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands, except
per share data)
<S> <C> <C> <C>
Revenue:
Product licenses................................. $ 949 $ 1,567 $ 3,680
Professional services............................ 982 2,873 5,944
Other revenue.................................... 111 1,410 4,387
------- ------- --------
Total revenue................................... 2,042 5,850 14,011
------- ------- --------
Cost of revenue:
Cost of product licenses......................... 54 52 153
Cost of professional services (excluding in 1999
stock compensation of $139)..................... 678 1,982 4,991
Cost of other revenue............................ 90 890 2,987
------- ------- --------
Total cost of revenue........................... 822 2,924 8,131
------- ------- --------
Gross profit...................................... 1,220 2,926 5,880
------- ------- --------
Operating expenses:
Selling and marketing (excluding in 1999 stock
compensation of $225)........................... 1,074 3,867 9,254
Research and development (excluding in 1999 stock
compensation of $97)............................ 1,969 1,881 5,164
General and administrative (excluding in 1999
stock compensation of $47)...................... 1,057 3,157 6,693
Stock compensation............................... -- -- 508
------- ------- --------
Total operating expenses........................ 4,100 8,905 21,619
------- ------- --------
Loss from operations............................ (2,880) (5,979) (15,739)
Interest income................................... 349 299 549
Interest expense.................................. (49) (72) (113)
Other income (expense), net....................... 60 (8) (160)
------- ------- --------
Net loss.......................................... (2,520) (5,760) (15,463)
Accretion on redeemable convertible preferred
stock............................................ (533) (789) (1,904)
------- ------- --------
Net loss attributable to common stockholders...... $(3,053) $(6,549) $(17,367)
======= ======= ========
Basic and diluted net loss per common share....... $ (0.83) $ (1.44) $ (3.28)
Shares used in computing basic and diluted net
loss per common share............................ 3,696 4,537 5,298
Pro forma basic and diluted net loss per common
share (unaudited)................................ $ (0.87)
Shares used in computing pro forma basic and
diluted net loss per common share (unaudited).... 17,686
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series D Series C Series B Series A
Redeemable Redeemable Redeemable Redeemable
Convertible Convertible Convertible Convertible
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
-------------- ------------- ------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ -- $ -- -- $ -- 1,533 $4,274 2,475 $2,667
Issuance of
preferred stock,
including
related issuance
costs of $15.... 909 2,500
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 384 149
Net loss........
----- ------- ----- ------ ----- ------ ----- ------
Balance at
December 31,
1997............ -- -- -- -- 2,442 7,158 2,475 2,816
Issuance of
preferred
stock........... 33 100
Issuance of
preferred stock,
including
related issuance
costs of $85.... 1,620 6,886
Exercise of
employee stock
options.........
Repayment of
notes receivable
from
stockholders....
Issuance of
common stock in
exchange for
services........
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 234 407 148
Net loss........
----- ------- ----- ------ ----- ------ ----- ------
Balance at
December 31,
1998............ -- -- 1,620 7,120 2,475 7,665 2,475 2,964
Issuance of
preferred
stock........... 6 25
Issuance of
preferred stock,
including
related issuance
costs of $24.... 2,671 23,829
Exercise of
employee stock
options.........
Repayment of
notes receivable
from
stockholders....
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 932 415 408 149
Deferred
compensation
related to
employee stock
option grants...
Amortization of
deferred stock
compensation....
Net loss........
----- ------- ----- ------ ----- ------ ----- ------
Balance at
December 31,
1999............ 2,671 $24,761 1,626 $7,560 2,475 $8,073 2,475 $3,113
===== ======= ===== ====== ===== ====== ===== ======
<CAPTION>
Total
Redeemable Common Stock Notes Total
Convertible ------------ Additional Deferred Receivable Stockholders'
Preferred Par Paid-In Stock From Accumulated Equity
Stock Shares Value Capital Compensation Stockholders Deficit (Deficit)
----------- ------ ----- ---------- ------------ ------------ ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ $ 6,941 3,696 $ 4 $ 350 $ -- $ -- $ (2,234) $ (1,880)
Issuance of
preferred stock,
including
related issuance
costs of $15.... 2,500 (15) (15)
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 533 (533) (533)
Net loss........ (2,520) (2,520)
----------- ------ ----- ---------- ------------ ------------ ----------- -------------
Balance at
December 31,
1997............ 9,974 3,696 4 350 -- -- (5,302) (4,948)
Issuance of
preferred
stock........... 100 --
Issuance of
preferred stock,
including
related issuance
costs of $85.... 6,886 (85) (85)
Exercise of
employee stock
options......... 987 1 69 (28) 42
Repayment of
notes receivable
from
stockholders.... 16 16
Issuance of
common stock in
exchange for
services........ 101 -- 67 67
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 789 (789) (789)
Net loss........ (5,760) (5,760)
----------- ------ ----- ---------- ------------ ------------ ----------- -------------
Balance at
December 31,
1998............ 17,749 4,784 5 486 -- (12) (11,936) (11,457)
Issuance of
preferred
stock........... 25 --
Issuance of
preferred stock,
including
related issuance
costs of $24.... 23,829 (24) (24)
Exercise of
employee stock
options......... 801 1 79 80
Repayment of
notes receivable
from
stockholders.... 12 12
Accrual of
cumulative
dividends on
redeemable
convertible
preferred
stock........... 1,904 (1,904) (1,904)
Deferred
compensation
related to
employee stock
option grants... 5,413 (5,413) --
Amortization of
deferred stock
compensation.... 508 508
Net loss........ (15,463) (15,463)
----------- ------ ----- ---------- ------------ ------------ ----------- -------------
Balance at
December 31,
1999............ $43,507 5,585 $ 6 $5,978 $(4,905) $ -- $(29,327) $(28,248)
=========== ====== ===== ========== ============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(2,520) $(5,760) $(15,463)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 243 466 785
Stock compensation expense........................ -- -- 508
Common stock issued in exchange for services...... -- 67 --
Amortization of interest income................... (24) -- --
Provision for doubtful accounts................... -- 75 (15)
Gain on sale/leaseback transaction................ (43) -- --
Translation (gains) losses, net................... -- -- 4
Changes in operating assets and liabilities:
Accounts receivable.............................. (279) (2,641) (1,080)
Prepaid expenses and other current assets........ 6 (141) (286)
Other assets..................................... (35) (161) (347)
Accounts payable................................. 68 1,137 (557)
Accrued expenses................................. 209 499 1,282
Deferred revenue................................. 35 44 610
------- ------- --------
Net cash used in operating activities........... (2,340) (6,415) (14,559)
------- ------- --------
Cash flows from investing activities:
Purchases of fixed assets......................... (479) (926) (3,100)
Purchases of restricted investments............... -- -- (573)
Purchases of short-term investments............... (6,549) (1,378) --
Maturities of short-term investments.............. 5,928 6,042 200
------- ------- --------
Net cash (used in) provided by investing
activities..................................... (1,100) 3,738 (3,473)
------- ------- --------
Cash flows from financing activities:
Proceeds from sale/leaseback transactions......... 500 -- --
Principal payments on capital lease obligations... (126) (222) (231)
Proceeds from notes payable....................... -- -- 1,500
Principal payments on notes payable............... -- -- (167)
Proceeds from issuance of preferred stock, net of
issuance costs................................... 2,485 6,901 23,830
Proceeds from issuance of common stock............ -- 42 80
Repayment of notes receivable from stockholders... -- 16 12
------- ------- --------
Net cash provided by financing activities....... 2,859 6,737 25,024
------- ------- --------
Effects of changes in exchange rates on cash...... -- -- (4)
------- ------- --------
Net increase in cash and cash equivalents....... (581) 4,060 6,988
Cash and cash equivalents, beginning of year....... 1,007 426 4,486
------- ------- --------
Cash and cash equivalents, end of year............. $ 426 $ 4,486 $ 11,474
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 41 $ 72 $ 113
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, the Company sold fixed assets with a net book value of $458,000 to
a leasing company for cash proceeds of $500,000 and subsequently reacquired
those assets under a capital lease.
During 1998, the Company issued 280,000 shares of its common stock to employees
upon the exercise of stock options in exchange for notes receivable totaling
$28,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business
SpeechWorks International, Inc. (the "Company") was incorporated in May
1994 and began operations in September 1994 under the name Applied Language
Technologies, Inc. In October 1998, the Company's stockholders voted to change
its name to SpeechWorks International, Inc. The Company is engaged in the
development and marketing of speech recognition software and interactive
systems using speech understanding software, and related products and services.
Principal markets include both domestic and international companies. The
Company operates in one reportable segment.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements reflect the operations of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are classified as available for sale. The Company invests excess
cash primarily in U.S. Treasury securities and money market funds of major
financial institutions. These investments are subject to minimal credit and
market risk.
The Company's cash equivalents at December 31, 1997 include $414,400 in
money market funds. At December 31, 1998, the Company's cash equivalents
included $935,000 and $3,469,000 in money market funds and U.S. Treasury
securities, respectively. At December 31, 1999, the Company's cash equivalents
included $6,444,000 and $3,061,000 in money market funds and U.S. Treasury
securities, respectively.
Short-Term Investments
The Company's short-term investments at December 31, 1997 and 1998 were
comprised of U.S. Treasury securities which matured within one year of the
respective balance sheet date. These securities were classified as available-
for-sale and were stated at cost plus accrued interest, which approximated fair
market value. Gross unrealized gains and losses on such securities as of
December 31, 1997 and 1998, and realized gains and losses on sales of such
securities for the years ended December 31, 1997, 1998 and 1999 were not
significant.
Concentration of Credit Risk and Major Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily comprised of trade accounts
receivable. Management believes its credit policies reflect normal industry
terms and business risk. The Company does not anticipate nonperformance by the
counterparties and, accordingly, does not require collateral.
At December 31, 1997, 30%, 25%, 11%, 11% and 10% of the Company's accounts
receivable were due from five customers. At December 31, 1998, 59% and 14% of
the Company's accounts receivable were due from two customers. At December 31,
1999, 21%, 17%, 11% and 10% of the Company's accounts receivable were due from
four customers.
F-7
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue from three customers represented 27%, 26% and 15% of total revenue
during the year ended December 31, 1997. Revenue from two customers represented
32% and 13% of total revenue during the year ended December 31, 1998. Revenue
from two customers represented 34% and 11% of total revenue during the year
ended December 31, 1999.
Fair Value of Financial Instruments
Financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable and accrued expenses are carried in the
consolidated financial statements at amounts that approximated their fair value
as of December 31, 1997, 1998 and 1999.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Fixed assets held under capital
leases are stated at the lower of the fair market value of the related asset or
the present value of the minimum lease payments at the inception of the lease
and are amortized on a straight-line basis over either the life of the related
asset or the term of the lease.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of
Position 98-9. Revenue from the sale of licenses to use the Company's software
products is recognized upon delivery, provided that no significant obligations
remain, evidence of the arrangement exists, the fees are fixed or determinable,
and collectibility is probable. Revenue from royalties on sales of the
Company's products by resellers to third parties is recognized upon delivery to
the third party when such information is available, or when notified by the
reseller that such royalties are due as a result of a sale, provided that
collectibility is probable.
Professional services revenue primarily consists of fees for custom
development services, consulting services, and support and maintenance
services. Revenue relating to the development of custom software applications
and nonrecurring platform development work for third parties (including fees
for licenses to use the Company's software products in the related development
effort and thereafter in conjunction with the delivered custom application), as
well as revenue relating to consulting services, provided on a fixed-fee basis
are recognized using the percentage-of-completion method of accounting,
provided that collection of the related receivable is probable. In applying
this method, the Company measures each project's percentage-of-completion by
the ratio of labor hours incurred to date to estimated total labor hours to
complete the project. This method is used because management considers expended
labor hours to be the best available measure of progress on these projects.
Adjustments to contract estimates are made in the periods in which the facts
requiring such revisions become known. When the estimate indicates a loss, such
loss is provided for in its entirety. When services are provided on a time and
materials basis, revenue is recognized as the services are rendered. Revenue
related to maintenance and support arrangements is recognized ratably over the
contract period.
Other revenue primarily consists of hardware sales and other resold
services. Resold hardware revenue is recognized upon delivery provided that
collectibility is probable and no significant post-delivery obligations remain
relating to the sale.
F-8
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development and Capitalized Software Development Costs
Costs incurred in the research and development of new software products
and enhancements to existing products, other than certain software development
costs that qualify for capitalization, are expensed as incurred. Software
development costs incurred subsequent to the establishment of technological
feasibility, but prior to general release of the product, are capitalized and
amortized to cost of software license revenues over the estimated useful life
of the related products. As of December 31, 1998 and 1999, costs eligible for
capitalization were not material.
Accounting for Stock Compensation
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation expense is recorded for options
issued to employees in fixed amounts to the extent that the fixed exercise
prices are less than the fair market value of the Company's common stock at the
date of grant. The Company follows the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" (Note 7). All stock-based awards to nonemployees are accounted
for at their fair value in accordance with SFAS No. 123 and related
interpretations.
Advertising Expense
The Company expenses advertising costs as incurred. During the years ended
December 31, 1997, 1998 and 1999, advertising expense totaled $48,000, $407,000
and $1,334,000, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance against deferred tax assets is recorded if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company does
not provide for U.S. income taxes on the undistributed earnings of its foreign
subsidiaries, which the Company considers to be permanent investments.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the reporting of
comprehensive income (loss) in addition to net income (loss). For the years
ended December 31, 1997, 1998 and 1999, the Company had no other comprehensive
income items which were material to its financial position or results of
operations. Accordingly, the adoption of SFAS No. 130 had no impact on the
Company's consolidated financial statements.
Foreign Currency Translation
The Company's functional currency is the U.S. dollar for all of its
subsidiaries. Substantially all of the Company's revenues are invoiced and
collected in U.S. dollars. Assets and liabilities of foreign subsidiaries which
are denominated in foreign currencies are remeasured into U.S. dollars at rates
of exchange in effect at the end of the year. Revenue and expense amounts are
remeasured using an average of exchange rates in effect during the period. Net
realized and unrealized gains and losses resulting from foreign currency
remeasurement are included in the consolidated statement of operations as other
income or expense.
F-9
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Loss Per Common Share--Historical
The Company computes net loss per common share in accordance with SFAS 128
"Earnings per Share." Under the provisions of SFAS 128, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding. There
is no difference between basic and diluted net loss per share since potential
common shares from the conversion of redeemable convertible preferred stock and
the exercise of options and warrants were antidilutive for all periods
presented. The calculation of diluted net loss per common share for the year
ended December 31, 1997 does not include 3,296,356, 777,237 and 7,375,500
potential shares of common stock equivalents related to common stock options,
common stock warrants and redeemable convertible preferred stock, respectively.
The calculation of diluted net loss per common share for the year ended
December 31, 1998 does not include 3,396,882, 807,237 and 9,854,565 potential
shares of common stock equivalents related to common stock options, common
stock warrants and redeemable convertible preferred stock, respectively. The
calculation of diluted net loss per common share for the year ended December
31, 1999 does not include 4,836,202, 807,237 and 13,870,477 potential shares of
common stock equivalents, related to common stock options, common stock
warrants and redeemable convertible preferred stock, respectively.
Unaudited Pro Forma Net Loss Per Common Share
The unaudited pro forma net loss per common share for the year ended
December 31, 1999 is calculated assuming the automatic conversion of all
preferred stock outstanding had occurred as of the beginning of the year or as
of the date of issuance of the preferred stock, if later. Therefore, accretion
on the redeemable convertible preferred stock is excluded from the calculation
of pro forma net loss per common share. The redeemable convertible preferred
stock automatically converts into one and one half shares of common stock upon
the completion of the Company's initial public offering (Note 5).
Unaudited Pro Forma Balance Sheet
Under the terms of the Company's redeemable convertible preferred stock
(Note 5), all shares of such preferred stock will automatically convert into
common stock upon completion of the Company's initial public offering of common
stock. The unaudited pro forma balance sheet reflects the conversion of the
outstanding shares of redeemable convertible preferred stock into 13,870,477
shares of common stock, as if the conversion had occurred on December 31, 1999.
In addition, the unaudited pro forma balance sheet reflects the filing of an
amended certificate of incorporation in connection with the effectiveness of
the registration statement for the Company's initial public offering, wherein
the total authorized shares of common stock will be increased to 100,000,000.
The amended certificate of incorporation also will authorize 10,000,000 shares
of undesignated preferred stock.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Components particularly subject to estimation include
estimates of costs to complete custom software development arrangements and
fair values of the Company's equity instruments. Actual results could differ
from those estimates and would impact future results of operations and cash
flows.
F-10
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recent Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the undelivered
elements is recognized as revenue related to the delivered elements. SOP 98-9
is effective for transactions entered into during years beginning after March
15, 1999 (year 2000 for the Company), however, early adoption is permitted. The
Company has adopted SOP 98-9.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133, as recently amended by SFAS
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. Because the Company does not currently hold any
derivative instruments and does not currently engage in hedging activities, it
expects the adoption of SFAS No. 133 will not have a material impact on its
financial position or operating results.
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful December 31,
life -------------
(years) 1998 1999
--------- ------ ------
(in
thousands)
<S> <C> <C> <C>
Computer and office equipment.......................... 3 $ 606 $3,157
Computer and office equipment under capital leases..... 3 765 765
Furniture and fixtures................................. 5 410 959
Furniture and fixtures under capital leases............ 5 35 35
------ ------
1,816 4,916
Less--accumulated depreciation and amortization........ 723 1,508
------ ------
$1,093 $3,408
====== ======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 was $243,000, $466,000 and $785,000, respectively, of which
$156,000 related to fixed assets under capital leases in 1997, and $262,000
related to fixed assets under capital leases for 1998 and 1999. Assets under
capital leases collateralize the related lease obligations.
4. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
(in
thousands)
<S> <C> <C>
Accrued compensation.............................................. $ 499 $1,104
Accrued other..................................................... 311 988
------ ------
$ 810 $2,092
====== ======
</TABLE>
F-11
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock, $0.001 par value, consists of the
following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Series D; 0 and 2,800,000 shares authorized; 0 and
2,671,397 shares issued and outstanding at December 31,
1998 and 1999, respectively............................ $ -- $24,761
Series C; 1,626,092 shares authorized; 1,620,210 and
1,626,092 shares issued and outstanding at December 31,
1998 and 1999, respectively............................ 7,120 7,560
Series B; 2,474,500 shares authorized, issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 7,665 8,073
Series A; 2,475,000 shares authorized, issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 2,964 3,113
------- -------
$17,749 $43,507
======= =======
</TABLE>
The Series D redeemable convertible preferred stock (the "'Series D
preferred stock"), the Series C redeemable convertible preferred stock (the
"Series C preferred stock"), the Series B redeemable convertible preferred
stock (the "Series B preferred stock") and the Series A redeemable convertible
preferred stock (the "Series A preferred stock") are hereinafter referred to
collectively as the "redeemable preferred stock." At December 31, 1999, the
redeemable preferred stock had the following characteristics:
Conversion Rights
Each share of redeemable preferred stock is convertible, at the option of
the holder, into one and one-half shares of common stock of the Company,
subject to certain anti-dilution adjustments. The redeemable preferred stock
will automatically convert into common stock upon the closing of a qualified
initial public offering under which net proceeds equal or exceed $30,000,000.
Additionally, the Series D preferred stock carries a provision in which the
stockholders' conversion rate can be adjusted. If the Company receives proceeds
from an initial public offering or acquisition below a pre-determined amount,
the Series D will convert at a rate higher than one and one-half shares of
common stock for one share of Series D, subject to a formula.
Dividend Rights
The holders of the redeemable preferred stock are entitled to receive
dividends at a rate of 6% per annum in preference to the common stockholders.
These dividends are cumulative and accrue on a daily basis from the date of
issuance whether or not declared. Cumulative unpaid dividends on the redeemable
preferred stock of $932,000, $649,000, $1,257,000 and $638,000 have been
charged to accumulated deficit and are included in the carrying value of the
Series D, Series C, Series B and Series A preferred stock, respectively, at
December 31, 1999.
Voting Rights
The holders of redeemable preferred stock generally vote together with the
holders of common stock on all matters and are entitled to one vote for each
share of common stock into which the redeemable preferred stock is convertible.
F-12
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation Rights
In the event of liquidation, dissolution, merger, sale or winding up of
the Company, the holders of the Series D preferred stock are entitled to
receive, prior to and in preference to any distribution to the holders of the
Series C preferred stock, Series B preferred stock, Series A preferred stock
and common stock, $8.92 per share (subject to certain anti-dilution
adjustments) plus any accrued but unpaid dividends.
Upon the payment of all required liquidating amounts to the Series D
preferred stockholders, the holders of Series C preferred stock are entitled to
receive, prior to and in preference to any distribution to the holders of the
Series B preferred stock, Series A preferred stock and common stock, $4.25 per
share (subject to certain anti-dilution adjustments) plus any accrued but
unpaid dividends.
Upon the payment of all required liquidating amounts to the Series C
preferred stockholders, the holders of the Series B preferred stock are
entitled to receive, prior to and in preference to the holders of the Series A
preferred stock and common stock, $2.75 per share (subject to certain anti-
dilution adjustments) plus any accrued but unpaid dividends.
Upon the payment of all required liquidating amounts to the Series B
preferred stockholders, the holders of the Series A preferred stock are
entitled to receive, prior to and in preference to the holders of common stock,
$1.00 per share (subject to certain anti-dilution adjustments) plus any accrued
but unpaid dividends. Any net assets remaining after the payment of
preferential amounts to the holders of the redeemable preferred stock shall be
shared ratably by the Series A preferred stockholders and common stockholders.
Redemption Rights
At any time on or after March 31, 2002, subject to their majority vote as
a single class, holders of outstanding shares of each series of redeemable
preferred stock shall have the right to cause the Company to redeem such shares
in one-third increments over a three-year period at the respective original
issue price per share plus any accrued but unpaid dividends.
6. Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are not
entitled to receive dividends unless declared by the Board of Directors. Any
such dividends would be subject to the preferential dividend rights of the
preferred stockholders.
Stock Split
In January 2000, the Company effected a three-for-two stock split of all
common stock. In accordance with the terms of the redeemable preferred stock
agreements, conversion rights to all series of redeemable preferred stock were
increased. After the stock split, each share of redeemable preferred stock is
convertible into one and one half shares of common stock. All common stock
share amounts in these consolidated financial statements have been restated to
reflect this stock split.
F-13
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Right of First Refusal
At December 31, 1999, the Company's outstanding common stock is subject to
certain restrictions as to sale or transfer. The Company and its stockholders
are entitled to a right of first refusal to purchase shares offered for sale at
the offer price.
Warrants
In connection with a leasing agreement entered in 1996, the Company issued
a warrant to purchase 36,000 shares of its common stock at a price of $0.67 per
share. The warrant is subject to certain anti-dilution adjustments and may be
exercised, in whole or in part, on or before October 2002. The value ascribed
to this warrant upon its issuance, utilizing the Black-Scholes valuation model,
was not significant.
In January 1997, the Company issued to a customer a warrant to purchase
741,237 shares of the Company's common stock at a price of $2.05 per share,
subject to certain anti-dilution adjustments. This warrant may be exercised at
the option of the holder, in whole or in part, at any time on or before January
2002, subject to a maximum of three exercises. However, the Company retains the
right to call this warrant in connection with an initial public offering,
provided 45 days advance notice is given to the warrant holder, at a redemption
price equal to 500% of the unexercised warrant shares multiplied by the
exercise price upon the closing of the initial public offering. At any time,
the Company may, at its option, except as noted above, redeem the warrant at a
redemption price equal to 200% of the market value of this warrant. The value
ascribed to this warrant upon its issuance, utilizing the Black-Scholes
valuation model, was not significant.
In November 1998, in connection with the acquisition of the name
"SpeechWorks," the Company issued a warrant to an unrelated third party to
purchase 30,000 shares of the Company's common stock at a price of $2.83 per
share, subject to certain anti-dilution adjustments. This warrant may be
exercised at the option of the holder, in whole or in part, at any time on or
before November 2003. The value ascribed to this warrant upon its issuance,
utilizing the Black-Scholes valuation model, was not significant.
Reserved Shares
At December 31, 1999, the Company had 19,834,932 shares of its common
stock reserved for issuance upon exercise of options issued or issuable under
the Company's stock option plans, upon conversion of authorized redeemable
convertible preferred stock and upon exercise of common stock warrants.
7. Stock Option Plans
During August 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the grant of incentive stock options
("ISOs") as well as non-qualified options to employees, directors and other
individuals providing services to the Company. The Board of Directors
determines the term of each option, exercise price, number of shares for which
each option is granted, whether restrictions will be imposed on the shares
subject to options and the rate at which each option is exercisable. The
exercise price for ISOs cannot be less than the fair market value per share of
the underlying common stock on the date granted (110% of fair market value for
ISOs granted to holders of more than 10% of the voting stock of the Company).
The term of ISOs cannot exceed ten years (five years for ISOs granted to
holders of more than 10% of the voting stock of the Company). A maximum of
5,157,218 shares of common stock have been reserved for issuance upon the
exercise of options granted under the 1995 Plan.
F-14
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of options granted under the Company's stock
option plan as of December 31, 1997, 1998 and 1999 and changes during the years
then ended is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Number of average Number of average Number of average
shares exercise shares exercise shares exercise
(in thousands) price (in thousands) price (in thousands) price
-------------- --------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,292 $0.07 3,296 $0.15 3,397 $0.35
Granted............... 1,005 0.35 1,150 0.69 2,795 2.51
Exercised............. -- -- (987) 0.07 (801) 0.10
Canceled.............. (1) 0.07 (62) 0.19 (555) 1.47
----- ----- -----
Outstanding at end of
year................... 3,296 $0.15 3,397 $0.36 4,836 $1.51
===== ===== =====
Options exercisable at
end of year............ 1,406 $0.10 1,265 $0.17 1,423 $0.51
Weighted average fair
value of options
granted during the
year................... $0.11 $0.21 $0.65
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------- -----------------------
Weighted average Weighted Weighted
Number remaining average Number average
outstanding contractual life exercise exercisable exercise
Range of exercise prices (in thousands) (in years) price (in thousands) price
- ------------------------ -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.067--0.33 1,369 6.73 $0.22 970 $0.19
0.43--0.83 1,407 8.68 0.73 381 0.65
1.50--2.17 1,160 9.61 2.01 2 2.17
4.00--4.00 630 9.80 4.00 10 4.00
4.13--4.13 270 9.25 4.13 60 4.13
----- -----
$0.067--$4.13 4,836 8.53 $1.51 1,423 $0.51
===== =====
</TABLE>
Under APB Opinion No. 25, no compensation expense was recognized for the
years ended December 31, 1997 and 1998, and compensation expense of $508,000
was recognized for option grants made during the year ended December 31, 1999.
Had compensation expense for these awards been determined based on the fair
value at the date of grant consistent with the method prescribed by SFAS No.
123, the Company's net loss attributable to common stockholders and net loss
per common share for the years ended December 31, 1997, 1998 and 1999 would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
Net Net Net
Net loss loss Net loss loss Net loss loss
attributable per attributable per attributable per
to common common to common common to common common
stockholders share stockholders share stockholders share
------------ ------ ------------ ------ ------------ ------
(in thousands, excpet per share data)
<S> <C> <C> <C> <C> <C> <C>
As reported..... $(3,053) $(0.83) $(6,549) $(1.44) $ (17,367) $(3.28)
Pro forma....... (3,089) (0.84) (6,664) (1.47) (17,719) (3.34)
</TABLE>
F-15
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For this purpose, the fair value of options at the date of grant was
estimated using the minimum value method with the following weighted-average
assumptions for 1997, 1998 and 1999: risk-free interest rates of 4.2% to 5.6%,
5.7% to 6.2% and 4.25% to 6.0%, respectively; no dividend yields or volatility
factors; and weighted-average expected life of the options of 5 years, 5 years
and 7.53 years, respectively. However, because the determination of the fair
value of all options granted after the Company becomes a publicly-traded entity
will include an expected volatility factor, because most options vest over
periods of up to four years and because additional option grants are expected
to be made subsequent to December 31, 1999, the pro forma effects of applying
the fair value method may be materially different in future years.
8. Commitments
Operating Leases
The Company leases its primary office space under noncancelable operating
leases which expire through September 30, 2004. Under the terms of the lease
relating to its main facility, the Company is required to maintain an
irrevocable standby letter of credit stating the lessor as the beneficiary. The
letter of credit must be in the amount of $160,000 through December 31, 1999,
with such amount being reduced by $40,000 each succeeding year through the
expiration of the lease.
During 1999, the Company leased additional office space under a
noncancelable operating lease which expires in 2004. Under the terms of the
lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount
of $413,500 through September 2001, with such amount reduced by $100,000 after
September 2001 and an additional $100,000 after September 2002.
During 1999, the Company leased office space in Montreal, Canada under a
noncancelable operating lease which expires in 2010. Under the terms of the
lease, the Company is required to maintain an irrevocable letter of credit
stating the lessor as beneficiary. The letter of credit must be in the amount
of $240,000 through November 2009, with such amount reduced by $24,000 each
succeeding year through expiration of the lease.
Rent expense under operating leases was $170,800, $488,000 and $1,050,000
for the years ended December 31, 1997, 1998 and 1999, respectively.
Capital Leases
In 1996 and 1997, the Company entered into equipment lease agreements with
a leasing company. At December 31, 1998 and 1999, the Company had no remaining
availability under either of these capital lease agreements.
F-16
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease obligations under capital and operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year leases leases
---- ------- ---------
(in thousands)
<S> <C> <C>
2000....................................................... $193 $ 1,605
2001....................................................... -- 1,801
2002....................................................... -- 2,207
2003....................................................... -- 2,267
2004....................................................... -- 1,657
Thereafter................................................. -- 583
---- -------
Total minimum lease payments............................. 193 $10,120
=======
Less--amount representing interest......................... 10
----
Present value of minimum lease payments.................. $183
====
</TABLE>
Royalty Agreement
In August 1994, the Company entered into a license agreement last amended
in July 1996 under which the Company obtained a nonexclusive right to use
certain software technology through the term of the licensor's copyrights on
such technology. In exchange, the Company is required to pay royalties on net
sales of licensed product. These royalties begin at 5% of licensed product
sales and decrease as a percentage of sales based on cumulative life to date
sales. In addition, the Company is required to pay annual minimum royalties
totaling $90,000 and $80,000 for the years ended December 31, 1999 and 2000,
respectively, and $50,000 annually thereafter. These payments can be used to
offset future royalties payable under the agreement. Under the amended
agreement, the Company recorded royalty expense totaling $54,000, $52,000 and
$93,000 during the years ended December 31, 1997, 1998 and 1999, respectively.
Also, in 1999, cost of product license revenue included a $60,000 payment to a
client as a royalty for our resale of an application originally developed for
that client.
9. Notes Payable and Line of Credit
In March 1999, the Company entered into an equipment financing agreement
with a bank. Under this agreement, the Company entered into two lines of credit
under which the Company obtained the right to draw down up to $1,500,000 to
finance purchases of fixed assets. Borrowings under these lines are
collateralized by the fixed assets purchased and bear interest at an annual
rate of prime plus 0.75% (8.50% at December 31, 1999) which is payable monthly.
Borrowings made between March 1999 and May 1999 and between June 1999 and
November 1999 converted into term loans on May 31, 1999 and November 30, 1999,
respectively, at which point monthly payments of principal plus interest are
due over a period of 36 months. During 1999, the Company borrowed the entire
$1,500,000 available under these lines. At December 31, 1999, $1,333,000 was
outstanding under the resulting notes payable; maturing $500,000 in 2000,
$500,000 in 2001 and $333,000 in 2002. Under the financing agreement, the
Company is obligated to comply with certain financial covenants; the Company
was in full compliance with these covenants at December 31, 1999.
Also in March 1999, the Company entered into a $750,000 revolving line of
credit with the same bank. A loan modification in November 1999 increased the
line of credit to $1,300,000. Amounts available for borrowing are based upon
certain eligible accounts receivable. Borrowings under the revolving line of
credit bear interest at the bank's prime rate plus 0.5% (8.50% at December 31,
1999), and all outstanding borrowings are due March 30, 2000. At December 31,
1999, no amounts were outstanding under the revolving line of credit and
$1,060,000 was available for borrowing.
F-17
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. Segment Reporting
The Company operates in a single segment and has no organizational
structure dictated by product lines, geography or customer type.
The following table presents total revenue and long-lived assets,
excluding intangible assets, information by geographic area as of and for the
years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Total Revenue Long-Lived Assets
--------------------- ------------------
1997 1998 1999 1997 1998 1999
------ ------ ------- ---- ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestic............................... $2,042 $5,850 $13,649 $675 $1,268 $3,499
International.......................... -- -- 362 -- 29 460
------ ------ ------- ---- ------ ------
$2,042 $5,850 $14,011 $675 $1,297 $3,959
====== ====== ======= ==== ====== ======
</TABLE>
International revenue is based on the country in which the sale
originates.
11. Income Taxes
The Company is a cash basis taxpayer for federal and state income tax
purposes. As a result of taxable losses generated, the Company has not recorded
any provisions for income taxes for the years ended December 31, 1997, 1998 and
1999. The following is a reconciliation between the amount of the Company's
income taxes utilizing the U.S. federal statutory rate and the Company's actual
provision for income taxes for the years ended December 31, 1997, 1998 and
1999:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998 1999
------ ------- -------
(in thousands)
<S> <C> <C> <C>
At U.S. federal statutory rate....................... $ (857) $(1,958) $(5,328)
State taxes, net of federal effect................... (156) (386) (1,045)
Effect of change in valuation allowance.............. 1,060 2,431 6,416
Other................................................ (47) (87) (43)
------ ------- -------
Provision for income taxes........................... $ -- $ -- $ --
====== ======= =======
</TABLE>
The Company's net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 4,080 $ 9,524
Tax credit carryforwards................................... 250 638
Accrual to cash adjustment................................. -- 364
Other...................................................... 2 30
------- --------
Gross deferred tax assets.................................... 4,332 10,556
Deferred tax asset valuation allowance....................... (4,140) (10,556)
------- --------
Net deferred tax asset..................................... 192 --
Deferred tax liabilities:
Accrual to cash adjustment................................. (192) --
------- --------
Total net deferred tax asset............................. $ -- $ --
======= ========
</TABLE>
F-18
<PAGE>
SPEECHWORKS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1999 and 1998, the Company provided a valuation allowance
for the full amount of its net deferred tax assets since, based on the weight
of available evidence, management cannot conclude that it is more likely than
not that these future benefits will be realized.
At December 31, 1999, the Company has federal and state net operating loss
carryforwards of $23,400,000 and $22,800,000, respectively, available to reduce
future income, which expire beginning in 2011 and 2001, respectively. The
Company also has federal and state research and development credit
carryforwards of $352,000 and $365,000, respectively, available to reduce
future income tax liabilities, which expire beginning in 2013.
The Company also has non-US loss carryforwards and tax credits of
$2,200,000 and $45,000 that begin to expire in 2007 and 2010, respectively.
Under the Internal Revenue Code, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss and tax credit carryforwards which can be utilized in future years to
offset future taxable income and tax liabilities.
12. 401(k) Savings Plan
The Company has established a retirement savings plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers
substantially all employees of the Company who meet minimum age and service
requirements, and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the 401(k) Plan may
be made at the discretion of the Board of Directors. The Company has not made
any contributions to the 401(k) Plan through December 31, 1999.
13. Subsequent Events
On April 11, 2000, the Company sold 2,544,681 shares of its Series E
redeemable convertible preferred stock (the "Series E preferred stock") for net
proceeds of $19,930,000. The rights and preferences of the Series E preferred
stock are substantially the same as those of the Series A preferred stock,
Series B preferred stock and Series C preferred stock as described in Note 5,
except that the Series E preferred stock is convertible into common stock on a
one for one basis. In the event of any liquidation, dissolution or winding-up
of the Company, the holders of Series E preferred stock have a liquidation
preference above the Series A preferred stock, Series B preferred stock, Series
C preferred stock, Series D preferred stock and common stock, and are entitled
to receive $7.86 per share. Because the deemed fair value of the Company's
common stock for financial reporting purposes was greater than the issuance
price of the Series E preferred stock, the Company will record a beneficial
conversion feature of $5.2 million on the Series E preferred stock, which will
be treated as a preferred stock dividend as of the date of issue, thus
increasing the net loss attributable to common stockholders.
On April 14, 2000, the Board of Directors approved the 2000 Employee,
Director and Consultant Stock Option Plan, subject to stockholder approval. A
total of 4,000,000 shares of common stock have been reserved for issuance under
this plan.
F-19
<PAGE>
This page will include SpeechWorks' client and partner logos.
At the bottom of the page, centered text will read:
SpeechWorks
The Market Share Leader in Telephony-Based Automatic Speech Recognition
Frost & Sullivan Report: U.S. Telephony-Based Speech Technology Software
Markets, April 2000
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[SPEECHWORKS LOGO]
Common Stock
----------------
PROSPECTUS
----------------
Chase H&Q
J.P. Morgan & Co.
U.S. Bancorp Piper Jaffray
----------------
, 2000
----------------
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.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common shares or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
<TABLE>
<S> <C>
SEC registration fee................................................ $22,770
Nasdaq National Market listing fee.................................. *
NASD filing fee..................................................... 9,125
Printing and engraving fees......................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Blue sky fees and expenses.......................................... 10,000
Transfer agent and registrar fees................................... *
Director and officer insurance...................................... *
Miscellaneous....................................................... *
-------
Total............................................................... *
</TABLE>
*To be furnished by amendment
All of the above figures, except the SEC registration fee, NASD filing fee
and Nasdaq National Market listing fee, are estimates.
Item 14. Indemnification of Directors and Officers.
Our certificate of incorporation provides that we shall indemnify to the
fullest extent authorized by the Delaware General Corporation Law, each person
who is involved in any litigation or other proceeding because such person is or
was a director or officer of SpeechWorks or is or was serving as an officer or
director of another entity at our request, against all expense, loss or
liability reasonably incurred or suffered in connection therewith. Our
certificate of incorporation provides that the right to indemnification
includes the right to be paid expenses incurred in defending any proceeding in
advance of its final disposition, provided, however, that such advance payment
will only be made upon delivery to us of an undertaking, by or on behalf of the
director or officer, to repay all amounts so advanced if it is ultimately
determined that such director is not entitled to indemnification. If we do not
pay a proper claim for indemnification in full within 60 days after we receive
a written claim for such indemnification, the certificate of incorporation and
our bylaws authorize the claimant to bring an action against us and prescribe
what constitutes a defense to such action.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, (i.e., one brought by or on behalf of the
corporation), indemnification may be provided only for expenses actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit if such person acted in good faith and
in a manner that he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, except that no indemnification shall be
provided if such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
or
II-1
<PAGE>
suit was brought shall determine that the defendant is fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article Tenth of our certificate of incorporation eliminates the liability of a
director to us or our stockholders for monetary damages for such a breach of
fiduciary duty as a director, except for liabilities arising:
. from any breach of the director's duty of loyalty to us or our
stockholders,
. from acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the Delaware General Corporation Law, and
. from any transaction from which the director derived an improper
personal benefit.
We carry insurance policies insuring our directors and officers against
certain liabilities that they may incur in their capacity as directors and
officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
SpeechWorks, our directors and officers who sign the Registration Statement and
persons who control SpeechWorks, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this Registration Statement, we
have sold the following securities that were not registered under the
Securities Act as summarized below. The share information provided below
reflects the three-for-two split of the common stock effected on January 5,
2000. Upon completion of this offering our outstanding securities will
automatically convert as follows:
. each share of series A Convertible Participating Preferred Stock will
convert into 1.5 shares of common stock;
. each share of series B Convertible Preferred Stock will convert into
1.5 shares of common stock;
. each share of series C Convertible Preferred Stock will convert into
1.5 shares of common stock;
. each share of series D Convertible Preferred Stock will convert into
1.5 shares of common stock; and
. each share of series E Convertible Preferred Stock will convert into
one share of common stock.
(a)Issuances of Capital Stock and Warrants
On September 30, 1996, February 14, 1997 and April 22, 1998 we issued and
sold a total of 2,474,500 shares of series B convertible preferred stock to
nine investors at a price per share of $2.75 in a private placement for total
proceeds of $6,804,875.
On May 8 and July 28, 1998 and January 9, 1999, we issued and sold a total
of 1,626,092 shares of series C convertible preferred stock to 12 investors at
a price per share of $4.25 in a private placement for total proceeds of
$6,910,891.
On November 8, 1998, we issued a warrant to purchase 30,000 shares of
common stock to SoundWorks USA, Inc. in connection with our acquisition of the
"speechworks.com" domain name.
On April 29, June 21 and June 29, 1999, we issued and sold a total of
2,671,389 shares of series D convertible preferred stock to 10 investors at a
price per share of $8.92 in a private placement for total proceeds of
$23,828,790.
On January 5, 2000, we effected a three-for two stock split of our
outstanding common stock in which each two outstanding shares of common stock
were split into three shares of common stock.
II-2
<PAGE>
On April 11, 2000, we issued and sold a total of 2,544,681 shares of
series E convertible preferred stock to 17 investors at a price per share of
$7.86 in a private placement for total proceeds of $20,001,193.
(b)Certain Grants and Exercises of Stock Options
As of April 14, 2000 we have issued options to purchase a total of
4,699,315 shares of common stock under our stock plans, 1,343,734 of which are
currently exercisable, at a weighted average exercise price of $1.77 per share.
The sale and issuance of the above securities were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access to information about us.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
*1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of SpeechWorks International, Inc.
*3.2 Restated Certificate of Incorporation of SpeechWorks International, Inc. to be
filed prior to completion of the offering
3.3 Bylaws of SpeechWorks International, Inc.
*3.4 Amended and Restated Bylaws of SpeechWorks International, Inc. to be effective
upon completion of the offering
*4.1 Form of Common Stock Certificate
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with respect to
the legality of securities being registered
*+10.1 License Agreement, dated August 3, 1994, between the Registrant and
Massachusetts Institute of Technology, as amended
10.2 Fourth Amended and Restated Registration Rights Agreement, dated as of April
11, 2000, among the Registrant and the investors party thereto
10.3 Lease Agreement, dated February 21, 1997, between the Registrant and Landman
Omnibus V Limited Partnership
10.4 Sublease Agreement, dated April 1, 1998, between the Registrant and Exchange
Applications, Inc.
10.5 Amended and Restated 1995 Stock Option Plan
*10.6 2000 Employee, Director and Consultant Stock Option Plan
*10.7 2000 Employee Stock Purchase Plan
10.8 Employment Agreement, dated September 2, 1997, between the Registrant and
Stuart R. Patterson
10.9 Form of Incentive Stock Option Agreement
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see Exhibit 5.1)
24.1 Powers of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the commission.
II-4
<PAGE>
(b)Financial Statement Schedules
Financial Statement Schedules are omitted because the information required
thereby is either not applicable or is included in our consolidated financial
statements or notes to those consolidated financial 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 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, 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 Securities 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 Securities 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on April 19, 2000.
SPEECHWORKS INTERNATIONAL, INC.
By: /s/ Stuart R. Patterson
------------------------------------
Stuart R. Patterson
Chief Executive Officer
POWER OF ATTORNEY
We the undersigned officers and directors of SpeechWorks International,
Inc., hereby severally constitute and appoint Stuart R. Patterson and Rick
Olin, and each of them singly (with full power to each of them to act alone),
our true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution in each of them for him and in his name, place
and stead, and in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other Registration Statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as full to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them or their or his substitute or substitutes
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stuart R. Patterson Chief Executive Officer, April 19, 2000
_______________________ President and Director
Stuart R. Patterson (principal executive
officer)
/s/ Richard J. Westelman Chief Financial Officer April 19, 2000
_______________________ (principal financial and
Richard J. Westelman accounting officer)
/s/ Michael S. Phillips Chief Technology Officer April 19, 2000
_______________________ and Director
Michael S. Phillips
/s/ William J. O'Farrell Chairman of the Board April 19, 2000
_______________________
William J. O'Farrell
/s/ Axel Bichara Director April 19, 2000
_______________________
Axel Bichara
/s/ Richard Burnes Director April 19, 2000
_______________________
Richard Burnes
/s/ Robert Finch Director April 19, 2000
_______________________
Robert Finch
/s/ John C. Freker, Jr. Director April 19, 2000
_______________________
John C. Freker, Jr.
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
*1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of SpeechWorks International, Inc.
*3.2 Restated Certificate of Incorporation of SpeechWorks International, Inc. to be
filed prior to completion of the offering
3.3 Bylaws of SpeechWorks International, Inc.
*3.4 Amended and Restated Bylaws of SpeechWorks International, Inc. to be effective
upon completion of the offering
*4.1 Form of Common Stock Certificate
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with respect to
the legality of securities being registered
*+10.1 License Agreement, dated August 3, 1994, between the Registrant and
Massachusetts Institute of Technology, as amended
10.2 Fourth Amended and Restated Registration Rights Agreement, dated as of April
11, 2000, among the Registrant and the investors party thereto
10.3 Lease Agreement, dated February 21, 1997, between the Registrant and Landman
Omnibus V Limited Partnership
10.4 Sublease Agreement, dated April 1, 1998, between the Registrant and Exchange
Applications, Inc.
10.5 Amended and Restated 1995 Stock Option Plan
*10.6 2000 Employee, Director and Consultant Stock Option Plan
*10.7 2000 Employee Stock Purchase Plan
10.8 Employment Agreement, dated September 2, 1997, between the Registrant and
Stuart R. Patterson
10.9 Form of Incentive Stock Option Agreement
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see Exhibit 5.1)
24.1 Powers of Attorney (See page II-5)
27.1 Financial Data Schedule
</TABLE>
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the commission.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SPEECHWORKS INTERNATIONAL, INC.
SpeechWorks International, Inc. (the "Corporation"), a Delaware
corporation, hereby certifies as follows:
1. The name of the Corporation is SpeechWorks International, Inc. The
original name of the corporation was Applied Language Technologies, Inc. and the
date of filing of the original Certificate of Incorporation of the Corporation
with the Secretary of State of Delaware was July 24, 1995.
2. This Restated Certificate of Incorporation (the "Certificate of
Incorporation") amends, restates and integrates the provisions of the
Certificate of Incorporation, as heretofore amended or supplemented, of said
Corporation and has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware
pursuant to a resolution adopted by the Board of Directors of the Corporation
and by the written consent of the holders of at least a majority of the
outstanding shares of the Common Stock and the holders of at least two-thirds of
the outstanding shares of each series of Preferred Stock in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
3. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety as follows:
FIRST: The name of the Corporation is:
SPEECHWORKS INTERNATIONAL, INC.
SECOND: The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is 1013 Centre
Road, City of Wilmington, County of New Castle and the name of the registered
agent of the Corporation in the State of Delaware is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock that
the Corporation shall have the authority to issue is 31,375,592 shares, $.00l
par value, which shall consist of two classes of stock as follows:
Common Stock, $.00l par value 22,000,000 shares
("Common Stock")
<PAGE>
<TABLE>
<S> <C>
Preferred Stock, $.00l par value 9,375,592 shares
The Preferred Stock shall consist of four series as follows:
Series A Convertible Participating Preferred Stock 2,475,000 shares
("Series A Convertible Participating
Preferred Stock")
Series B Convertible Preferred Stock 2,474,500 shares
("Series B Convertible Preferred Stock")
Series C Convertible Preferred Stock 1,626,092 shares
("Series C Convertible Preferred Stock")
Series D Convertible Preferred Stock 2,800,000 shares
("Series D Convertible Preferred Stock")
</TABLE>
________________________________________________________________________________
The Series A Convertible Participating Preferred Stock, the Series B
Convertible Preferred Stock, the Series C Convertible Preferred Stock and the
Series D Convertible Preferred Stock are collectively referred to herein as the
"Preferred Stock."
The rights, preferences, privileges and restrictions granted to and imposed
upon the various classes and series of stock of the Corporation are as follows:
A. COMMON STOCK
------------
i. Voting Rights. Except as otherwise required by law or this
-------------
Certificate of Incorporation, on all matters to be voted on by
stockholders of the Corporation each holder of Common Stock shall have
one vote in respect of each share of Common Stock held of record by
such holder on the books of the Corporation. Except as otherwise
required by law or provided herein, holders of Common Stock shall vote
together as a single class with holders of Preferred Stock having
voting rights, subject to any special or preferential voting rights of
any series of Preferred Stock from time to time outstanding.
ii. Dividends. Whenever dividends upon the Preferred Stock at the
---------
time outstanding, to the extent of any preference to which such
Preferred Stock is entitled, shall have been paid in full or declared
and set apart for payment for all past dividend periods, and after the
provisions for any sinking or purchase fund or funds for any series of
Preferred Stock shall have been complied with, the Board of Directors
may declare and pay dividends on the Common Stock, payable in cash, or
otherwise, and the holders of Shares of Preferred Stock shall be
entitled to share therein to the extent provided in this Certificate
of Incorporation.
2
<PAGE>
iii. Liquidation Rights. In the event of any liquidation,
------------------
dissolution, or winding up of the Corporation or upon the distribution
of the assets of the Corporation, all assets and funds of the
Corporation remaining after the payment to the holders of the
Preferred Stock of the full preferential amounts to which they shall
be entitled as provided in this Certificate of Incorporation, shall be
divided and distributed to the holders of Common Stock, subject to the
provisions of this Certificate of Incorporation that would allow the
holders of any series of Preferred Stock to participate in
distributions to which the holders of Common Stock are entitled.
B. PREFERRED STOCK
---------------
1. Voting Rights.
-------------
(a) Except as otherwise expressly provided in the Certificate of
Incorporation of the Corporation, or as required by law, the holders of
shares of Preferred Stock shall vote together with the Common Stock and all
other classes and series of stock of the Corporation entitled to vote
together with the Common Stock as a single class on all actions to be taken
by the shareholders of the Corporation. Each share of Preferred Stock
shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the largest number of whole shares of Common
Stock into which such shares of Preferred Stock could be converted,
pursuant to the provisions of paragraph 5 hereof, at the record date for
the determination of shareholders entitled to vote on such matter or, if no
such record date is established, at the date such vote is taken or any
written consent of shareholders is solicited. Notwithstanding the
foregoing, a holder of Preferred Stock shall not have a vote with respect
to any additional shares of Common Stock which are issuable as a result of
anti-dilution adjustments set forth in paragraph 5(e)(i)(A) due to the sale
or issuance by the Corporation of warrants, options, purchase rights and
the like until such time as the shares of Common Stock are actually issued
upon exercise of such warrants, options, purchase rights, and the like.
(b) At any time when shares of any series of Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Certificate of the Incorporation of the Corporation, and in addition to any
other vote required by law or the Certificate of Incorporation of the
Corporation, without the written consent of the holders of at least fifty
percent (50%) of the then outstanding shares of Preferred Stock, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
as a separate class or, if such amendment would only materially adversely
affect any of the rights, preferences, privileges of or limitations
provided herein of a series of Preferred Stock, without the vote or written
consent of the holders of at least fifty percent (50%) of the then
outstanding shares of such series of Preferred Stock (unless the provisions
of paragraph 1(b)(iii) apply), given in writing or by vote at a meeting,
consenting or voting (as the case may be) as a separate series, the
Corporation will not:
3
<PAGE>
(i) Amend its Certificate of Incorporation if such amendment
would materially adversely affect any of the rights, preferences,
privileges of or limitations provided for herein of the Preferred
Stock or any series thereof. Without limiting the generality of the
preceding sentence, the Corporation will not amend its Certificate of
Incorporation to:
(A) Change the dividend rights of the holders of such
series of Preferred Stock; or change the relative seniority
rights of the holders of such series of Preferred Stock as to the
payment of dividends in relation to the holders of any other
class or series of capital stock of the Corporation; or
(B) Reduce the amount payable to the holders of such
series of Preferred Stock upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, or
change the relative seniority of the liquidation preferences of
the holders of such series of Preferred Stock in relation to the
rights upon liquidation of the holders of any other class or
series of capital stock of the Corporation; or
(C) Cancel or modify the conversion rights of the holders
of shares of such series of Preferred Stock provided for in
paragraph 5 herein.
(ii) Increase the authorized number of shares of Preferred
Stock or create or increase the authorized number of shares of any
additional class or series of shares of the Corporation's capital
stock, including any security or obligation convertible into Preferred
Stock or any other class or series of stock, unless such class or
series of capital stock ranks junior to the Preferred Stock with
respect to the distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether such creation, authorization or
increase shall be by means of amendment to this Certificate of
Incorporation, or by merger, consolidation or otherwise.
(iii) Without limiting the generality of the foregoing, the
Corporation will not, without the approval of the holders of at least
two-thirds of the then outstanding shares of any series of Preferred
Stock, voting as a single series, amend its Certificate of
Incorporation to:
(A) change the relative seniority rights of the holders of
such series of Preferred Stock as to the payment of dividends in
relation to the holders of any other series of Preferred Stock of
the Corporation; or
(B) change the relative seniority of the liquidation
preferences of the holders of such series of Preferred Stock in
relation to the rights
4
<PAGE>
upon liquidation of the holders of any other series of Preferred
Stock of the Corporation.
2. No Impairment of Rights. The Corporation will not, by amendment of
-----------------------
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the Preferred Stock set forth herein, and will at all times
in good faith assist in the carrying out of all such terms and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the holders of the Preferred Stock against dilution or other
impairment. Without limiting the generality of the foregoing, the Corporation
(i) will not increase the par value of any shares of stock receivable on the
conversion of the Preferred Stock above the amount payable therefor on such
conversion, and (ii) will take all such action as may be necessary or
appropriate in order that the Corporation may validly and legally issue fully
paid and non-assessable shares of stock on the conversion of all Preferred Stock
from time to time outstanding.
3. Dividend Rights. No cash dividends shall be declared or set aside for
---------------
any shares of Preferred Stock except as follows:
(a) Series A Convertible Participating Preferred Stock. From and
--------------------------------------------------
after the date of the original issuance of the shares of Series A
Convertible Participating Preferred Stock, the holders of the Series A
Convertible Participating Preferred Stock shall be entitled to receive, out
of funds legally available therefor, cumulative dividends at the simple
rate per annum of 6% of $1.00, being the original price for which the
shares of Series A Convertible Participating Preferred Stock were initially
issued (as equitably adjusted by the Board of Directors for any stock
split, stock dividend, reclassification of shares or other similar event
affecting Series A Convertible Participating Preferred Stock, the "Original
Purchase Price" for such series) (the "Series A Accruing Dividends"). The
Series A Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative so that, if such dividends in
respect of any previous or current dividend period, at the aforesaid rate,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the deficiency shall first be paid before any dividend
or other distribution shall be paid on or declared and set apart for the
Series A Convertible Participating Preferred Stock; provided, however, that
the Corporation shall be under no obligation to pay any such Series A
Accruing Dividends (i) until and when so declared by the Board of
Directors, (ii) upon the liquidation, dissolution or winding-up of the
Corporation as provided in Section 4 below, or (iii) upon any redemption of
the Series A Convertible Participating Preferred Stock; and
(b) Series B Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series B Convertible Preferred
Stock, the holders of the Series B Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends at the simple rate per annum of 6% of $2.75, being the original
price for which the shares of Series B Convertible Preferred Stock were
initially issued (as equitably adjusted by the Board of Directors for any
stock split, stock
5
<PAGE>
dividend, reclassification of shares or other similar event affecting
Series B Convertible Preferred Stock, the "Original Purchase Price" for
such series) (the "Series B Accruing Dividends"). The Series B Accruing
Dividends shall accrue from day to day, whether or not earned or declared,
and shall be cumulative so that, if such dividends in respect of any
previous or current dividend period, at the aforesaid rate, shall not have
been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be paid before any dividend or other
distribution shall be paid on or declared and set apart for the Series B
Convertible Preferred Stock; provided, however, that the Corporation shall
be under no obligation to pay any such Series B Accruing Dividends (i)
until and when so declared by the Board of Directors, (ii) upon the
liquidation, dissolution or winding-up of the Corporation as provided in
Section 4 below, or (iii) upon any redemption of the Series B Convertible
Preferred Stock; and
(c) Series C Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series C Convertible Preferred
Stock, the holders of the Series C Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends at the simple rate per annum of 6% of $4.25, being the original
price for which the shares of Series C Convertible Preferred Stock were
initially issued (as equitably adjusted by the Board of Directors for any
stock split, stock dividend reclassification of shares or other similar
event affecting Series C Convertible Preferred Stock, the "Original
Purchase Price" for such series) (the "Series C Accruing Dividends"). The
Series C Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative so that, if such dividends in
respect of any previous or current dividend period, at the aforesaid rate,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the deficiency shall first be paid before any dividend
or other distribution shall be paid on or declared and set apart for the
Series C Convertible Preferred Stock; provided, however, that the
Corporation shall be under no obligation to pay any such Series C Accruing
Dividends (i) until and when so declared by the Board of Directors, (ii)
upon the liquidation, dissolution or winding-up of the Corporation as
provided in Section 4 below, or (iii) upon any redemption of the Series C
Convertible Preferred Stock; and
(d) Series D Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series D Convertible Preferred
Stock, the holders of the Series D Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends at the simple rate per annum of 6% of $8.92, being the original
price for which the shares of Series D Convertible Preferred Stock were
initially issued (as equitably adjusted by the Board of Directors for any
stock split, stock dividend reclassification of shares or other similar
event affecting the Series D Convertible Preferred Stock, the "Original
Purchase Price" for such series) (the "Series D Accruing Dividends"). The
Series D Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative so that, if such dividends in
respect of any previous or current dividend period, at the aforesaid rate,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the deficiency shall first be paid before any dividend
or other distribution shall be paid on or
6
<PAGE>
declared and set apart for the Series D Convertible Preferred Stock;
provided, however, that the Corporation shall be under no obligation to pay
any such Series D Accruing Dividends (i) until and when so declared by the
Board of Directors, (ii) upon the liquidation, dissolution or winding-up of
the Corporation as provided in Section 4 below, or (iii) upon any
redemption of the Series D Convertible Preferred Stock; and
(e) In the event the Board of Directors of the Corporation shall
declare a dividend (other than a dividend payable in Common Stock or other
securities of the Company) payable upon the then outstanding shares of the
Common Stock of the Corporation, the Board of Directors shall declare at
the same time a dividend upon the then outstanding shares of the Preferred
Stock, payable at the same time as the dividend paid on the Common Stock,
in an amount equal to the amount of dividends, per share of Preferred
Stock, as would have been payable on the largest number of whole shares of
Common Stock into which each share of Preferred Stock held by each holder
thereof if such Preferred Stock had been converted to Common Stock pursuant
to the provisions of paragraph 5 hereof as of the record date for the
determination of holders of Common Stock entitled to receive such
dividends; and
(f) In the event the Board of Directors of the Corporation shall
declare a dividend (other than a dividend payable in Common Stock or other
securities of the Company) payable upon any class or series of capital
stock of the Corporation other than Common Stock or the Preferred Stock,
the Board of Directors shall declare at the same time a dividend upon the
then outstanding shares of Preferred Stock, payable at the same time as
such dividend on such other class or series of capital stock in an amount
equal to, (i) in the case of any series or class convertible into Common
Stock, that dividend, per share of Preferred Stock, as would equal the
dividend payable on such other class or series determined as if all such
shares of such class or series had been converted to Common Stock and all
shares of Preferred Stock have been converted to Common Stock on the record
date for the determination of holders entitled to receive such dividend or
(ii) if such class or series of Capital Stock is not convertible into
Common Stock, at a rate per share of each series of Preferred Stock
determined by dividing the amount of the dividend payable on each share of
such class or series of capital stock by the original issuance price of
such class or series of capital stock and multiplying such fraction by the
Original Purchase Price for such series.
(g) Except for the Series A Accruing Dividends, the Series B Accruing
Dividends, the Series C Accruing Dividends or the Series D Accruing
Dividends and dividends declarable and payable in accordance with
paragraphs 3(e) and (f) above, the Company shall not declare and pay a
dividend on any series of Preferred Stock unless the same dividend is
declared and paid on all series of Preferred Stock.
4. Liquidation Rights.
------------------
(a) Subject to the special adjustment provisions for the Series D
Convertible Preferred Stock contained in paragraph 5(e)(iv), in the event
of a voluntary or involuntary
7
<PAGE>
liquidation, dissolution or winding up of the Corporation, before any
payment shall be made or assets distributed to the holders of Common Stock,
Series A Convertible Participating Preferred Stock, the Series B
Convertible Preferred Stock, the Series C Convertible Preferred Stock or
any other class or series of stock which ranks on liquidation, with respect
to the right to receive payments upon such liquidation, junior to the
Series D Convertible Preferred Stock, the holders of record of shares of
Series D Convertible Preferred Stock shall be entitled to receive, at the
discretion of each holder, either (i) an amount per share equal to the
Original Purchase Price of the Series D Convertible Preferred Stock plus an
amount equal to the unpaid Series D Accruing Dividend, plus any other
declared and unpaid dividends thereon, up to and including the date of
payment, out of the assets of the Corporation legally available therefor,
or (ii) the number of shares of Common Stock into which such holder's
Series D Convertible Preferred Stock are convertible pursuant to paragraph
5 hereof plus an amount equal to the unpaid Series D Accruing Dividend,
plus any other declared and unpaid dividends thereon, up to and including
the date of payment, out of the assets of the Corporation legally available
therefor. The aggregate dollar amount to be paid to the holders of Series D
Convertible Preferred Stock is referred to as a "Series D Convertible
Preferred Liquidation Amount." If the funds available upon liquidation are
insufficient to satisfy in full the Series D Convertible Preferred
Liquidation Amount, the entire assets of the Corporation available for such
distribution shall be distributed ratably among the holders of the Series D
Convertible Preferred Stock based on the number of shares held by each.
(b) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series D Preferred Stock
shall have been paid in full the Series D Convertible Preferred Liquidation
Amount, before any payment shall be made or any assets distributed to the
holders of Common Stock, Series A Convertible Participating Preferred
Stock, Series B Convertible Preferred Stock or any other class or series of
stock which ranks on liquidations, with respect to the right to receive
payments upon such liquidation, junior to the Series C Convertible
Preferred Stock, the holders of record of shares of Series C Convertible
Preferred Stock shall be entitled to receive, at the discretion of each
holder, either (i) an amount per share equal to the Original Purchase Price
of the Series C Convertible Preferred Stock plus an amount equal to the
unpaid Series C Accruing Dividend, plus any other declared and unpaid
dividends thereon, up to and including the date of payment, out of the
assets of the Corporation legally available therefor, or (ii) the number of
shares of Common Stock into which such holder's Series C Convertible
Preferred Stock are convertible pursuant to paragraph 5 hereof plus an
amount equal to the unpaid Series C Accruing Dividend, plus any other
declared and unpaid dividends thereon, up to and including the date of
payment, out of the assets of the Corporation legally available therefor.
The aggregate of such dollar amounts to be paid to the holders of the
Series C Convertible Preferred Stock is referred to as the "Series C
Convertible Preferred Liquidation Amount". If, after payments to the
Series D Convertible Preferred Stock, the funds available upon liquidation
are insufficient to satisfy in full the Series C Convertible Preferred
Liquidation Amount, the entire assets of the Corporation available for such
distribution to the holders of Series C Convertible
8
<PAGE>
Preferred Stock shall be distributed ratably among such holders based on
the number of shares held by each.
(c) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series D Preferred Stock and
Series C Preferred Stock shall have been paid in full the Series D
Convertible Preferred Liquidation Amount and the Series C Convertible
Preferred Liquidation Amount, respectively, before any payment shall be
made or any assets distributed to the holders of Common Stock, Series A
Convertible Participating Preferred Stock or any other class or series of
stock which ranks on liquidations, with respect to the right to receive
payments upon such liquidation, junior to the Series B Convertible
Preferred Stock, the holders of record of shares of Series B Convertible
Preferred Stock shall be entitled to receive, at the discretion of each
holder, either (i) an amount per share equal to the Original Purchase Price
of the Series B Convertible Preferred Stock plus an amount equal to the
unpaid Series B Accruing Dividend, plus any other declared and unpaid
dividends thereon, up to and including the date of payment, out of the
assets of the Corporation legally available therefor, or (ii) the number of
shares of Common Stock into which such holder's Series B Convertible
Preferred Stock are convertible pursuant to paragraph 5 hereof plus an
amount equal to the unpaid Series B Accruing Dividend, plus any other
declared and unpaid dividends thereon, up to and including the date of
payment, out of the assets of the Corporation legally available therefor.
The aggregate of such dollar amounts to be paid to the holders of the
Series B Convertible Preferred Stock is referred to as the "Series B
Convertible Preferred Liquidation Amount". If, after payments to the
Series D Convertible Preferred Stock and Series C Convertible Preferred
Stock, the funds available upon liquidation are insufficient to satisfy in
full the Series B Convertible Preferred Liquidation Amount, the entire
assets of the Corporation available for such distribution to the holders of
Series B Convertible Preferred Stock shall be distributed ratably among
such holders based on the number of shares held by each.
(d) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series D Convertible
Preferred Stock, Series C Convertible Preferred Stock and Series B
Convertible Preferred Stock shall have been paid in full the Series D
Convertible Preferred Liquidation Amount, Series C Convertible Preferred
Liquidation Amount and Series B Convertible Preferred Liquidation Amount,
respectively, before any payment shall be made or any assets distributed to
the holders of Common Stock or any other class or series of stock which
ranks on liquidations, with respect to the right to receive payments upon
such liquidation, junior to the Series A Convertible Participating
Preferred Stock, the holders of record of shares of Series A Convertible
Participating Preferred Stock shall be entitled to receive, out of the
assets of the Corporation legally available therefor, an amount per share
equal to the Original Purchase Price of the Series A Convertible
Participating Preferred Stock, plus an amount equal to the unpaid Series A
Accruing Dividend, plus any other declared and unpaid dividends thereon, up
to and including the date of payment. The aggregate of such amounts to be
paid to the holders of the Series A Convertible Participating Preferred
Stock is referred to as the "Series A Convertible Preferred Liquidation
Amount". For the
9
<PAGE>
purposes hereof, the Common Stock shall rank on liquidation junior to the
Series A Convertible Participating Preferred Stock with respect to the
right to receive payments upon liquidation. If, after payment to the Series
D Convertible Preferred Stock, Series C Convertible Preferred Stock and
Series B Convertible Preferred Stock, the funds available upon liquidation
are insufficient to satisfy in full the Series A Convertible Preferred
Liquidation Amount, the entire assets of the Corporation available for such
distribution to the holders of Series A Convertible Participating Preferred
Stock shall be distributed ratably among such holders based on the number
of shares held by each.
(e) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series D Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series B Convertible
Preferred Stock and Series A Convertible Participating Preferred Stock
shall have been paid in full the Series D Convertible Preferred Liquidation
Amount, Series C Convertible Preferred Liquidation Amount, the Series B
Convertible Preferred Liquidation Amount and the Series A Convertible
Preferred Liquidation Amount, respectively, the holders of Series A
Convertible Participating Preferred Stock shall share ratably with the
holders of the outstanding shares of Common Stock in the remaining net
assets of the Corporation available for distribution (with each share of
Series A Convertible Participating Preferred Stock being deemed, for such
purpose, to be equal to the number of shares of Common Stock (including
fractions of a share) into which such share of Series A Convertible
Participating Preferred Stock is convertible immediately prior to the close
of business on the business day fixed for such distribution).
(f) The merger or consolidation of the Corporation into or with
another corporation which results in the exchange of outstanding shares of
the Corporation for securities or other consideration issued or paid or
caused to be issued or paid by any such other corporation or affiliate
thereof (other than a merger in which the Corporation is the surviving
corporation and which will not result in more than fifty percent (50%) of
the capital stock of the Corporation outstanding immediately after the
effective date of such merger being owned of record or beneficially by
persons other than the holders of such capital stock immediately prior to
such merger), or the sale, conveyance or transfer of all or substantially
all of the assets of the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation for purposes of this paragraph
4, unless the holders of at least a majority of the then outstanding shares
of Preferred Stock elect otherwise by giving notice to the Corporation at
least two (2) days before the effective date of such event. If no such
notice is given, such event shall be deemed to be a liquidation,
dissolution or winding up for purposes of this paragraph 4(f) and the
provisions of paragraph 5(h) shall not apply. The Series D Convertible
Preferred Liquidation Amount, Series C Convertible Preferred Liquidation
Amount, the Series B Convertible Preferred Liquidation Amount and the
Series A Convertible Preferred Liquidation Amount (collectively the
"Preferred Stock Liquidation Amounts") shall in all events be paid in cash;
provided, however, that if the Preferred Stock Liquidation Amounts are
payable in connection with a consolidation or merger of the Corporation,
then each holder of Preferred Stock may, at its election, receive payments
of its respective
10
<PAGE>
Preferred Stock Liquidation Amount in the same form of consideration as is
payable with respect to the Common Stock. Wherever a distribution provided
for in this Section 4 is payable in property other than in cash, the value
of such distribution shall be the fair market value of such property as
determined in good faith by the Company's Board of Directors.
5. Conversion Rights. The holders of the Preferred Stock shall have the
-----------------
following conversion rights:
(a) Conversion.
-----------
(i) Optional Conversion. Subject to and in compliance with the
-------------------
provisions of this paragraph 5, any shares of the Series A Convertible
Participating Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock or Series D Convertible Preferred
Stock may, at the option of the holder, be converted at any time or
from time to time into fully-paid and non-assessable shares
(calculated as to each conversion to the nearest smaller whole share)
of Common Stock (except that upon any liquidation of the Corporation
or redemption of shares of Preferred Stock the right of conversion
thereof shall terminate at the close of business on the last business
day next preceding the date fixed for payment of the amount
distributable on such shares of Preferred Stock). The number of
shares of Common Stock to which a holder of shares of a series of
Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the Applicable Conversion Rate for such series
(determined as provided in paragraph 5(c)) by the number of shares of
Preferred Stock being converted.
(ii) Conversion Upon Qualified Public Offering. All outstanding
-----------------------------------------
shares of Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the
Corporation or a transfer agent designated by the Corporation into the
number of shares of Common Stock into which such Preferred Stock is
convertible pursuant to paragraph 5(a) hereof, immediately prior to
the closing of the first firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation in which the aggregate gross
proceeds are at least $30,000,000 and which is underwritten by a so
called "first tier" investment banking firm (a "Qualified Public
Offering"). Notice of any such Qualified Public Offering must be
delivered to each holder of Preferred Stock at least thirty (30) days
in advance of the proposed closing date for such Qualified Public
Offering. As soon as practicable following the automatic conversion
of the Preferred Stock as a result of a Qualified Public Offering the
Corporation will give each holder written notice of such conversion.
11
<PAGE>
(iii) Automatic Conversion. All outstanding shares of any
--------------------
series of Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the
Corporation or a transfer agent designated by the Corporation into the
number of shares of Common Stock into which such series of Preferred
Stock is convertible pursuant to paragraph 5(a) hereof at such time as
fewer than 10% of the shares of such series of Preferred Stock as
originally issued by the Company remain outstanding. As soon as
practicable following the automatic conversion of any series of
Preferred Stock pursuant to this paragraph 5(a)(iii), the Corporation
will give each holder of such series of Preferred Stock written notice
of such conversion.
(b) Conversion Procedures. Upon the occurrence of the conversion
---------------------
specified in paragraphs 5(a)(i), 5(a)(ii) or 5(a)(iii) hereof, each holder
of such Preferred Stock shall surrender the certificates representing such
shares at the office of the Corporation or of its transfer agent designated
by the Corporation. Thereupon, there shall be issued and delivered to such
holder a certificate or certificates for the number of shares of Common
Stock into which the shares of the Preferred Stock surrendered were
convertible on the date on which such conversion occurred. The Corporation
shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless certificates evidencing
such shares of the Preferred Stock being converted are either delivered to
the Corporation or any such transfer agent or the holder notifies the
Corporation or any such transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation (with surety if requested) from
any loss incurred by it in connection therewith.
(c) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") for each series of Preferred Stock
shall be the quotient obtained by dividing the Original Purchase Price for
such series, by the Applicable Conversion Value for such series, calculated
as provided in paragraph 5(d).
(d) Applicable Conversion Values. The Applicable Conversion Value
----------------------------
for each series of Preferred Stock, in effect from time to time shall
initially be the Original Purchase Price for such series of Preferred
Stock, as adjusted from time to time in accordance with paragraph 5(e)
hereof.
(e) Adjustments to Applicable Conversion Values.
-------------------------------------------
(i) Upon Sale or Issuance of Common Stock.
-------------------------------------
(A) If the Corporation shall, while there are any shares
of any series of Preferred Stock outstanding, issue or sell
shares of its Common Stock without consideration or at a price
per share less than the Applicable Conversion Value for such
series in effect immediately prior to such
12
<PAGE>
issuance or sale, then upon each such issuance or sale, except as
hereinafter provided, such Applicable Conversion Values shall be
lowered so as to be equal to an amount determined by multiplying
such Applicable Conversion Value by a fraction;
(x) the numerator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock, plus (2)
the number of shares of Common Stock which the net aggregate
consideration, if any, received by the Corporation for the
total number of such additional shares of Common Stock so
issued would purchase at such Applicable Conversion Value in
effect immediately prior to such issuance, and
(y) the denominator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares of Common Stock plus
(2) the number of such additional shares of Common Stock so
issued;
provided, however, in no event will any adjustment be made to the
-------- -------
extent it would result in any shares of Common Stock being issued
for an amount which is less than the par value of such shares.
Upon Sale or Issuance of Warrants, Options or Purchase
------------------------------------------------------
Rights with Respect to Common Stock - For the purposes of this
-----------------------------------
paragraph 5(e)(i), the issuance of any warrants, options,
subscriptions or purchase rights with respect to shares of Common
Stock and the issuance of any securities convertible into or
exchangeable for shares of Common Stock (or the issuance of any
warrants, options or any rights with respect to such convertible
or exchangeable securities) shall be deemed an issuance at such
time of such Common Stock if the Net Consideration Per Share (as
hereinafter determined) which may be received by the Corporation
for any such Common Stock shall be less than the Applicable
Conversion Value(s) at the time of such issuance. Any obligation,
agreement or undertaking to issue warrants, options,
subscriptions or purchase rights or convertible or exchangeable
securities at any time in the future shall be deemed to be an
issuance at the time such obligation, agreement or undertaking is
made or arises. No adjustment of the Applicable Conversion
Value(s) shall be made under this paragraph 5(e)(i) upon the
issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or
purchase rights or pursuant to the exercise of any conversion or
exchange rights in any convertible securities if any adjustment
shall previously have been made upon the issuance of any such
warrants, options
13
<PAGE>
or any rights therefor) as above provided. Any adjustment
of the Applicable Conversion Value(s) with respect to this
paragraph which relates to warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock shall be
disregarded if, as, and when such warrants, options,
subscriptions or purchase rights expire or are canceled without
being exercised, so that the Applicable Conversion Value(s)
effective immediately upon such cancellation or expiration shall
be equal to the Applicable Conversion Value(s) in effect
immediately prior to the time of the issuance of the expired or
canceled warrants, options, subscriptions or purchase rights,
with such additional adjustments as would have been made to that
Applicable Conversion Value(s) had the expired or canceled
warrants, options, subscriptions or purchase rights not been
issued. For purposes of this paragraph, the "Net Consideration
Per Share" which may be received by the Corporation shall be
determined as follows:
(x) The "Net Consideration Per Share" shall mean the
amount equal to the total amount of consideration, if any,
received by the Corporation for the issuance of such
warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities, plus the minimum
amount of consideration, if any, payable to the Corporation
upon exercise or conversion thereof, divided by the
aggregate number of shares of Common Stock that would be
issued if all such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities
were exercised, exchanged or converted.
(y) The "Net Consideration Per Share" which may be
received by the Corporation shall be determined in each
instance as of the date of issuance of warrants, options,
subscriptions or other purchase rights or convertible or
exchangeable securities without giving effect to any
possible future price adjustments or rate adjustments which
may be applicable with respect to such warrants, options,
subscriptions or other purchase rights or convertible or
exchangeable securities.
Consideration: Non-Cash Property - For purposes of this
---------------------------------
paragraph 5(e)(i), if part or all of the consideration received
by the Corporation in connection with the issuance of shares of
Common Stock or the issuance of any of the securities described
in this paragraph 5(e)(i) consists of consideration other than
cash, the Board of Directors of the Corporation shall in its good
faith discretion value such property, whereupon such value shall
be given to such consideration and shall be recorded on the books
of the Corporation with respect to receipt of such property.
14
<PAGE>
This paragraph 5(e)(i)(A) shall not apply and no adjustment
in the Applicable Conversion Value shall be made hereunder under
any of the circumstances which would constitute an Extraordinary
Common Stock Event (as hereinafter defined in paragraph
5(e)(iii)).
(B) Notwithstanding the foregoing, the following provisions
shall apply with respect to the adjustment of the Applicable
Conversion Value of the Series A Convertible Participating
Preferred Stock pursuant to paragraph 5(e)(i)(A).
In the event any holder of shares of Series A Convertible
Participating Preferred Stock does not participate in a Financing
(as defined below) by purchasing its full Basic Amount (as
defined below) and (x) the Corporation has fully complied in all
respects with its obligations pursuant to Section 14 of the Third
Amended and Restated Stockholders Agreement dated April 29, 1999
by and among the Corporation and the other signatories thereto
(the "Stockholders Agreement") and (y) the pre-emptive rights of
such holder pursuant to Section 14 of the Stockholders Agreement
have not been waived at the request of the Corporation by such
holder or waived by the holders of the Preferred Stock pursuant
to such Section 14, then paragraph 5(e)(i)(A) shall not apply to
any shares of Series A Convertible Participating Preferred Stock
held by such holder and each share of Series A Convertible
Participating Preferred Stock held by such holder shall,
immediately prior to such financing, automatically be converted
into one share of a new series of Series A Convertible
Participating Preferred Stock, such new series to be designated
Series A-1, Series A-2, Series A-3 and so on depending upon the
order in which such series is created. All new series of Series A
Convertible Participating Preferred Stock shall be identical in
all respects to the Series A Convertible Participating Preferred
Stock (including the right to any previously effective adjustment
to the Applicable Conversion Value of such series), except that
none of the provisions of paragraph 5(e)(i)(A) shall apply to
such new series. Each holder of shares of Series A Convertible
Participating Preferred Stock that have been converted into a new
series pursuant to this paragraph 5(e)(i)(B) shall, immediately
upon written notice from the Corporation surrender to the
Corporation at its principal office all certificates for such
Series A Convertible Participating Preferred Stock, and the
Corporation shall thereupon deliver to such holder a new series
of Series A Convertible Participating Preferred Stock. For the
purposes of this paragraph 5(e)(i)(B), a holder's "Basic Amount"
of a financing shall be its pro-rata share of such financing
determined on a Fully Diluted Basis. For purposes of this
paragraph 5(e)(i)(B), "Fully Diluted Basis" shall be based on the
number of shares of Common Stock into which the shares of Series
A Convertible Participating Preferred Stock held by each holder
could be converted on the date of such notices, and
15
<PAGE>
treating all outstanding shares of Preferred Stock and other
outstanding warrants, options and securities of the Corporation
convertible into, exercisable or exchangeable for Common Stock as
so converted, exercised or exchanged based on the number of
shares of Common Stock into which such Preferred Stock and other
outstanding warrants, options and securities are then convertible
into or exercisable or exchangeable for, subject to proportional
reduction by the Board of Directors of the Corporation if the
Corporation elects to add additional investors in such financing.
A holder's pro-rata share shall at all times bear the same ratio
to such financing that the ratio of such holder's Common Stock
(as determined on a Fully Diluted Basis) bears to the total
number of shares of Common Stock outstanding (as determined on a
Fully Diluted Basis). A "Financing" shall mean any transaction,
designated as such by the Board of Directors of the Corporation,
pursuant to which the Corporation shall have issued any shares of
Common Stock, or other securities convertible into, exchangeable
or exercisable for shares of Common Stock in which the aggregate
consideration to the Corporation shall equal $1,000,000 or more.
The provisions of this paragraph 5(e)(i)(B) shall not apply to
the issuance of shares of Series B, Series C or Series D
Convertible Preferred Stock.
(C) Notwithstanding the foregoing, the following provisions
shall apply with respect to the adjustment of the Applicable
Conversion Value of the Series B Convertible Preferred Stock
pursuant to paragraph 5(e)(i)(A).
In the event any holder of shares of Series B Convertible
Preferred Stock does not participate in a Financing (as defined
below) by purchasing its full Basic Amount (as defined below) and
(x) the Corporation has fully complied in all respects with its
obligations pursuant to Section 14 of the Stockholders Agreement
and (y) the pre-emptive rights of such holder pursuant to Section
14 of the Stockholders Agreement have not been waived at the
request of the Corporation by such holder or waived by the
holders of the Preferred Stock pursuant to such Section 14, then
paragraph 5(e)(i)(A) shall not apply to any shares of Series B
Convertible Preferred Stock held by such holder and each share of
Series B Convertible Preferred Stock held by such holder shall,
immediately prior to such financing, automatically be converted
into one share of a new series of Series B Convertible Preferred
Stock, such new series to be designated Series B-1, Series B-2,
Series B-3 and so on depending upon the order in which such
series is created. All new series of Series B Convertible
Preferred Stock shall be identical in all respects to the Series
B Convertible Preferred Stock (including the right to any
previously effective adjustment to the Applicable Conversion
Value of such series), except that none of the provisions of
paragraph 5(e)(i)(A) shall apply to such new series. Each holder
of shares of Series B Convertible Preferred Stock that have been
16
<PAGE>
converted into a new series pursuant to this paragraph 5(e)(i)(C)
shall, immediately upon written notice from the Corporation
surrender to the Corporation at its principal office all
certificates for such Series B Convertible Preferred Stock, and
the Corporation shall thereupon deliver to such holder a new
series of Series B Convertible Preferred Stock. For the purposes
of this paragraph 5(e)(i)(C), a holder's "Basic Amount" of a
financing shall be its pro-rata share of such financing
(determined on a Fully Diluted Basis; for purposes of this
paragraph 5(e)(i)(C) "Fully Diluted Basis" shall be based on the
number of shares of Common Stock into which the shares of Series
B Convertible Preferred Stock held by each holder could be
converted on the date of such notices, and treating all
outstanding shares of Preferred Stock and other outstanding
warrants, options and securities of the Corporation convertible
into, exercisable or exchangeable for Common Stock as so
converted, exercised or exchanged based on the number of shares
of Common Stock into which such Preferred Stock and other
outstanding warrants, options and securities are then convertible
into or exercisable or exchangeable for), subject to proportional
reduction by the Board of Directors of the Corporation if the
Corporation elects to add additional investors in such financing.
A holder's pro-rata share shall at all times bear the same ratio
to such financing that the ratio of such holder's Common Stock
(as determined on a Fully Diluted Basis) bears to the total
number of shares of Common Stock outstanding (as determined on a
Fully Diluted Basis). A "Financing" shall mean any transaction,
designated as such by the Board of Directors of the Corporation,
pursuant to which the Corporation shall have issued any shares of
Common Stock, or other securities convertible into, exchangeable
or exercisable for shares of Common Stock in which the aggregate
consideration to the Corporation shall equal $1,000,000 or more.
The provisions of this paragraph 5(e)(i)(C) shall not apply to
the issuance of shares of Series B, Series C or Series D
Convertible Preferred Stock.
(D) Notwithstanding the foregoing, the following provisions
shall apply with respect to the adjustment of the Applicable
Conversion Value of the Series C Convertible Preferred Stock
pursuant to paragraph 5(e)(i)(A).
In the event any holder of shares of Series C Convertible
Preferred Stock does not participate in a Financing (as defined
below) by purchasing its full Basic Amount (as defined below) and
(x) the Corporation has fully complied in all respects with its
obligations pursuant to Section 14 of the Stockholders Agreement
and (y) the pre-emptive rights of such holder pursuant to Section
14 of the Stockholders Agreement have not been waived at the
request of the Corporation by such holder or waived by the
holders of the Preferred Stock pursuant to such Section 14, then
paragraph 5(e)(i)(A) shall not apply to any shares of Series C
Convertible Preferred
17
<PAGE>
Stock held by such holder and each share of Series C Convertible
Preferred Stock held by such holder shall, immediately prior to
such financing, automatically be converted into one share of a
new series of Series C Convertible Preferred Stock, such new
series to be designated Series C-1, Series C-2, Series C-3 and so
on depending upon the order in which such series is created. All
new series of Series C Convertible Preferred Stock shall be
identical in all respects to the Series C Convertible Preferred
Stock (including the right to any previously effective adjustment
to the Applicable Conversion Value of such series), except that
none of the provisions of paragraph 5(e)(i)(A) shall apply to
such new series. Each holder of shares of Series C Convertible
Preferred Stock that have been converted into a new series
pursuant to this paragraph 5(e)(i)(D) shall, immediately upon
written notice from the Corporation surrender to the Corporation
at its principal office all certificates for such Series C
Convertible Preferred Stock, and the Corporation shall thereupon
deliver to such holder a new series of Series C Convertible
Preferred Stock. For the purposes of this paragraph 5(e)(i)(D), a
holder's "Basic Amount" of a financing shall be its pro-rata
share of such financing (determined on a Fully Diluted Basis; for
purposes of this paragraph 5(e)(i)(D) "Fully Diluted Basis" shall
be based on the number of shares of Common Stock into which the
shares of Series C Convertible Preferred Stock held by each
holder could be converted on the date of such notices, and
treating all outstanding shares of Preferred Stock and other
outstanding warrants, options and securities of the Corporation
convertible into, exercisable or exchangeable for Common Stock as
so converted, exercised or exchanged based on the number of
shares of Common Stock into which such Preferred Stock and other
outstanding warrants, options and securities are then convertible
into or exercisable or exchangeable for), subject to proportional
reduction by the Board of Directors of the Corporation if the
Corporation elects to add additional investors in such financing.
A holder's pro-rata share shall at all times bear the same ratio
to such financing that the ratio of such holder's Common Stock
(as determined on a Fully Diluted Basis) bears to the total
number of shares of Common Stock outstanding (as determined on a
Fully Diluted Basis). A "Financing" shall mean any transaction,
designated as such by the Board of Directors of the Corporation,
pursuant to which the Corporation shall have issued any shares of
Common Stock, or other securities convertible into, exchangeable
or exercisable for shares of Common Stock in which the aggregate
consideration to the Corporation shall equal $1,000,000 or more.
The provisions of this paragraph 5(e)(i)(D) shall not apply to
the issuance of shares of Series C or Series D Convertible
Preferred Stock.
(E) Notwithstanding the foregoing, the following provisions
shall apply with respect to the adjustment of the Applicable
Conversion
18
<PAGE>
Value of the Series D Convertible Preferred Stock pursuant to
paragraph 5(e)(i)(A).
In the event any holder of shares of Series D Convertible
Preferred Stock does not participate in a Financing (as defined
below) by purchasing its full Basic Amount (as defined below) and
(x) the Corporation has fully complied in all respects with its
obligations pursuant to Section 14 of the Stockholders Agreement
and (y) the pre-emptive rights of such holder pursuant to Section
14 of the Stockholders Agreement have not been waived at the
request of the Corporation by such holder or waived by the
holders of the Preferred Stock pursuant to such Section 14, then
paragraph 5(e)(i)(A) shall not apply to any shares of Series D
Convertible Preferred Stock held by such holder and each share of
Series D Convertible Preferred Stock held by such holder shall,
immediately prior to such financing, automatically be converted
into one share of a new series of Series D Convertible Preferred
Stock, such new series to be designated Series D-1, Series D-2,
Series D-3 and so on depending upon the order in which such
series is created. All new series of Series D Convertible
Preferred Stock shall be identical in all respects to the Series
D Convertible Preferred Stock (including the right to any
previously effective adjustment to the Applicable Conversion
Value of such series), except that none of the provisions of
paragraph 5(e)(i)(A) shall apply to such new series. Each holder
of shares of Series D Convertible Preferred Stock that have been
converted into a new series pursuant to this paragraph 5(e)(i)(E)
shall, immediately upon written notice from the Corporation
surrender to the Corporation at its principal office all
certificates for such Series D Convertible Preferred Stock, and
the Corporation shall thereupon deliver to such holder a new
series of Series D Convertible Preferred Stock. For the purposes
of this paragraph 5(e)(i)(E), a holder's "Basic Amount" of a
financing shall be its pro-rata share of such financing
(determined on a Fully Diluted Basis; for purposes of this
paragraph 5(e)(i)(E) "Fully Diluted Basis" shall be based on the
number of shares of Common Stock into which the shares of Series
D Convertible Preferred Stock held by each holder could be
converted on the date of such notices, and treating all
outstanding shares of Preferred Stock and other outstanding
warrants, options and securities of the Corporation convertible
into, exercisable or exchangeable for Common Stock as so
converted, exercised or exchanged based on the number of shares
of Common Stock into which such Preferred Stock and other
outstanding warrants, options and securities are then convertible
into or exercisable or exchangeable for), subject to proportional
reduction by the Board of Directors of the Corporation if the
Corporation elects to add additional investors in such financing.
A holder's pro-rata share shall at all times bear the same ratio
to such financing that the ratio of such holder's Common Stock
(as determined on a Fully Diluted Basis) bears to the total
number of shares of Common
19
<PAGE>
Stock outstanding (as determined on a Fully Diluted Basis). A
"Financing" shall mean any transaction, designated as such by the
Board of Directors of the Corporation, pursuant to which the
Corporation shall have issued any shares of Common Stock, or
other securities convertible into, exchangeable or exercisable
for shares of Common Stock in which the aggregate consideration
to the Corporation shall equal $1,000,000 or more. The provisions
of this paragraph 5(e)(i)(E) shall not apply to the issuance of
shares of Series D Convertible Preferred Stock.
(ii) Certain Issues of Common Stock Excepted. Anything in
---------------------------------------
paragraph 5(e)(i) to the contrary notwithstanding, the Corporation
shall not be required to make any adjustment of the Applicable
Conversion Values as set forth in paragraph 5(e)(i), in the case of
(w) the issuance of any shares of Common Stock upon conversion of any
shares of Preferred Stock, or (x) the issuance or grant of options to
purchase up to 3,510,154 shares of Common Stock (included in such
number are all options outstanding on the date this paragraph of the
Certificate of Incorporation becomes effective or the issuance of
shares of Common Stock upon the exercise of any such options which
number shall be equitably adjusted on the occurrence of an
Extraordinary Common Stock Event, as hereinafter defined, a
reclassification, reorganization or similar event affecting the Common
Stock) to officers, directors, employees of or consultants to the
Corporation, (y) the sale to employees, consultants and directors of
shares reacquired by the Company pursuant to transactions described in
Sections 5.2(e)(ii) and (iii) of the Series D Convertible Preferred
Stock Purchase Agreement dated as of April 29, 1999, by and among the
Corporation and the purchasers named therein, and options issued with
respect to such reacquired shares, or (z) the issuance of any shares
of Common Stock upon the exercise of (i) warrants by Lighthouse
Capital Partners, L.P. to purchase up to 24,000 shares of Common Stock
(as may be equitably adjusted pursuant to the terms thereof), (ii)
warrants by InterVoice, Inc. to purchase up to 494,158 shares of
Common Stock (as may be equitably adjusted pursuant to the terms
thereof), (iii) warrants by SoundWorks USA, Inc. to purchase up to
20,000 shares of Common Stock or (iv) warrants issued to banks and
other financial institutions in connection with any financing
arrangements to which the Company is a party which have been approved
by a majority of the members of the Board of Directors.
(iii) Upon Extraordinary Common Stock Event. Upon the happening
-------------------------------------
of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value of each series of Preferred Stock shall,
simultaneously with the happening of such Extraordinary Common Stock
Event, be adjusted by multiplying the then effective Applicable
Conversion Value of such series by a fraction, (X) the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and (Y)
the denominator of which shall be the number of shares of Common
Stock outstanding immediately after such Extraordinary Common Stock
Event,
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<PAGE>
and the product so obtained shall thereafter be the Applicable
Conversion Value for such series of Preferred Stock. The Applicable
Conversion Values, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive Extraordinary Common Stock
Event or Events.
"Extraordinary Common Stock Event" shall mean (x) the issue of
additional shares of the Common Stock as a dividend or other
distribution on outstanding Common Stock, (y) the subdivision of
outstanding shares of Common Stock into a greater number of shares of
the Common Stock, or (z) the combination of outstanding shares of the
Common Stock into a smaller number of shares of the Common Stock.
(iv) Special Adjustment Provisions for the Series D Convertible
----------------------------------------------------------
Preferred Stock.
---------------
(A) Notwithstanding anything herein to the contrary, if the
closing of a (x) Qualified Public Offering or (y) transaction which is
deemed to be a liquidation event pursuant to Section 4(f) regardless
of whether a majority of the then outstanding shares of Preferred
Stock have elected otherwise pursuant to such Section 4(f) (a "Sale of
the Corporation") occurs on or prior to December 31, 2000 and the
Target Price (as defined below) is less than $17.84 per share (as
equitably adjusted for any stock split, stock dividend,
reclassification of shares or other similar event affecting the Common
Stock), the Applicable Conversion Value for the Series D Convertible
Preferred Stock shall be adjusted (as of immediately prior to the
closing of such Qualified Public Offering or Sale of the Corporation),
if and only to the extent that such Applicable Conversion Value (as
adjusted) would result in an Applicable Conversion Rate for the Series
D Convertible Preferred Stock which is greater than the Applicable
Conversion Rate then in effect, to an amount equal to the greater of
(a) $6.00 and (b) the product of the Target Price multiplied by fifty
percent (50%). For purposes of this Section 5(e)(iv)(A), the Target
Price shall mean (x) the public offering price per share of Common
Stock as specified on the cover of the final prospectus relating to
the Qualified Public Offering plus 7.5% or (y) the price per share to
be received by the holders of Common Stock (assuming the conversion of
all shares of Preferred Stock) in the event of a Sale of the
Corporation.
(B) Notwithstanding anything herein to the contrary, if the
closing of a (x) Qualified Public Offering or (y) Sale of the
Corporation occurs after December 31, 2000, the Applicable Conversion
Value for the Series D Convertible Preferred Stock shall be adjusted
(as of immediately prior to the closing of such Qualified Public
Offering or Sale of the Corporation), if and only to the extent that
such Applicable Conversion Value (as adjusted) would result in an
Applicable Conversion Rate for the Series D Convertible Preferred
Stock which is greater than the Applicable Conversion Rate then in
effect, to a dollar amount equal to that which would provide to each
holder of Series D Convertible
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<PAGE>
Preferred Stock a forty percent (40%) internal rate of return,
compounded on an annual basis, calculated on an as-if-converted basis
and assuming the sale of such shares of Common Stock issuable upon
conversion of Series D Convertible Preferred Stock by such holder at
the Target Price per share, measured from the date of the initial
issuance of the Series D Convertible Preferred Stock to the date of
effectiveness with the Securities and Exchange Commission of the
registration statement relating to such Qualified Public Offering or
the consummation of the Sale of the Corporation, as the case may be;
provided, however, that the Applicable Conversion Value for the Series
D Preferred Stock shall not be adjusted pursuant to this Section
5(e)(iv)(B) to an amount greater than $8.92 nor less than $6.00. All
calculations made pursuant to this Section 5(e)(iv) shall be made in
good faith by the Corporation's Board of Directors after consultation
with the Corporation's independent public accountants.
(f) Dividends. In the event the Corporation shall make or issue, or
---------
fix a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock or in assets (excluding
ordinary cash dividends paid out of retained earnings), then and in each
such event, provision shall be made so that the holders of Preferred Stock
shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the number of securities or such
other assets of the Corporation which they would have received had their
Preferred Stock been converted into Common Stock on the date of such event
and had they thereafter, during the period from the date of such event to
and including the Conversion Date (as that term is hereafter defined in
paragraph 5(j)), retained such securities or such other assets receivable
by them as aforesaid during such period, giving application to all
adjustments called for during such period under this paragraph 5 with
respect to the rights of the holders of Preferred Stock.
(g) Capital Reorganization or Reclassification. If the Common Stock
------------------------------------------
issuable upon the conversion of the Preferred Stock shall be changed into
the same or different number of shares of any series or classes of stock,
whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
elsewhere in this paragraph 5, or a reorganization, merger, consolidation
or sale of assets provided for elsewhere in this paragraph 5), then and in
each such event the holder of each share of Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares
of stock and other securities and property receivable upon such
reorganization, reclassification or other change by holders of the number
or shares of Common Stock into which such share of Preferred Stock might
have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
(h) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common
Stock (other than a subdivision, combination, reclassification or exchange
of shares provided for elsewhere
22
<PAGE>
in this paragraph 5) or a merger or consolidation of the Corporation with
or into another corporation, or the sale of all or substantially all of the
Corporation's properties and assets to any other person (other than an
event described in paragraph 4(f), unless the requisite number of holders
of Preferred Stock have elected not to treat such event as a liquidation
for purposes of such paragraph), then, as a part of such reorganization,
merger, consolidation or sale, provision shall be made so that the holders
of the Preferred Stock shall be entitled to receive upon consummation of
such transaction, the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation resulting from
such merger, consolidation or sale, to which a holder of Common Stock
issuable upon conversion would have been entitled upon consummation of such
capital reorganization, merger, consolidation, or sale, provided that no
such provision shall be deemed to constitute the consent of the holders of
the Preferred Stock to any such transaction if such consent is required by
the Certificate of Incorporation of the Corporation or under applicable
law.
(i) Certificate as to Adjustments. In each case of an adjustment or
-----------------------------
readjustment of the Applicable Conversion Rate for any series of Preferred
Stock, the Corporation will furnish each holder of such series of Preferred
Stock with a certificate showing such adjustment or readjustment, and
stating in detail the facts upon which such adjustment or readjustment is
based.
(j) Exercise of Conversion Privilege. To exercise its conversion
--------------------------------
privilege, a holder of Preferred Stock shall surrender the certificate or
certificates representing the shares being converted together with a
written notice of such conversion to the Corporation at its principal
office or to the transfer agent, if any, which has been designated by the
Corporation. Such notice shall also state the name or names (with address
or addresses) in which the certificate or certificates for shares of Common
Stock issuable upon such conversion shall be issued. The certificate or
certificates for shares of Preferred Stock surrendered for the conversion
shall be accompanied by proper assignment thereof to the Corporation or in
blank. The date when such written notice is received by the Corporation,
together with the certificate or certificates representing the shares of
Preferred Stock being converted, shall be the "Conversion Date". As
promptly as practicable after the Conversion Date, the Corporation shall
issue and deliver to the holder of the shares of Preferred Stock being
converted, (i) such certificate or certificates as it may request for the
number of whole shares of Common Stock issuable upon the conversion of such
shares of Preferred Stock in accordance with the provisions of this
paragraph 5, and (ii) cash, as provided in paragraph 5(k), in respect of
any fraction of a share of Common Stock issuable upon such conversion.
Such conversion shall be deemed to have been effected immediately prior to
the close of business on the Conversion Date, and at such time the rights
of the holder as holder of the converted shares of Preferred Stock shall
cease and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record
of the shares of Common Stock represented thereby.
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<PAGE>
(k) Cash in Lieu of Fractional Shares. No fractional shares of
---------------------------------
Common Stock or scrip representing fractional shares shall be issued upon
the conversion of shares of Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Preferred Stock, the Corporation shall pay to the holder of the shares of
Preferred Stock which were converted a cash adjustment in respect of such
fractional shares in an amount equal to the same fraction of the fair
market value per share of the Common Stock (as determined in good faith by
the Board of Directors) at the close of business on the Conversion Date.
The determination as to whether or not any to make any cash payment in lieu
of the issuance of fractional shares shall be based upon the total number
of shares of Preferred Stock being converted at any one time by any holder
thereof, not upon each share of Preferred Stock being converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Preferred Stock represented by a certificate or certificates surrendered
by a holder are converted, the Corporation shall execute and deliver to or
on the order of the holder, at the expense of the Corporation, a new
certificate representing the number of shares of Preferred Stock which were
not converted.
(m) Reservation of Shares of Common Stock. The Corporation shall at
-------------------------------------
all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
of the shares of the Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Preferred Stock, and if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Corporation shall take such corporate action subject
to the terms of the Corporation's Certificate of Incorporation and
applicable law as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for
such purpose.
(n) Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Preferred Stock shall be made without charge to
the holders thereof for any issuance tax in respect thereof provided that
the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock
which is being converted.
(o) Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Preferred Stock or of any shares
of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion
of such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6. Redemption.
----------
24
<PAGE>
(a) The Corporation shall, on or after March 31, 2002, at the
written election of the holders of at least a majority of the then
outstanding shares of a series of Preferred Stock delivered to the
Corporation and specifying the first day on which such shares are to be
redeemed, (i) redeem on the date specified by such holders one-third of the
shares of the series of Preferred Stock outstanding on the date of such
election as provided in paragraph 6(e), (ii) redeem on the first
anniversary of such date an additional one-half of the shares of the series
of Preferred Stock outstanding on such date as provided in paragraph 6(e)
and (iii) redeem on the second anniversary of such date all the remaining
shares of the series of Preferred Stock then outstanding on such date as
provided in paragraph 6(e) (each such date being herein called a
"Redemption Date").
(b) All shares of Preferred Stock which are to be redeemed hereunder
shall remain issued and outstanding until the Redemption Price therefore
has been indefeasibly paid in full in cash. If the Corporation for any
reason fails to pay the Redemption Price for any shares of Preferred Stock
on or prior to the date specified in this paragraph 6, then the unpaid
Redemption Price shall thereafter bear interest at the annual rate of 12%,
compounded annually until paid.
(c) The Redemption Price (the "Redemption Price") for each share of
each series of Preferred Stock redeemed pursuant to paragraph 6 shall be
the sum of the Original Purchase Price for such shares (subject to
equitable adjustment in the event of any stock dividend, stock split,
reclassification of shares or similar event affecting or relating to the
Preferred Stock) plus (i) the amount of the unpaid Series A Accruing
Dividends, Series B Accruing Dividends, Series C Accruing Dividends or
Series D Accruing Dividends, as applicable to such shares, and (ii) all
other declared but unpaid dividends on such shares up to and including the
applicable Redemption Date.
(d) After receipt of any notice of election pursuant to paragraph
6(a) the Corporation will give written notice by mail, postage prepaid to
each holder of record of any series of Preferred Stock to be redeemed, such
notice to be addressed to each such holder at its post office address shown
by the records of the Corporation, specifying the number of shares to be
redeemed, the Redemption Price, and the place and date of such redemption
("Redemption Date"), (which date shall not be a day on which banks in the
City of Boston are required or authorized to close) and to be given at
least twenty (20) days prior to the Redemption Date; provided, however,
that the Corporation's failure to give such notice shall in no way affect
its obligation to redeem the shares of Preferred Stock as provided in this
paragraph 6. If on or before the Redemption Date, the funds necessary for
redemption shall have been deposited with an independent payment agent so
as to be and continue to be available therefor, then, notwithstanding that
any certificate for shares of Preferred Stock to be redeemed shall not have
been surrendered for cancellation, from and after the close of business on
the Redemption Date, the shares so called for redemption shall no longer be
deemed outstanding, any dividends thereon shall cease to accrue, and all
rights with respect to such shares, including all conversion rights
pursuant to paragraph 5 hereof, shall forthwith cease, except only the
right of the holders thereof to receive, upon presentation of the
certificate representing shares so called for
25
<PAGE>
redemption, the Redemption Price applicable to such Preferred Stock without
interest thereon. If the holders of different series of Preferred Stock
elect redemption under this paragraph 6(d), all the redeemable shares of
Preferred Stock are to be redeemed on the Redemption Date, subject to the
provisions of paragraph 6(e).
(e) If the funds of the Corporation legally available for redemption
of Preferred Stock on any Redemption Date are insufficient to redeem the
total number of Preferred Stock to be redeemed on such Redemption Date, the
Corporation shall first redeem such number of shares of Series D
Convertible Preferred Stock ratably from the holders thereof to the extent
of any funds legally available for redemption of Series D Convertible
Preferred Stock according to the respective amounts which would be payable
with respect to the full number of Series D Convertible Preferred Stock to
be redeemed from such holders on such date as if all such Series D
Convertible Preferred Stock were Redeemed in full. Only after the
Corporation shall have redeemed in full all shares of Series D Convertible
Preferred Stock to be redeemed on such Redemption Date, then the
Corporation shall immediately redeem such shares of Series C Convertible
Preferred Stock ratably from the holders thereof, to the extent of any
funds legally available for redemption of Series C Convertible Preferred
Stock, according to the respective amounts which would be payable with
respect to the full number of Series C Convertible Preferred Stock to be
redeemed from them on such date as if all such Series C Convertible
Preferred Stock were redeemed in full. Only after the Corporation shall
have redeemed in full all shares of Series C Convertible Preferred Stock to
be redeemed on such Redemption Date, then the Corporation shall immediately
redeem such shares of Series B Convertible Preferred Stock ratably from the
holders thereof, to the extent of any funds legally available for
redemption of Series B Convertible Preferred Stock, according to the
respective amounts which would be payable with respect to the full number
of Series B Convertible Preferred Stock to be redeemed from them on such
date as if all such Series B Convertible Preferred Stock were redeemed in
full. Only after the Corporation shall have redeemed in full all shares of
Series B Convertible Preferred Stock to be redeemed on such Redemption
Date, then the Corporation shall immediately redeem such shares of Series A
Convertible Participating Preferred Stock ratably from the holders thereof,
to the extent of any funds legally available for redemption of Series A
Convertible Participating Preferred Stock, according to the respective
amounts which would be payable with respect to the full number of Series A
Convertible Participating Preferred Stock to be redeemed from them on such
date as if all such Series A Convertible Participating Preferred Stock were
redeemed in full. Any Preferred Stock not redeemed shall remain
outstanding. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Preferred Stock,
such funds will be used, at the end of the next succeeding fiscal quarter,
to redeem the balance of such Preferred Stock to be redeemed on such
Redemption Date, or such portion thereof for which funds are then
available, on the basis set forth above. Any Preferred Stock may be
converted by the holder thereof to Common Stock, in accordance with the
provisions of the Certificate of Incorporation of the Corporation, at any
time prior to the close of business on the last business day next preceding
the Redemption Date.
26
<PAGE>
7. Notices of Record Date. In the event of
----------------------
(a) any taking by the Corporation of a record of the holders of any
series of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any
series or any other securities or property, or to receive any other right,
or
(b) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, or any
transfer of all or substantially all of the assets of the Corporation to
any other corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation,
then and in each such event the Corporation shall mail or cause to be mailed to
each holder of Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective and (iii) the time, if any, that is to be fixed, as to when the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such notice shall be mailed at least thirty (30) days prior to the
date specified in such notice on which such action is to be taken.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition and not in limitation of
the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, conferred by the State of Delaware, it is
further provided that:
(a) The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total
number of directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the Corporation would have if there were no vacancies.
No election of directors need be by written ballot.
(b) After the original or other By-Laws of the Corporation have been
adopted, amended or repealed, as the case may be, in accordance with the
provisions of Section 109 of the General Corporation Law of the State of
Delaware, and, after the Corporation has received any
27
<PAGE>
payment for any of its stock, the power to adopt, amend or repeal the By-Laws of
the Corporation may be exercised by the Board of Directors of the Corporation.
(c) The books of the Corporation may be kept at such place within or
without the State of Delaware as the By-Laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented from time to time, indemnify and advance expenses to,
(i) its directors and officers and (ii) any person who at the request of the
Corporation is or was serving as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, from
and against any and all of the expenses, liabilities, or other matters referred
to in or covered by said section as amended or supplemented (or any successor),
provided, however, that except with respect to proceedings to enforce rights to
indemnification, the By-Laws of the Corporation may provide that the Corporation
shall indemnify any director, officer or such person in connection with a
proceeding (or part thereof) initiated by such director, officer or such person
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation. The Corporation, by action of its Board of
Directors, may provide indemnification or advance expenses to employees and
agents of the Corporation or other persons only on such terms and conditions and
to the extent determined by the Board of Directors in its sole and absolute
discretion. The indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
EIGHTH: No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except to the extent that exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as in effect at the time such liability or limitation thereof
is determined. No amendment, modification or repeal of this Article shall apply
to or have any effect on the liability of alleged liability of any director of
the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment, modification or repeal. If the General
Corporation law of the State of Delaware is amended after approval by the
stockholders of this Article to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or
28
<PAGE>
stockholder thereof or on the application of any receiver or receivers appointed
for this Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such matter as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
TENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article.
[remainder of page intentionally left blank]
29
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its duly authorized officer this 29th day of
April, 1999.
SPEECHWORKS INTERNATIONAL, INC.
By: /s/ Stuart R. Patterson
------------------------------
Stuart R. Patterson
President and Chief Executive Officer
30
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
SPEECHWORKS INTERNATIONAL, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
SpeechWorks International, Inc.
2. The original name of the Corporation was Applied Language
Technologies, Inc. The date of filing of the original Certificate of
Incorporation of the Corporation was July 24, 1995 and the Certificate of
Incorporation was restated on April 29, 1999.
3. The Restated Certificate of Incorporation is hereby amended by:
(a) inserting the following paragraph as subsection (iv) of Part A of
Article FOURTH thereof:
"iv. Reclassification. Upon the effectiveness of this Certificate of
----------------
Amendment, every two shares of Common Stock outstanding or held by the
Corporation in its treasury shall be changed and reclassified into three
shares of Common Stock, $0.001 par value per share, which shares shall be
fully paid and nonassessable shares of Common Stock of the Corporation."
(b) striking out Section 5(e)(ii) of Part B of Article FOURTH thereof and
by substituting in lieu of said Section 5(e)(ii) of Article FOURTH the following
new Section 5(e)(ii):
"(ii) Certain Issues of Common Stock Excepted. Anything in paragraph
---------------------------------------
5(e)(i) to the contrary notwithstanding, the Corporation shall not be
required to make any adjustment of the Applicable Conversion Values as set
forth in paragraph 5(e)(i), in the case of (w) the issuance of any shares
of Common Stock upon conversion of any shares of Preferred Stock, or (x)
the issuance or grant of options to purchase up to 4,716,951 shares of
Common Stock (included in such number are all options outstanding on the
date this paragraph of the Certificate of Incorporation becomes effective
or the issuance of shares of Common Stock upon the exercise of any such
options which number shall be equitably adjusted on the occurrence of an
Extraordinary Common Stock Event, as hereinafter defined, a
reclassification, reorganization or similar event affecting the Common
Stock) to officers, directors, employees of or consultants to the
Corporation, (y) the sale to employees, consultants and directors of shares
reacquired by the Company pursuant to transactions described in Sections
5.2(e)(ii) and (iii) of the Series D Convertible Preferred Stock Purchase
Agreement dated as of April 29, 1999, by and
<PAGE>
among the Corporation and the purchasers named therein, and options issued
with respect to such reacquired shares, or (z) the issuance of any shares
of Common Stock upon the exercise of (i) warrants by Lighthouse Capital
Partners, L.P. to purchase up to 24,000 shares of Common Stock (as may be
equitably adjusted pursuant to the terms thereof), (ii) warrants by
InterVoice, Inc. to purchase up to 494,158 shares of Common Stock (as may
be equitably adjusted pursuant to the terms thereof), (iii) warrants by
SoundWorks USA, Inc. to purchase up to 20,000 shares of Common Stock or
(iv) warrants issued to banks and other financial institutions in
connection with any financing arrangements to which the Company is a party
which have been approved by a majority of the members of the Board of
Directors."
[remainder of page intentionally left blank]
-2-
<PAGE>
4. Pursuant to Section 228(a) of the General Corporation Law of the State
of Delaware, the holders of outstanding shares of the Corporation having no less
than the minimum number of votes that would be necessary to authorize or take
such actions at a meeting at which all shares entitled to vote thereon were
present and voted, consented to the adoption of the aforesaid amendments without
a meeting, without a vote and without prior notice and that written notice of
the taking of such actions has been given in accordance with Section 228(d) of
the General Corporation Law of the State of Delaware.
5. The amendment of the certificate of incorporation herein certified has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed this 31st day of December, 1999.
/s/ Stuart R. Patterson
----------------------------
Stuart R. Patterson
President and Chief Executive Officer
-3-
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
SPEECHWORKS INTERNATIONAL, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
SpeechWorks International, Inc.
2. The original name of the Corporation was Applied Language
Technologies, Inc. The date of filing of the original Certificate of
Incorporation of the Corporation was July 24, 1995 and the Certificate of
Incorporation was restated on April 29, 1999 and amended by a Certificate of
Amendment filed on January 5, 2000.
3. The Restated Certificate of Incorporation, as amended, is hereby
further amended by deleting Article FOURTH thereof in its entirety and by
substituting the following in lieu thereof:
FOURTH. The total number of shares of all classes of capital stock that
the Corporation shall have the authority to issue is 46,791,662 shares, $.00l
par value, which shall consist of two classes of stock as follows:
Common Stock, $.00l par value 35,000,000 shares
("Common Stock")
Preferred Stock, $.00l par value 11,791,662 shares
The Preferred Stock shall consist of five series as follows:
Series A Convertible Participating Preferred Stock 2,475,000 shares
("Series A Convertible Participating
Preferred Stock")
Series B Convertible Preferred Stock 2,474,500 shares
("Series B Convertible Preferred Stock")
Series C Convertible Preferred Stock 1,626,092 shares
("Series C Convertible Preferred Stock")
Series D Convertible Preferred Stock 2,671,389 shares
<PAGE>
("Series D Convertible Preferred Stock")
Series E Convertible Preferred Stock 2,544,681 shares
("Series E Convertible Preferred Stock")
_____________________________________________________________________________
The Series A Convertible Participating Preferred Stock, the Series B
Convertible Preferred Stock, the Series C Convertible Preferred Stock, the
Series D Convertible Preferred Stock and the Series E Convertible Preferred
Stock are collectively referred to herein as the "Preferred Stock."
The rights, preferences, privileges and restrictions granted to and imposed
upon the various classes and series of stock of the Corporation are as follows:
2
<PAGE>
A. COMMON STOCK
------------
i. Voting Rights. Except as otherwise required by law or this
-------------
Certificate of Incorporation, on all matters to be voted on by
stockholders of the Corporation each holder of Common Stock shall have
one vote in respect of each share of Common Stock held of record by
such holder on the books of the Corporation. Except as otherwise
required by law or provided herein, holders of Common Stock shall vote
together as a single class with holders of Preferred Stock having
voting rights, subject to any special or preferential voting rights of
any series of Preferred Stock from time to time outstanding.
ii. Dividends. Whenever dividends upon the Preferred Stock at the
---------
time outstanding, to the extent of any preference to which such
Preferred Stock is entitled, shall have been paid in full or declared
and set apart for payment for all past dividend periods, and after the
provisions for any sinking or purchase fund or funds for any series of
Preferred Stock shall have been complied with, the Board of Directors
may declare and pay dividends on the Common Stock, payable in cash, or
otherwise, and the holders of shares of Preferred Stock shall be
entitled to share therein to the extent provided in this Certificate
of Incorporation.
iii. Liquidation Rights. In the event of any liquidation,
------------------
dissolution, or winding up of the Corporation or upon the distribution
of the assets of the Corporation, all assets and funds of the
Corporation remaining after the payment to the holders of the
Preferred Stock of the full preferential amounts to which they shall
be entitled as provided in this Certificate of Incorporation, shall be
divided and distributed to the holders of Common Stock, subject to the
provisions of this Certificate of Incorporation that would allow the
holders of any series of Preferred Stock to participate in
distributions to which the holders of Common Stock are entitled.
B. PREFERRED STOCK
---------------
1. Voting Rights.
-------------
(a) Except as otherwise expressly provided in this Certificate of
Incorporation, or as required by law, the holders of shares of Preferred
Stock shall vote together with the Common Stock and all other classes and
series of stock of the Corporation entitled to vote together with the
Common Stock as a single class on all actions to be taken by the
shareholders of the Corporation. Each share of Preferred Stock shall
entitle the holder thereof to such number of votes per share on each such
action as shall equal the largest number of whole shares of Common Stock
into which such shares of Preferred Stock could be converted, pursuant to
the provisions of paragraph 5 hereof, at the record date for the
determination of shareholders entitled to vote on such matter or, if no
such record date is established, at the date such vote is taken or any
written consent of shareholders is
3
<PAGE>
solicited. Notwithstanding the foregoing, a holder of Preferred Stock shall
not have a vote with respect to any additional shares of Common Stock which
are issuable as a result of anti-dilution adjustments set forth in
paragraph 5(e)(i) due to the sale or issuance by the Corporation of
warrants, options, purchase rights and the like until such time as the
shares of Common Stock are actually issued upon exercise of such warrants,
options, purchase rights, and the like.
(b) At any time when shares of any series of Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by this
Certificate of Incorporation, and in addition to any other vote required by
law or this Certificate of Incorporation, without the written consent of
the holders of at least fifty percent (50%) of the then outstanding shares
of Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) as a separate class or, if such amendment would
only materially adversely affect any of the rights, preferences, privileges
of or limitations provided herein of a series of Preferred Stock, without
the vote or written consent of the holders of at least fifty percent (50%)
of the then outstanding shares of such series of Preferred Stock (unless
the provisions of paragraph 1(b)(iii) apply), given in writing or by vote
at a meeting, consenting or voting (as the case may be) as a separate
series, the Corporation will not:
(i) Amend this Certificate of Incorporation if such amendment
would materially adversely affect any of the rights, preferences,
privileges of or limitations provided for herein of the Preferred
Stock or any series thereof. Without limiting the generality of the
preceding sentence, the Corporation will not amend its Certificate of
Incorporation to:
(A) change the dividend rights of the holders of such series
of Preferred Stock; or change the relative seniority rights of
the holders of such series of Preferred Stock as to the payment
of dividends in relation to the holders of any other class or
series of capital stock of the Corporation; or
(B) change the amount payable to the holders of such series
of Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, or change the
relative seniority of the liquidation preferences of the holders
of such series of Preferred Stock in relation to the rights upon
liquidation of the holders of any other class or series of
capital stock of the Corporation; or
(C) cancel or modify the conversion rights of the holders of
shares of such series of Preferred Stock provided for in
paragraph 5 herein; or
(D) change the percentage vote requirements set forth in
this paragraph 1(b).
4
<PAGE>
(ii) Increase the authorized number of shares of Preferred
Stock or create or increase the authorized number of shares of any
additional class or series of shares of the Corporation's capital
stock, including any security or obligation convertible into Preferred
Stock or any other class or series of stock, unless such class or
series of capital stock ranks junior to the Preferred Stock with
respect to the right to receive dividends, the distribution of assets
upon liquidation, dissolution or winding up of the Corporation and as
to redemption, whether such creation, authorization or increase shall
be by means of amendment to this Certificate of Incorporation, or by
merger, consolidation or otherwise.
(iii) Without limiting the generality of the foregoing, the
Corporation will not, without the approval of the holders of at least
two-thirds of the then outstanding shares of any series of Preferred
Stock, voting as a single series, amend this Certificate of
Incorporation to:
(A) change the relative seniority rights of the holders of
such series of Preferred Stock as to the payment of dividends in
relation to the holders of any other series of Preferred Stock of
the Corporation; or
(B) change the relative seniority of the liquidation
preferences of the holders of such series of Preferred Stock in
relation to the rights upon liquidation of the holders of any
other series of Preferred Stock of the Corporation; or
(C) change the relative seniority of the holders of such
series of Preferred Stock in relation to the rights upon
redemption of the holders of any other class or series of capital
stock of the Corporation;
2. No Impairment of Rights. The Corporation will not, by amendment of
-----------------------
this Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the Preferred Stock set forth herein, and will at all times
in good faith assist in the carrying out of all such terms and in the taking of
all such action as may be necessary or appropriate in order to protect the
rights of the holders of the Preferred Stock against dilution or other
impairment. Without limiting the generality of the foregoing, the Corporation
(i) will not increase the par value of any shares of stock receivable on the
conversion of the Preferred Stock above the amount payable therefor on such
conversion, and (ii) will take all such action as may be necessary or
appropriate in order that the Corporation may validly and legally issue fully
paid and non-assessable shares of stock on the conversion of all Preferred Stock
from time to time outstanding.
3. Dividend Rights. No cash dividends shall be declared or set aside for
---------------
any shares of Preferred Stock except as follows:
5
<PAGE>
(a) Series A Convertible Participating Preferred Stock. From and
--------------------------------------------------
after the date of the original issuance of the shares of Series A
Convertible Participating Preferred Stock, the holders of the Series A
Convertible Participating Preferred Stock shall be entitled to receive, out
of funds legally available therefor, cumulative dividends per share at the
simple rate per annum of 6% of $1.00, being the original price for which
the shares of Series A Convertible Participating Preferred Stock were
initially issued (as equitably adjusted by the Board of Directors for any
stock split, stock dividend, reclassification of shares or other similar
event affecting Series A Convertible Participating Preferred Stock, the
"Original Purchase Price" for such series) (the "Series A Accruing
Dividends"). The Series A Accruing Dividends shall accrue from day to day,
whether or not earned or declared, and shall be cumulative so that, if such
dividends in respect of any previous or current dividend period, at the
aforesaid rate, shall not have been paid or declared and a sum sufficient
for the payment thereof set apart, the deficiency shall first be paid
before any dividend or other distribution shall be paid on or declared and
set apart for the Common Stock or any other class or series of capital
stock of the Corporation that is junior to the Series A Convertible
Participating Preferred Stock with respect to the right to receive
dividends; provided, however, that the Corporation shall be under no
obligation to pay any such Series A Accruing Dividends (i) until and when
so declared by the Board of Directors, (ii) until the liquidation,
dissolution or winding-up of the Corporation as provided in Section 4
below, or (iii) until any redemption of the Series A Convertible
Participating Preferred Stock; and
(b) Series B Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series B Convertible Preferred
Stock, the holders of the Series B Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends per share at the simple rate per annum of 6% of $2.75, being the
original price for which the shares of Series B Convertible Preferred Stock
were initially issued (as equitably adjusted by the Board of Directors for
any stock split, stock dividend, reclassification of shares or other
similar event affecting Series B Convertible Preferred Stock, the "Original
Purchase Price" for such series) (the "Series B Accruing Dividends"). The
Series B Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative so that, if such dividends in
respect of any previous or current dividend period, at the aforesaid rate,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the deficiency shall first be paid before any dividend
or other distribution shall be paid on or declared and set apart for the
Common Stock or any other class or series of capital stock of the
Corporation that is junior to the Series B Convertible Preferred Stock with
respect to the right to receive dividends; provided, however, that the
Corporation shall be under no obligation to pay any such Series B Accruing
Dividends (i) until and when so declared by the Board of Directors, (ii)
until the liquidation, dissolution or winding-up of the Corporation as
provided in Section 4 below, or (iii) until any redemption of the Series B
Convertible Preferred Stock; and
(c) Series C Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series C Convertible Preferred
Stock, the holders of the
6
<PAGE>
Series C Convertible Preferred Stock shall be entitled to receive, out of
funds legally available therefor, cumulative dividends per share at the
simple rate per annum of 6% of $4.25, being the original price for which
the shares of Series C Convertible Preferred Stock were initially issued
(as equitably adjusted by the Board of Directors for any stock split, stock
dividend reclassification of shares or other similar event affecting Series
C Convertible Preferred Stock, the "Original Purchase Price" for such
series) (the "Series C Accruing Dividends"). The Series C Accruing
Dividends shall accrue from day to day, whether or not earned or declared,
and shall be cumulative so that, if such dividends in respect of any
previous or current dividend period, at the aforesaid rate, shall not have
been paid or declared and a sum sufficient for the payment thereof set
apart, the deficiency shall first be paid before any dividend or other
distribution shall be paid on or declared and set apart for the Common
Stock or any other class or series of capital stock of the Corporation that
is junior to the Series C Convertible Preferred Stock with respect to the
right to receive dividends; provided, however, that the Corporation shall
be under no obligation to pay any such Series C Accruing Dividends (i)
until and when so declared by the Board of Directors, (ii) until the
liquidation, dissolution or winding-up of the Corporation as provided in
Section 4 below, or (iii) until any redemption of the Series C Convertible
Preferred Stock; and
(d) Series D Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series D Convertible Preferred
Stock, the holders of the Series D Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends per share at the simple rate per annum of 6% of $8.92, being the
original price for which the shares of Series D Convertible Preferred Stock
were initially issued (as equitably adjusted by the Board of Directors for
any stock split, stock dividend reclassification of shares or other similar
event affecting the Series D Convertible Preferred Stock, the "Original
Purchase Price" for such series) (the "Series D Accruing Dividends"). The
Series D Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative so that, if such dividends in
respect of any previous or current dividend period, at the aforesaid rate,
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the deficiency shall first be paid before any dividend
or other distribution shall be paid on or declared and set apart for the
Common Stock or any other class or series of capital stock of the
Corporation that is junior to the Series D Convertible Preferred Stock with
respect to the right to receive dividends; provided, however, that the
Corporation shall be under no obligation to pay any such Series D Accruing
Dividends (i) until and when so declared by the Board of Directors, (ii)
until the liquidation, dissolution or winding-up of the Corporation as
provided in Section 4 below, or (iii) until any redemption of the Series D
Convertible Preferred Stock; and
(e) Series E Convertible Preferred Stock. From and after the date of
------------------------------------
the original issuance of the shares of Series E Convertible Preferred
Stock, the holders of the Series E Convertible Preferred Stock shall be
entitled to receive, out of funds legally available therefor, cumulative
dividends per share at the simple rate per annum of 6% of $7.86, being the
original price for which the shares of Series E Convertible Preferred
7
<PAGE>
Stock were initially issued (as equitably adjusted by the Board of
Directors for any stock split, stock dividend reclassification of shares or
other similar event affecting the Series E Convertible Preferred Stock, the
"Original Purchase Price" for such series) (the "Series E Accruing
Dividends"). The Series E Accruing Dividends shall accrue from day to day,
whether or not earned or declared, and shall be cumulative so that, if such
dividends in respect of any previous or current dividend period, at the
aforesaid rate, shall not have been paid or declared and a sum sufficient
for the payment thereof set apart, the deficiency shall first be paid
before any dividend or other distribution shall be paid on or declared and
set apart for the Common Stock or any other class or series of capital
stock of the Corporation that is junior to the Series E Convertible
Preferred Stock with respect to the right to receive dividends; provided,
however, that the Corporation shall be under no obligation to pay any such
Series E Accruing Dividends (i) until and when so declared by the Board of
Directors, (ii) until the liquidation, dissolution or winding-up of the
Corporation as provided in Section 4 below, or (iii) until any redemption
of the Series E Convertible Preferred Stock; and
(f) In the event the Board of Directors of the Corporation shall
declare a dividend (other than a dividend payable in Common Stock or other
securities of the Company) payable upon the then outstanding shares of the
Common Stock of the Corporation, the Board of Directors shall declare at
the same time a dividend upon the then outstanding shares of the Preferred
Stock, payable at the same time as the dividend paid on the Common Stock,
in an amount equal to the amount of dividends, per share of Preferred
Stock, as would have been payable on the largest number of whole shares of
Common Stock issuable upon conversion of each share of Preferred Stock
pursuant to the provisions of paragraph 5 hereof as of the record date for
the determination of holders of Common Stock entitled to receive such
dividends; and
(g) In the event the Board of Directors of the Corporation shall
declare a dividend (other than a dividend payable in Common Stock or other
securities of the Company) payable upon any class or series of capital
stock of the Corporation other than Common Stock or the Preferred Stock,
the Board of Directors shall declare at the same time a dividend upon the
then outstanding shares of Preferred Stock, payable at the same time as
such dividend on such other class or series of capital stock in an amount
equal to, (i) in the case of any series or class convertible into Common
Stock, that dividend, per share of Preferred Stock, as would equal the
dividend payable on such other class or series determined as if all such
shares of such class or series had been converted to Common Stock and all
shares of Preferred Stock have been converted to Common Stock on the record
date for the determination of holders entitled to receive such dividend or
(ii) if such class or series of Capital Stock is not convertible into
Common Stock, at a rate per share of each series of Preferred Stock
determined by dividing the amount of the dividend payable on each share of
such class or series of capital stock by the original issuance price of
such class or series of capital stock and multiplying such quotient by the
Original Purchase Price for such series.
8
<PAGE>
(h) Except for the Series A Accruing Dividends, the Series B Accruing
Dividends, the Series C Accruing Dividends, the Series D Accruing Dividends
or the Series E Accruing Dividends and dividends declarable and payable in
accordance with paragraphs 3(f) and (g) above, the Company shall not
declare and pay a dividend on any series of Preferred Stock unless the same
dividend is declared and paid on all series of Preferred Stock.
Furthermore, the Corporation shall not declare and pay any Series A
Accruing Dividends, Series B Accruing Dividends, Series C Accruing
Dividends or Series D Accruing Dividends unless the Series E Accruing
Dividends are declared and paid at the same time.
4. Liquidation Rights.
------------------
(a) In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, before any payment shall be
made or assets distributed to the holders of Common Stock, Series A
Convertible Participating Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series D Convertible Preferred
Stock or any other class or series of stock which ranks on liquidation,
with respect to the right to receive payments upon such liquidation, junior
to the Series E Convertible Preferred Stock, the holders of record of
shares of Series E Convertible Preferred Stock shall be entitled to
receive, at the discretion of each holder, either (i) an amount per share
equal to the Original Purchase Price of the Series E Convertible Preferred
Stock plus an amount equal to all unpaid Series E Accruing Dividends, plus
any other declared and unpaid dividends thereon, up to and including the
date of payment, out of the assets of the Corporation legally available
therefor, or (ii) the number of shares of Common Stock into which such
holder's Series E Convertible Preferred Stock are convertible pursuant to
paragraph 5 hereof plus an amount equal to all unpaid Series E Accruing
Dividends, plus any other declared and unpaid dividends thereon, up to and
including the date of payment, out of the assets of the Corporation legally
available therefor. The aggregate dollar amount to be paid to the holders
of Series E Convertible Preferred Stock is referred to as the "Series E
Convertible Preferred Liquidation Amount." If the funds available upon
liquidation are insufficient to satisfy in full the Series E Convertible
Preferred Liquidation Amount, the entire assets of the Corporation
available for such distribution shall be distributed ratably among the
holders of the Series E Convertible Preferred Stock based on the number of
shares of Series E Convertible Preferred Stock held by each.
(b) Subject to the special adjustment provisions for the Series D
Convertible Preferred Stock contained in paragraph 5(e)(iv), upon any such
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series E Preferred Stock
shall have been paid in full the Series E Convertible Preferred Liquidation
Amount, before any payment shall be made or assets distributed to the
holders of Common Stock, Series A Convertible Participating Preferred
Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock or any other class or series of stock which ranks on liquidation,
with respect to the right to receive payments upon such liquidation, junior
to the Series D Convertible Preferred Stock, the holders of
9
<PAGE>
record of shares of Series D Convertible Preferred Stock shall be entitled
to receive, at the discretion of each holder, either (i) an amount per
share equal to the Original Purchase Price of the Series D Convertible
Preferred Stock plus an amount equal to the unpaid Series D Accruing
Dividends, plus any other declared and unpaid dividends thereon, up to and
including the date of payment, out of the assets of the Corporation legally
available therefor, or (ii) the number of shares of Common Stock into which
such holder's Series D Convertible Preferred Stock are convertible pursuant
to paragraph 5 hereof plus an amount equal to the unpaid Series D Accruing
Dividends, plus any other declared and unpaid dividends thereon, up to and
including the date of payment, out of the assets of the Corporation legally
available therefor. The aggregate dollar amount to be paid to the holders
of Series D Convertible Preferred Stock is referred to as the "Series D
Convertible Preferred Liquidation Amount." If, after payment to the Series
E Convertible Preferred Stock, the funds available upon liquidation are
insufficient to satisfy in full the Series D Convertible Preferred
Liquidation Amount, the entire assets of the Corporation available for such
distribution shall be distributed ratably among the holders of the Series D
Convertible Preferred Stock based on the number of shares of Series D
Convertible Preferred Stock held by each.
(c) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series E Convertible
Preferred Stock and Series D Convertible Preferred Stock shall have been
paid in full the Series E Convertible Preferred Liquidation Amount and the
Series D Convertible Preferred Liquidation Amount, respectively, before any
payment shall be made or any assets distributed to the holders of Common
Stock, Series A Convertible Participating Preferred Stock, Series B
Convertible Preferred Stock or any other class or series of stock which
ranks on liquidations, with respect to the right to receive payments upon
such liquidation, junior to the Series C Convertible Preferred Stock, the
holders of record of shares of Series C Convertible Preferred Stock shall
be entitled to receive, at the discretion of each holder, either (i) an
amount per share equal to the Original Purchase Price of the Series C
Convertible Preferred Stock plus an amount equal to the unpaid Series C
Accruing Dividends, plus any other declared and unpaid dividends thereon,
up to and including the date of payment, out of the assets of the
Corporation legally available therefor, or (ii) the number of shares of
Common Stock into which such holder's Series C Convertible Preferred Stock
are convertible pursuant to paragraph 5 hereof plus an amount equal to the
unpaid Series C Accruing Dividends, plus any other declared and unpaid
dividends thereon, up to and including the date of payment, out of the
assets of the Corporation legally available therefor. The aggregate of
such dollar amounts to be paid to the holders of the Series C Convertible
Preferred Stock is referred to as the "Series C Convertible Preferred
Liquidation Amount". If, after payment to the Series E Convertible
Preferred Stock and Series D Convertible Preferred Stock, respectively, the
funds available upon liquidation are insufficient to satisfy in full the
Series C Convertible Preferred Liquidation Amount, the entire assets of the
Corporation available for such distribution to the holders of Series C
Convertible Preferred Stock shall be distributed ratably among such holders
based on the number of shares of Series C Convertible Preferred Stock held
by each.
10
<PAGE>
(d) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series E Convertible
Preferred Stock, Series D Convertible Preferred Stock and Series C
Preferred Stock shall have been paid in full the Series E Convertible
Preferred Liquidation Amount, the Series D Convertible Preferred
Liquidation Amount and the Series C Convertible Preferred Liquidation
Amount, respectively, before any payment shall be made or any assets
distributed to the holders of Common Stock, Series A Convertible
Participating Preferred Stock or any other class or series of stock which
ranks on liquidations, with respect to the right to receive payments upon
such liquidation, junior to the Series B Convertible Preferred Stock, the
holders of record of shares of Series B Convertible Preferred Stock shall
be entitled to receive, at the discretion of each holder, either (i) an
amount per share equal to the Original Purchase Price of the Series B
Convertible Preferred Stock plus an amount equal to the unpaid Series B
Accruing Dividends, plus any other declared and unpaid dividends thereon,
up to and including the date of payment, out of the assets of the
Corporation legally available therefor, or (ii) the number of shares of
Common Stock into which such holder's Series B Convertible Preferred Stock
are convertible pursuant to paragraph 5 hereof plus an amount equal to the
unpaid Series B Accruing Dividends, plus any other declared and unpaid
dividends thereon, up to and including the date of payment, out of the
assets of the Corporation legally available therefor. The aggregate of
such dollar amounts to be paid to the holders of the Series B Convertible
Preferred Stock is referred to as the "Series B Convertible Preferred
Liquidation Amount". If, after payment to the Series E Convertible
Preferred Stock, Series D Convertible Preferred Stock and Series C
Convertible Preferred Stock, respectively, the funds available upon
liquidation are insufficient to satisfy in full the Series B Convertible
Preferred Liquidation Amount, the entire assets of the Corporation
available for such distribution to the holders of Series B Convertible
Preferred Stock shall be distributed ratably among such holders based on
the number of shares of Series B Convertible Preferred Stock held by each.
(e) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series E Convertible
Preferred Stock, Series D Convertible Preferred Stock, Series C Convertible
Preferred Stock and Series B Convertible Preferred Stock shall have been
paid in full the Series E Convertible Preferred Liquidation Amount, the
Series D Convertible Preferred Liquidation Amount, the Series C Convertible
Preferred Liquidation Amount and the Series B Convertible Preferred
Liquidation Amount, respectively, before any payment shall be made or any
assets distributed to the holders of Common Stock or any other class or
series of stock which ranks on liquidations, with respect to the right to
receive payments upon such liquidation, junior to the Series A Convertible
Participating Preferred Stock, the holders of record of shares of Series A
Convertible Participating Preferred Stock shall be entitled to receive, out
of the assets of the Corporation legally available therefor, an amount per
share equal to the Original Purchase Price of the Series A Convertible
Participating Preferred Stock, plus an amount equal to the unpaid Series A
Accruing Dividends, plus any other declared and unpaid dividends thereon,
up to and including the date of payment. The aggregate of such amounts to
be paid to the holders of the Series A Convertible
11
<PAGE>
Participating Preferred Stock is referred to as the "Series A Convertible
Preferred Liquidation Amount". For the purposes hereof, the Common Stock
shall rank on liquidation junior to the Series A Convertible Participating
Preferred Stock with respect to the right to receive payments upon
liquidation. If, after payment to the Series E Convertible Preferred Stock,
Series D Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series B Convertible Preferred Stock, respectively, the funds available
upon liquidation are insufficient to satisfy in full the Series A
Convertible Preferred Liquidation Amount, the entire assets of the
Corporation available for such distribution to the holders of Series A
Convertible Participating Preferred Stock shall be distributed ratably
among such holders based on the number of shares of Series A Convertible
Participating Preferred Stock held by each.
(f) Upon any such liquidation, dissolution or winding up of the
Corporation, immediately after the holders of Series E Convertible
Preferred Stock, Series D Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series A
Convertible Participating Preferred Stock shall have been paid in full the
Series E Convertible Preferred Liquidation Amount, the Series D Convertible
Preferred Liquidation Amount, the Series C Convertible Preferred
Liquidation Amount, the Series B Convertible Preferred Liquidation Amount
and the Series A Convertible Preferred Liquidation Amount, respectively,
the holders of Series A Convertible Participating Preferred Stock shall
share ratably with the holders of the outstanding shares of Common Stock in
the remaining net assets of the Corporation available for distribution
(with each share of Series A Convertible Participating Preferred Stock
being deemed, for such purpose, to be equal to the number of shares of
Common Stock (including fractions of a share) into which such share of
Series A Convertible Participating Preferred Stock is convertible
immediately prior to the close of business on the business day fixed for
such distribution).
(g) The merger or consolidation of the Corporation into or with
another corporation which results in the exchange of outstanding shares of
the Corporation for securities or other consideration issued or paid or
caused to be issued or paid by any such other corporation or affiliate
thereof (other than a merger in which the Corporation is the surviving
corporation and which will not result in more than fifty percent (50%) of
the capital stock of the Corporation outstanding immediately after the
effective date of such merger being owned of record or beneficially by
persons other than the holders of such capital stock immediately prior to
such merger), or the sale, conveyance or transfer of all or substantially
all of the assets of the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation for purposes of this paragraph
4, unless the holders of at least a majority of the then outstanding shares
of Preferred Stock elect otherwise by giving notice to the Corporation at
least two (2) days before the effective date of such event. If no such
notice is given, such event shall be deemed to be a liquidation,
dissolution or winding up for purposes of this paragraph 4(g) and the
provisions of paragraph 5(h) shall not apply. The Series E Convertible
Preferred Liquidation Amount, the Series D Convertible Preferred
Liquidation Amount, the Series C Convertible Preferred Liquidation Amount,
the Series B Convertible Preferred
12
<PAGE>
Liquidation Amount and the Series A Convertible Preferred Liquidation
Amount (collectively the "Preferred Stock Liquidation Amounts") shall in
all events be paid in cash; provided, however, that if the Preferred Stock
Liquidation Amounts are payable in connection with a consolidation or
merger of the Corporation, then each holder of Preferred Stock may, at its
election, receive payments of its respective Preferred Stock Liquidation
Amount in the same form of consideration as is payable with respect to the
Common Stock. Wherever a distribution provided for in this Section 4 is
payable in property other than in cash, the value of such distribution
shall be the fair market value of such property as determined in good faith
by the Company's Board of Directors.
5. Conversion Rights. The holders of the Preferred Stock shall have the
-----------------
following conversion rights:
(a) Conversion.
-----------
(i) Optional Conversion. Subject to and in compliance with the
-------------------
provisions of this paragraph 5, any shares of the Series A Convertible
Participating Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred
Stock or Series E Convertible Preferred Stock may, at the option of
the holder, be converted at any time or from time to time into fully-
paid and non-assessable shares (calculated as to each conversion to
the nearest whole share) of Common Stock (except that upon any
liquidation of the Corporation or redemption of shares of Preferred
Stock the right of conversion thereof shall terminate at the close of
business on the last business day next preceding the date fixed for
payment of the amount distributable on such shares of Preferred
Stock). The number of shares of Common Stock to which a holder of
shares of a series of Preferred Stock shall be entitled upon
conversion shall be the product obtained by multiplying the Applicable
Conversion Rate for such series (determined as provided in paragraph
5(c)) by the number of shares of Preferred Stock being converted.
(ii) Conversion Upon Qualified Public Offering. All outstanding
-----------------------------------------
shares of Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the
Corporation or a transfer agent designated by the Corporation into the
number of shares of Common Stock into which such Preferred Stock is
convertible pursuant to paragraph 5(a) hereof, immediately prior to
the closing of the first firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation in which the aggregate gross
proceeds exceed $30,000,000 and which is underwritten by a nationally
recognized investment banking firm (a "Qualified Public Offering").
Notice of any such Qualified Public Offering must be delivered to each
holder of Preferred Stock at least thirty (30) days in advance of the
proposed closing date for such Qualified Public Offering. As soon as
13
<PAGE>
practicable following the automatic conversion of the Preferred Stock
as a result of a Qualified Public Offering the Corporation will give
each holder written notice of such conversion.
(iii) Automatic Conversion. All outstanding shares of any
--------------------
series of Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the
Corporation or a transfer agent designated by the Corporation into the
number of shares of Common Stock into which such series of Preferred
Stock is convertible pursuant to paragraph 5(a) hereof at such time as
fewer than 10% of the shares of such series of Preferred Stock as
originally issued by the Company remain outstanding. As soon as
practicable following the automatic conversion of any series of
Preferred Stock pursuant to this paragraph 5(a)(iii), the Corporation
will give each holder of such series of Preferred Stock written notice
of such conversion.
(b) Conversion Procedures. Upon the occurrence of the conversion
---------------------
specified in paragraphs 5(a)(i), 5(a)(ii) or 5(a)(iii) hereof, each holder
of such Preferred Stock shall surrender the certificates representing such
shares at the office of the Corporation or of its transfer agent designated
by the Corporation. Thereupon, there shall be issued and delivered to such
holder a certificate or certificates for the number of shares of Common
Stock into which the shares of the Preferred Stock surrendered were
convertible on the date on which such conversion occurred. The Corporation
shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless certificates evidencing
such shares of the Preferred Stock being converted are either delivered to
the Corporation or any such transfer agent or the holder notifies the
Corporation or any such transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation (with surety if requested) from
any loss incurred by it in connection therewith.
(c) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") for each series of Preferred Stock
shall be the quotient obtained by dividing the Original Purchase Price for
such series, by the Applicable Conversion Value for such series, calculated
as provided in paragraph 5(d).
(d) Applicable Conversion Values. The Applicable Conversion Value
----------------------------
for each series of Preferred Stock, in effect from time to time shall
initially be the Original Purchase Price for such series of Preferred
Stock, as adjusted from time to time in accordance with paragraph 5(e)
hereof. As of April 7, 2000, after adjustment for the 3-for-2 split of
Common Stock effected by the Corporation on January 5, 2000, the Applicable
Conversion Value for the Series A Preferred Stock was $0.67, the Applicable
Conversion Value for the Series B Preferred Stock was $1.83, the Applicable
Conversion Value for the Series C Preferred Stock was $2.84 and the
Applicable Conversion Value for the Series D Preferred Stock was $5.95.
14
<PAGE>
(e) Adjustments to Applicable Conversion Values.
-------------------------------------------
(i) Upon Sale or Issuance of Common Stock.
-------------------------------------
If the Corporation shall, while there are any shares of any
series of Preferred Stock outstanding, issue or sell shares of
its Common Stock without consideration or at a price per share
less than the Applicable Conversion Value for such series in
effect immediately prior to such issuance or sale, then upon each
such issuance or sale, except as hereinafter provided, such
Applicable Conversion Values shall be lowered so as to be equal
to an amount determined by multiplying such Applicable Conversion
Value by a fraction;
(x) the numerator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior to the
issuance of such additional shares of Common Stock, plus (2)
the number of shares of Common Stock which the net aggregate
consideration, if any, received by the Corporation for the
total number of such additional shares of Common Stock so
issued would purchase at such Applicable Conversion Value in
effect immediately prior to such issuance, and
(y) the denominator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares of Common Stock plus
(2) the number of such additional shares of Common Stock so
issued;
provided, however, in no event will any adjustment be made to the
-------- -------
extent it would result in any shares of Common Stock being issued
for an amount which is less than the par value of such shares.
Upon Sale or Issuance of Warrants, Options or Purchase
------------------------------------------------------
Rights with Respect to Common Stock - For the purposes of this
-----------------------------------
paragraph 5(e)(i), the issuance of any warrants, options,
subscriptions or purchase rights with respect to shares of Common
Stock and the issuance of any securities convertible into or
exchangeable for shares of Common Stock (or the issuance of any
warrants, options or any rights with respect to such convertible
or exchangeable securities) shall be deemed an issuance at such
time of such Common Stock if the Net Consideration Per Share (as
hereinafter determined) which may be received by the Corporation
for any such Common Stock shall be less than the Applicable
Conversion Value(s) at the time of such issuance. Any obligation,
agreement or undertaking to issue warrants, options,
subscriptions or purchase rights or convertible or exchangeable
securities at any time in the future shall be deemed to be an
15
<PAGE>
issuance at the time such obligation, agreement or undertaking is
made or arises. No adjustment of the Applicable Conversion
Value(s) shall be made under this paragraph 5(e)(i) upon the
issuance of any shares of Common Stock which are issued pursuant
to the exercise of any warrants, options, subscriptions or
purchase rights or pursuant to the exercise of any conversion or
exchange rights in any convertible securities if any adjustment
shall previously have been made upon the issuance of any such
warrants, options or subscriptions or purchase rights or upon the
issuance of any convertible securities (or upon the issuance of
any warrants, options or any rights therefor) as above provided.
Any adjustment of the Applicable Conversion Value(s) with respect
to this paragraph which relates to warrants, options,
subscriptions or purchase rights with respect to shares of Common
Stock shall be disregarded if, as, and when such warrants,
options, subscriptions or purchase rights expire or are canceled
without being exercised, so that the Applicable Conversion
Value(s) effective immediately upon such cancellation or
expiration shall be equal to the Applicable Conversion Value(s)
in effect immediately prior to the time of the issuance of the
expired or canceled warrants, options, subscriptions or purchase
rights, with such additional adjustments as would have been made
to that Applicable Conversion Value(s) had the expired or
canceled warrants, options, subscriptions or purchase rights not
been issued. For purposes of this paragraph, the "Net
Consideration Per Share" which may be received by the Corporation
shall be determined as follows:
(x) The "Net Consideration Per Share" shall mean the
amount equal to the total amount of consideration, if any,
received by the Corporation for the issuance of such
warrants, options, subscriptions or other purchase rights or
convertible or exchangeable securities, plus the minimum
amount of consideration, if any, payable to the Corporation
upon exercise or conversion thereof, divided by the
aggregate number of shares of Common Stock that would be
issued if all such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities
were exercised, exchanged or converted.
(y) The "Net Consideration Per Share" which may be
received by the Corporation shall be determined in each
instance as of the date of issuance of warrants, options,
subscriptions or other purchase rights or convertible or
exchangeable securities without giving effect to any
possible future price adjustments or rate adjustments which
may be applicable with respect to such warrants, options,
subscriptions or other purchase rights or convertible or
exchangeable securities.
16
<PAGE>
Consideration: Non-Cash Property - For purposes of this
---------------------------------
paragraph 5(e)(i), if part or all of the consideration received
by the Corporation in connection with the issuance of shares of
Common Stock or the issuance of any of the securities described
in this paragraph 5(e)(i) consists of consideration other than
cash, the Board of Directors of the Corporation shall in its good
faith discretion value such property, whereupon such value shall
be given to such consideration and shall be recorded on the books
of the Corporation with respect to receipt of such property.
This paragraph 5(e)(i) shall not apply and no adjustment in
the Applicable Conversion Value shall be made hereunder under any
of the circumstances which would constitute an Extraordinary
Common Stock Event (as hereinafter defined in paragraph
5(e)(iii)).
(ii) Certain Issues of Common Stock Excepted. Anything in
---------------------------------------
paragraph 5(e)(i) to the contrary notwithstanding, the Corporation
shall not be required to make any adjustment of the Applicable
Conversion Values as set forth in paragraph 5(e)(i), in the case of
(w) the issuance of any shares of Common Stock upon conversion of any
shares of Preferred Stock, or (x) the issuance or grant of options to
purchase up to 6,280,960 shares of Common Stock (included in such
number are all options outstanding on the date this paragraph of the
Certificate of Incorporation becomes effective or the issuance of
shares of Common Stock upon the exercise of any such options which
number shall be equitably adjusted on the occurrence of an
Extraordinary Common Stock Event, as hereinafter defined, a
reclassification, reorganization or similar event affecting the Common
Stock) to officers, directors, employees of or consultants to the
Corporation, (y) the sale to employees, consultants and directors of
shares reacquired by the Company pursuant to transactions described in
Sections 5.2(e)(ii) and (iii) of the Series E Convertible Preferred
Stock Purchase Agreement dated as of April 2000, by and among the
Corporation and the purchasers named therein, and options issued with
respect to such reacquired shares, or (z) the issuance of any shares
of Common Stock upon the exercise of (i) warrants by Lighthouse
Capital Partners, L.P. to purchase up to 24,000 shares of Common Stock
(as may be equitably adjusted pursuant to the terms thereof), (ii)
warrants by InterVoice, Inc. to purchase up to 494,158 shares of
Common Stock (as may be equitably adjusted pursuant to the terms
thereof), (iii) warrants by SoundWorks USA, Inc. to purchase up to
20,000 shares of Common Stock (as may be equitably adjusted pursuant
to the terms thereof) or (iv) warrants issued to banks and other
financial institutions in connection with any financing arrangements
to which the Company is a party which have been approved by a majority
of the members of the Board of Directors, provided, however, that when
such warrants are issued, the shares of Common Stock issuable upon the
exercise of such warrants will not represent more than 10% of the
shares of Common Stock then outstanding.
17
<PAGE>
(iii) Upon Extraordinary Common Stock Event. Upon the happening
-------------------------------------
of an Extraordinary Common Stock Event (as hereinafter defined), the
Applicable Conversion Value of each series of Preferred Stock shall,
simultaneously with the happening of such Extraordinary Common Stock
Event, be adjusted by multiplying the then effective Applicable
Conversion Value of such series by a fraction, (X) the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such Extraordinary Common Stock Event and (Y) the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event,
and the product so obtained shall thereafter be the Applicable
Conversion Value for such series of Preferred Stock. The Applicable
Conversion Values, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive Extraordinary Common Stock
Event or Events.
"Extraordinary Common Stock Event" shall mean (x) the issue of
additional shares of the Common Stock as a dividend or other
distribution on outstanding Common Stock, (y) the subdivision of
outstanding shares of Common Stock into a greater number of shares of
the Common Stock, or (z) the combination of outstanding shares of the
Common Stock into a smaller number of shares of the Common Stock.
(iv) Special Adjustment Provisions for the Series D Convertible
----------------------------------------------------------
Preferred Stock.
---------------
(A) Notwithstanding anything herein to the contrary, if the
closing of a (x) Qualified Public Offering or (y) transaction which is
deemed to be a liquidation event pursuant to Section 4(g) regardless
of whether a majority of the then outstanding shares of Preferred
Stock have elected otherwise pursuant to such Section 4(g) (a "Sale of
the Corporation") occurs on or prior to December 31, 2000 and the
Target Price (as defined below) is less than $17.84 per share (as
equitably adjusted for any stock split, stock dividend,
reclassification of shares or other similar event affecting the Common
Stock), the Applicable Conversion Value for the Series D Convertible
Preferred Stock shall be adjusted (as of immediately prior to the
closing of such Qualified Public Offering or Sale of the Corporation),
if and only to the extent that such Applicable Conversion Value (as
adjusted) would result in an Applicable Conversion Rate for the Series
D Convertible Preferred Stock which is greater than the Applicable
Conversion Rate then in effect, to an amount equal to the greater of
(a) $6.00 and (b) the product of the Target Price multiplied by fifty
percent (50%). For purposes of this Section 5(e)(iv)(A), the Target
Price shall mean (x) the public offering price per share of Common
Stock as specified on the cover of the final prospectus relating to
the Qualified Public Offering plus 7.5% or (y) the price per share to
be received by the holders of Common Stock (assuming the conversion of
all shares of Preferred Stock) in the event of a Sale of the
Corporation.
18
<PAGE>
(B) Notwithstanding anything herein to the contrary, if the
closing of a (x) Qualified Public Offering or (y) Sale of the
Corporation occurs after December 31, 2000, the Applicable Conversion
Value for the Series D Convertible Preferred Stock shall be adjusted
(as of immediately prior to the closing of such Qualified Public
Offering or Sale of the Corporation), if and only to the extent that
such Applicable Conversion Value (as adjusted) would result in an
Applicable Conversion Rate for the Series D Convertible Preferred
Stock which is greater than the Applicable Conversion Rate then in
effect, to a dollar amount equal to that which would provide to each
holder of Series D Convertible Preferred Stock a forty percent (40%)
internal rate of return, compounded on an annual basis, calculated on
an as-if-converted basis and assuming the sale of such shares of
Common Stock issuable upon conversion of Series D Convertible
Preferred Stock by such holder at the Target Price per share, measured
from the date of the initial issuance of the Series D Convertible
Preferred Stock to the date of effectiveness with the Securities and
Exchange Commission of the registration statement relating to such
Qualified Public Offering or the consummation of the Sale of the
Corporation, as the case may be; provided, however, that the
Applicable Conversion Value for the Series D Preferred Stock shall not
be adjusted pursuant to this Section 5(e)(iv)(B) to an amount greater
than $8.92 nor less than $6.00. All calculations made pursuant to
this Section 5(e)(iv) shall be made in good faith by the Corporation's
Board of Directors after consultation with the Corporation's
independent public accountants.
(f) Dividends. In the event the Corporation shall make or issue, or
---------
fix a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in securities of the
Corporation (other than shares of Common Stock) or in assets (excluding
ordinary cash dividends paid out of retained earnings), then and in each
such event, provision shall be made so that the holders of Preferred Stock
shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the number of securities or such
other assets of the Corporation which they would have received had their
Preferred Stock been converted into Common Stock on the date of such event
and had they thereafter, during the period from the date of such event to
and including the Conversion Date (as that term is hereafter defined in
paragraph 5(j)), retained such securities or such other assets receivable
by them as aforesaid during such period, giving application to all
adjustments called for during such period under this paragraph 5 with
respect to the rights of the holders of Preferred Stock.
(g) Capital Reorganization or Reclassification. If the Common Stock
------------------------------------------
issuable upon the conversion of the Preferred Stock shall be changed into
the same or different number of shares of any series or classes of stock,
whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
elsewhere in this paragraph 5, or a reorganization, merger, consolidation
or sale of assets provided for elsewhere in this paragraph 5), then and in
each such event the holder of each share of Preferred Stock shall have the
right thereafter
19
<PAGE>
to convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization,
reclassification or other change by holders of the number or shares of
Common Stock into which such share of Preferred Stock might have been
converted immediately prior to such reorganization, reclassification or
change, all subject to further adjustment as provided herein.
(h) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common
Stock (other than a subdivision, combination, reclassification or exchange
of shares provided for elsewhere in this paragraph 5) or a merger or
consolidation of the Corporation with or into another corporation, or the
sale of all or substantially all of the Corporation's properties and assets
to any other person (other than an event described in paragraph 4(g),
unless the requisite number of holders of Preferred Stock have elected not
to treat such event as a liquidation for purposes of such paragraph), then,
as a part of such reorganization, merger, consolidation or sale, provision
shall be made so that the holders of the Preferred Stock shall be entitled
to receive upon consummation of such transaction, the number of shares of
stock or other securities or property of the Corporation, or of the
successor corporation resulting from such merger, consolidation or sale, to
which a holder of Common Stock issuable upon conversion would have been
entitled upon consummation of such capital reorganization, merger,
consolidation, or sale, provided that no such provision shall be deemed to
constitute the consent of the holders of the Preferred Stock to any such
transaction if such consent is required by this Certificate of
Incorporation or under applicable law.
(i) Certificate as to Adjustments. In each case of an adjustment or
-----------------------------
readjustment of the Applicable Conversion Rate for any series of Preferred
Stock, the Corporation will furnish each holder of such series of Preferred
Stock with a certificate showing such adjustment or readjustment, and
stating in detail the facts upon which such adjustment or readjustment is
based.
(j) Exercise of Conversion Privilege. To exercise its conversion
--------------------------------
privilege, a holder of Preferred Stock shall surrender the certificate or
certificates representing the shares being converted together with a
written notice of such conversion to the Corporation at its principal
office or to the transfer agent, if any, which has been designated by the
Corporation. Such notice shall also state the name or names (with address
or addresses) in which the certificate or certificates for shares of Common
Stock issuable upon such conversion shall be issued. The certificate or
certificates for shares of Preferred Stock surrendered for the conversion
shall be accompanied by proper assignment thereof to the Corporation or in
blank. The date when such written notice is received by the Corporation,
together with the certificate or certificates representing the shares of
Preferred Stock being converted or the date of an automatic conversion
pursuant to paragraph 5(a)(ii) or paragraph 5(a)(iii) hereof, shall be the
"Conversion Date". As promptly as practicable after the Conversion Date,
the Corporation shall issue and deliver to the holder of the shares of
Preferred Stock being converted, (i) such certificate or certificates as it
may request for the number of whole shares of Common Stock issuable
20
<PAGE>
upon the conversion of such shares of Preferred Stock in accordance with
the provisions of this paragraph 5, and (ii) cash, as provided in paragraph
5(k), in respect of any fraction of a share of Common Stock issuable upon
such conversion. Such conversion shall be deemed to have been effected
immediately prior to the close of business on the Conversion Date, and at
such time the rights of the holder as holder of the converted shares of
Preferred Stock shall cease and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Common Stock represented thereby.
(k) Cash in Lieu of Fractional Shares. No fractional shares of
---------------------------------
Common Stock or scrip representing fractional shares shall be issued upon
the conversion of shares of Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Preferred Stock, the Corporation shall pay to the holder of the shares of
Preferred Stock which were converted a cash adjustment in respect of such
fractional shares in an amount equal to the same fraction of the fair
market value per share of the Common Stock (as determined in good faith by
the Board of Directors) at the close of business on the Conversion Date.
The determination as to whether or not any to make any cash payment in lieu
of the issuance of fractional shares shall be based upon the total number
of shares of Preferred Stock being converted at any one time by any holder
thereof, not upon each share of Preferred Stock being converted.
(l) Partial Conversion. In the event some but not all of the shares
------------------
of Preferred Stock represented by a certificate or certificates surrendered
by a holder are converted, the Corporation shall execute and deliver to or
on the order of the holder, at the expense of the Corporation, a new
certificate representing the number of shares of Preferred Stock which were
not converted.
(m) Reservation of Shares of Common Stock. The Corporation shall at
-------------------------------------
all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion
of the shares of the Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Preferred Stock, and if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, the Corporation shall take such corporate action subject
to the terms of this Certificate of Incorporation and applicable law as may
be necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purpose.
(n) Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Preferred Stock shall be made without charge to
the holders thereof for any issuance tax in respect thereof provided that
the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and
21
<PAGE>
delivery of any certificate in a name other than that of the holder of the
Preferred Stock which is being converted.
(o) Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Preferred Stock or of any shares
of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion
of such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6. Redemption.
----------
(a) The Corporation shall, on or after March 31, 2002, at the written
election of the holders of at least a majority of the then outstanding
shares of a series of Preferred Stock delivered to the Corporation (the
"Trigger Notice") (i) redeem on the date that is 45 days after the date the
Company receives the Trigger Notice one-third of the shares of the series
of Preferred Stock outstanding on the date of such Trigger Notice as
provided in paragraph 6(e), (ii) redeem on the first anniversary of such
date an additional one-half of the shares of the series of Preferred Stock
outstanding on such date as provided in paragraph 6(e) and (iii) redeem on
the second anniversary of such date all the remaining shares of the series
of Preferred Stock then outstanding on such date as provided in paragraph
6(e) (each such date being herein called a "Redemption Date").
(b) All shares of Preferred Stock which are to be redeemed hereunder
shall remain issued and outstanding until the Redemption Price (as defined
below) therefore has been indefeasibly paid in full in cash. If the
Corporation for any reason fails to pay the Redemption Price for any shares
of Preferred Stock on or prior to the date specified in this paragraph 6,
then the unpaid Redemption Price shall thereafter bear interest at the
annual rate of 12%, compounded annually until paid.
(c) The Redemption Price (the "Redemption Price") for each share of
each series of Preferred Stock redeemed pursuant to paragraph 6 shall be
the sum of the Original Purchase Price for such shares (subject to
equitable adjustment in the event of any stock dividend, stock split,
reclassification of shares or similar event affecting or relating to the
Preferred Stock) plus (i) the amount of the unpaid Series A Accruing
Dividends, Series B Accruing Dividends, Series C Accruing Dividends, Series
D Accruing Dividends or Series E Accruing Dividends, as applicable to such
shares, and (ii) all other declared but unpaid dividends on such shares up
to and including the applicable Redemption Date.
(d) Within ten (10) days after receipt of a Trigger Notice pursuant
to paragraph 6(a), the Corporation will give written notice by mail,
postage prepaid to each holder of record of each series of Preferred Stock,
such notice to be addressed to each such holder at its post office address
shown by the records of the Corporation, specifying the series of Preferred
Stock and number of shares to be redeemed, the Redemption Price, and the
place and Redemption Dates of such redemption ("Redemption Notice"). If on
or
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<PAGE>
before the Redemption Date, the funds necessary for redemption shall have
been deposited with an independent payment agent so as to be and continue
to be available therefor, then, notwithstanding that any certificate for
shares of Preferred Stock to be redeemed shall not have been surrendered
for cancellation, from and after the close of business on the Redemption
Date, the shares so called for redemption shall no longer be deemed
outstanding, any dividends thereon shall cease to accrue, and all rights
with respect to such shares, including all conversion rights pursuant to
paragraph 5 hereof, shall forthwith cease, except only the right of the
holders thereof to receive, upon presentation of the certificate
representing shares so called for redemption, the Redemption Price
applicable to such Preferred Stock without interest thereon. Subject to the
provisions of paragraph 6(e), if in response to such Redemption Notice, the
holders of a majority in interest of any other series of Preferred Stock
give notice to the Company at least five days prior to the initial
Redemption Date set forth in such Redemption Notice of their election to
have their shares of such series of Preferred Stock redeemed on each
Redemption Date set forth in such Redemption Notice (an "Election Notice"),
all outstanding shares of the series of Preferred Stock referred to in any
such Election Notice shall also be redeemed on the Redemption Dates set
forth in such Redemption Notice.
(e) If the funds of the Corporation legally available for redemption
of Preferred Stock on any Redemption Date are insufficient to redeem the
total number of shares of Preferred Stock to be redeemed on such Redemption
Date, the Corporation shall first redeem such number of shares of Series E
Convertible Preferred Stock ratably from the holders thereof to the extent
of any funds legally available for redemption of Series E Convertible
Preferred Stock according to the respective amounts which would be payable
with respect to the full number of Series E Convertible Preferred Stock to
be redeemed from such holders on such date as if all such Series E
Convertible Preferred Stock were redeemed in full. Only after the
Corporation shall have redeemed in full all shares of Series E Convertible
Preferred Stock to be redeemed on such Redemption Date, then the
Corporation shall immediately redeem such shares of Series D Convertible
Preferred Stock ratably from the holders thereof, to the extent of any
funds legally available for redemption of Series D Convertible Preferred
Stock, according to the respective amounts which would be payable with
respect to the full number of Series D Convertible Preferred Stock to be
redeemed from them on such date as if all such Series D Convertible
Preferred Stock were redeemed in full. Only after the Corporation shall
have redeemed in full all shares of Series D Convertible Preferred Stock to
be redeemed on such Redemption Date, then the Corporation shall immediately
redeem such shares of Series C Convertible Preferred Stock ratably from the
holders thereof, to the extent of any funds legally available for
redemption of Series C Convertible Preferred Stock, according to the
respective amounts which would be payable with respect to the full number
of Series C Convertible Preferred Stock to be redeemed from them on such
date as if all such Series C Convertible Preferred Stock were redeemed in
full. Only after the Corporation shall have redeemed in full all shares of
Series C Convertible Preferred Stock to be redeemed on such Redemption
Date, then the Corporation shall immediately redeem such shares of Series B
Convertible Preferred Stock ratably from the holders thereof, to the extent
of any funds legally available for redemption of Series B Convertible
Preferred Stock, according
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to the respective amounts which would be payable with respect to the full
number of Series B Convertible Preferred Stock to be redeemed from them on
such date as if all such Series B Convertible Preferred Stock were redeemed
in full. Only after the Corporation shall have redeemed in full all shares
of Series B Convertible Preferred Stock to be redeemed on such Redemption
Date, then the Corporation shall immediately redeem such shares of Series A
Convertible Participating Preferred Stock ratably from the holders thereof,
to the extent of any funds legally available for redemption of Series A
Convertible Participating Preferred Stock, according to the respective
amounts which would be payable with respect to the full number of Series A
Convertible Participating Preferred Stock to be redeemed from them on such
date as if all such Series A Convertible Participating Preferred Stock were
redeemed in full. Any Preferred Stock not redeemed shall remain
outstanding. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Preferred Stock,
such funds will be used, at the end of the next succeeding fiscal quarter,
to redeem the balance of such Preferred Stock to be redeemed on such
Redemption Date, or such portion thereof for which funds are then
available, on the basis set forth above. Any Preferred Stock may be
converted by the holder thereof to Common Stock, in accordance with the
provisions of this Certificate of Incorporation, at any time prior to the
close of business on the last business day next preceding the Redemption
Date.
7. Notices of Record Date. In the event of
----------------------
(a) any taking by the Corporation of a record of the holders of any
class or series of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or
any right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or series or any other securities or property, or to
receive any other right, or
(b) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, or any
transfer of all or substantially all of the assets of the Corporation to
any other corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation,
then and in each such event, the Corporation shall mail or cause to be mailed to
each holder of Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective and (iii) the time, if any, that is to be fixed, as to when the
holders of record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up. Such
24
<PAGE>
notice shall be mailed at least thirty (30) days prior to the date specified in
such notice on which such action is to be taken.
25
<PAGE>
4. Pursuant to Section 228(a) of the General Corporation Law of the State
of Delaware, the holders of outstanding shares of the Corporation having no less
than the minimum number of votes that would be necessary to authorize or take
such actions at a meeting at which all shares entitled to vote thereon were
present and voted, consented to the adoption of the aforesaid amendments without
a meeting, without a vote and without prior notice and that written notice of
the taking of such actions has been given in accordance with Section 228(d) of
the General Corporation Law of the State of Delaware.
5. The amendment of the certificate of incorporation herein certified has
been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed this _____ day of April, 2000.
______________________________________
Stuart R. Patterson
President and Chief Executive Officer
26
<PAGE>
Exhibit 3.3
APPLIED LANGUAGE TECHNOLOGIES. NC.
(a Delaware Corporation)
------------
BY-LAWS
------------
ARTICLE I OFFICES
SECTION 1. Registered Office. The registered office of the Corporation
shall be located at 32 Loockerman Square, Suite L- 100, Dover, Delaware 19904,
Dover, County of Kent, State of Delaware, and the name of the resident agent in
charge thereof shall be The Prentice-Hall Corporation System, Inc.
SECTION 2. Other Offices. The Corporation may also have offices at such
other places, within or without the State of Delaware, as the Board of Directors
may from time to time appoint or the business of the Corporation may require.
ARTICLE II SEAL
The seal of the Corporation shall, subject to alteration by the Board of
Directors, consist of a flat-faced circular die with the word "Delaware",
together with the name of the Corporation and the year of incorporation, cut or
engraved thereon.
ARTICLE III MEETING OF STOCKHOLDERS
SECTION 1. Place of Meeting. Meetings of the stockholders shall be held
either within or without the State of Delaware at such place as the Board of
Directors may fix from time to time.
SECTION 2. Annual Meetings. The annual meeting of stockholders shall be
held for the election of directors on such date and at such time as the Board of
Directors may fix from time to time. Any other proper business may be transacted
at the annual meeting.
SECTION 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes may be called by the Chairman of the Board of Directors,
if there be one, the President or by the directors by resolution adopted by a
vote of the majority and special meetings shall be called by the President or
the Secretary whenever stockholders owning at least a majority of the capital
stock issued, outstanding and entitled to vote so request in writing. Such
request of stockholders shall state the purpose or purposes of the proposed
meeting.
SECTION 4. Notice. Written or printed notice of every meeting of
stockholders, annual or special, stating the hour, date and place thereof, and
the purpose or purposes in general terms for which the meeting is called shall,
not less than ten (10) days, or such longer period as shall be provided by law,
the Certificate of Incorporation, these By-Laws, or otherwise, and not more than
sixty (60) days before such meeting, be served upon or mailed to each
stockholder entitled to vote thereat, at the address of such stockholder as it
appears upon the stock records of the Corporation or, if such stockholder shall
have filed
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 3
Voting at meetings of stockholders need not be by written ballot and,
except as otherwise provided by law, need not be conducted by inspectors of
election unless so determined by the Chairman of the meeting or by the holders
of shares of stock having a majority of the votes which could be cast by the
holders of all outstanding shares of stock entitled to vote thereon which are
present in person or represented by proxy at such meeting. If it is required or
determined that inspectors of election be appointed, the Chairman shall appoint
two inspectors of election, who shall first take and subscribe an oath or
affirmation faithfully to execute the duties of inspectors at such meeting with
strict impartiality and according to the best of their ability. The inspectors
so appointed shall take charge of the polls and, after the balloting, shall make
a certificate of the result of the vote taken. No director or candidate for the
office of director shall be appointed as such inspector.
At any meeting at which a quorum is present, a plurality of the votes
properly cast for election to fill any vacancy on the Board of Directors shall
be sufficient to elect a candidate to fill such vacancy, and a majority of the
votes properly cast upon any other question shall decide the question, except in
any case where a larger vote is required by law, the Certificate of
Incorporation, these By-Laws, or otherwise.
SECTION 7. Organization. The Chairman of the Board, if there be one, or
in his or her absence the Vice Chairman, or in the absence of a Vice Chairman,
the President, or in the absence of the President, a Vice President, shall call
meetings of the stockholders to order and shall act as chairman thereof. The
Secretary of the Corporation, if present, shall act as secretary of all meetings
of stockholders, and, in his or her absence, the presiding officer may appoint a
secretary.
SECTION 8. Consent of Stockholders in Lieu of Meeting. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
by the Delaware General Corporation Law to be taken at any annual or special
meeting of the stockholders of the Corporation, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered in the manner required by this section to
the Corporation, written consents signed by a sufficient number of stockholders
to take action are delivered to the corporation by delivery to its registered
office in Delaware, its principal place of business, or an officer or agent of
the Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. In the event that the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law other than Section 228 thereof, if such
action had been voted on by stockholders at a meeting thereof, the certificate
filed under such other section shall state, in lieu of any statement required by
such section concerning any vote of stockholders, that written consent
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 4
has been given in accordance with Section 228 of the Delaware General
Corporation Law, and that written notice has been given as provided in such
Section 228.
ARTICLE IV DIRECTORS
SECTION 1. Number. The business and affairs of the Corporation shall be
conducted and managed by a Board of Directors consisting of not less than one
director, none of whom needs to be a stockholder. The number of directors for
each year shall be fixed at each annual meeting of stockholders, but if the
number is not so fixed, the number shall remain as it stood immediately prior to
such meeting.
At each annual meeting of stockholders, the stockholders shall elect
directors. Each director so elected shall hold office, subject to the provisions
of law, the Certificate of Incorporation, these By-Laws, or otherwise, until the
next annual meeting of stockholders or until his or her successor is elected and
qualified.
At any time during any year, except as otherwise provided by law, the
Certificate of Incorporation, these By-Laws, or otherwise, the number of
directors may be increased or reduced, in each case by vote of a majority of the
stock issued and outstanding and present in person or represented by proxy and
entitled to vote for the election of directors or a majority of the directors in
office at the time of such increase or decrease, regardless of whether such
majority constitutes a quorum.
SECTION 2. Term of Office. Each director shall hold office until the
next annual meeting of stockholders and until his or her successor is duly
elected and qualified or until his or her earlier death or resignation, subject
to the right of the stockholders at any time to remove any director or directors
as provided in Section 4 of this Article.
SECTION 3. Vacancies. If any vacancy shall occur among the directors, or
if the number of directors shall at any time be increased, the directors then in
office, although less than a quorum, by a majority vote may fill the vacancies
or newly-created directorships, or any such vacancies or newly-created
directorships may be filled by the stockholders at any meeting.
SECTION 4. Removal by Stockholders. Except as otherwise provided by law,
the Certificate of Incorporation or otherwise, the holders of record of the
capital stock of the Corporation entitled to vote for the election of directors
may, by a majority vote, remove any director or directors, with or without
cause, and, in their discretion, elect a new director or directors in place
thereof.
SECTION 5. Meetings. Meetings of the Board of Directors shall be held at
such place, within or without the State of Delaware, as may from time to time be
fixed by resolution of the Board of Directors or by the Chairman of the Board,
if there be one, or by the President, and as may be specified in the notice or
waiver of notice of any meeting. Meetings may be held at any time upon the call
of the Chairman of the Board, if there be one, or the President or any two (2)
of the directors in office by oral, telegraphic, telex, telecopy or other form
of electronic transmission, or written notice, duly served or sent or mailed to
each director not less than twenty-four (24) hours before such meeting, except
that, if mailed, not less than seventy-two (72) hours before such meeting.
Meetings may be held at any time and place without notice if all the
directors are present and do not object to the holding of such meeting for lack
of proper notice or if those not present shall, in writing or by telegram,
telex, telecopy or other form of electronic transmission, waive notice thereof A
regular
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 5
meeting of the Board may be held without notice immediately following the annual
meeting of stockholders at the place where such meeting is held. Regular
meetings of the Board may also be held without notice at such time and place as
shall from time to time be determined by resolution of the Board.
Members of the Board of Directors or any committee thereof may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and participation in a meeting
pursuant to the foregoing provisions shall constitute presence in person at the
meeting.
SECTION 6. Votes. Except as otherwise provided by law, the Certificate
of Incorporation or otherwise, the vote of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors.
SECTION 7. Quorum and Adjournment, Except as otherwise provided by law,
the Certificate of Incorporation or otherwise, a majority of the directors shall
constitute a quorum for the transaction of business. If at any meeting of the
Board there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time without notice other than announcement of
the adjournment at the meeting, and at such adjourned meeting at which a quorum
is present any business may be transacted which might have been transacted at
the meeting as originally noticed.
SECTION 8. Compensation. Directors shall receive compensation for their
services, as such, and for service on any Committee of the Board of Directors,
as fixed by resolution of the Board of Directors and for expenses of attendance
at each regular or special meeting of the Board or any Committee thereof.
Nothing in this Section shall be construed to preclude a director from serving
the Corporation in any other capacity and receiving compensation therefor.
SECTION 9. Action By Consent of Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Such consent shall be treated as a vote adopted at a meeting for all purposes.
Such consents may be executed in one or more counterparts and not every Director
or committee member need sign the same counterpart.
ARTICLE V COMMITTEES OF DIRECTORS
SECTION 1. Executive Committee. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint an Executive
Committee of three (3) or more members, to serve during the pleasure of the
Board, to consist of such directors as the Board may from time to time
designate. The Board of Directors shall designate the Chairman of the Executive
Committee.
a. Procedure. The Executive Committee shall, by a vote of a majority
of its members, fix its own times and places of meeting, determine
the number of its members constituting a quorum for the transaction
of business, and prescribe its own rules of procedure, no change in
which shall be made save by a majority vote of its members.
b. Responsibilities. During the intervals between the meetings of the
Board of Directors, except as otherwise provided by the Board of
Directors in establishing such Committee or otherwise the
Executive Committee shall possess and may exercise all the powers
of the
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By laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 6
Board in the management and direction of the business and affairs
of the Corporation; provided, however, that the Executive Committee
shall not, except to the extent the Certificate of Incorporation or
the resolution providing for the issuance of shares of stock
adopted by the Board of Directors as provided in Section 151(a) of
the Delaware General Business Corporation Law, have the power:
(1) to amend or authorize the amendment of the Certificate of
Incorporation or these By-Laws;
(2) to authorize the issuance of stock;
(3) to authorize the payment of any dividend;
(4) to adopt an agreement of merger or consolidation of the
Corporation or to recommend to the stockholders the sale, lease or
exchange of all or substantially all the property and business of
the Corporation;
(5) to recommend to the stockholders a dissolution, or a revocation
of a dissolution, of the Corporation; or
(6) to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware Business Corporation Law.
c. Reports. The Executive Committee shall keep regular minutes of its
proceedings, and all action by the Executive Committee shall be
reported promptly to the Board of Directors. Such action shall be
subject to review, amendment and repeal by the Board, provided that
no rights of third parties shall be adversely affected by such
review, amendment or repeal.
d. Appointment of Additional Members. In the absence or
disqualification of any member of the Executive Committee, the
member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
SECTION 2. Audit Committee. The Board of Directors may, by resolution
passed by a majority of the whole Board, appoint an Audit Committee of three (3)
or more members who shall not be officers or employees of the Corporation to
serve during the pleasure of the Board. The Board of Directors shall designate
the Chairman of the Audit Committee.
a. Procedure. The Audit Committee, by a vote of a majority of its
members, shall fix its own times and places of meeting, shall
determine the number of its members constituting a quorum for the
transaction of business, and shall prescribe its own rules of
procedure, no change in which shall be made save by a majority vote
of its members.
b. Responsibilities. The Audit Committee shall review the annual
financial statements of the Corporation prior to their submission
to the Board of Directors, shall consult with the Corporation's
independent auditors, and may examine and consider such other
matters in relation to the internal and external audit of the
Corporation's accounts and in relation to the financial affairs of
the Corporation and its accounts, including the selection and
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 7
retention of independent auditors, as the Audit Committee may, in
its discretion, determine to be desirable.
c. Reports. The Audit Committee shall keep regular minutes of its
proceedings, and all action by the Audit Committee shall, from time
to time, be reported to the Board of Directors as it shall direct.
Such action shall be subject to review, amendment and repeal by the
Board, provided that no rights of third parties shall be adversely
affected by such review, amendment or repeal.
d. Appointment of Additional Members. In the absence or
disqualification of any member of the Audit Committee, the member
or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member.
SECTION 3. Other Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, at any time appoint one or more other
committees from and outside of its own number. Every such committee must include
at least one member of the Board of Directors. The Board may from time to time
designate or alter, within the limits permitted by law, the Certificate of
Incorporation and this Article, if applicable, the duties, powers and number of
members of such other committees or change their membership, and may at any time
abolish such other committees or any of them.
a. Procedure. Each committee, appointed pursuant to this Section,
shall, by a vote of a majority of its members, fix its own times
and places of meeting, determine the number of its members
constituting a quorum for the transaction of business, and
prescribe its own rules of procedure, no change in which shall be
made save by a majority vote of its members.
b. Responsibilities. Each committee, appointed pursuant to this
Section, shall exercise the powers assigned to it by the Board of
Directors in its discretion.
c. Reports. Each committee appointed pursuant to this Section shall
keep regular minutes of proceedings, and all action by each such
committee shall, from time to time, be reported to the Board of
Directors as it shall direct. Such action shall be subject to
review, amendment and repeal by the Board, provided that no rights
of third parties shall be adversely affected by such review,
amendment or repeal.
d. Appointment of Additional Members. In the absence or
disqualification of any member of each committee, appointed
pursuant to this Section, the member or members thereof present at
any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another member of
the Board of Directors (or, to the extent permitted, another
person) to act at the meeting in place of any such absent or
disqualified member.
SECTION 4. Term of Office. Each member of a committee shall hold office
until the first meeting of the Board of Directors following the annual meeting
of stockholders (or until such other time as the Board of Directors may
determine, either in the vote establishing the committee or at the election of
such member or otherwise) and until his or her successor is elected and
qualified, or until he or she sooner
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 8
dies, resigns, is removed, is replaced by change of membership or becomes
disqualified by ceasing to be a director (where membership on the Board is
required), or until the committee is sooner abolished by the Board of Directors.
ARTICLE VI OFFICERS
SECTION 1. Officers. The Board of Directors shall elect a President, a
Secretary and a Treasurer, and, in their discretion, may elect a Chairman of the
Board, a Vice Chairman of the Board, a Controller, and one or more Executive
Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers
and Assistant Controllers as deemed necessary or appropriate. Such officers
shall be elected annually by the Board of Directors at its first meeting
following the annual meeting of stockholders (or at such other meeting as the
Board of Directors determines), and each shall hold office for the term provided
by the vote of the Board, except that each will be subject to removal from
office in the discretion of the Board as provided herein. The powers and duties
of more than one office may be exercised and performed by the same person.
SECTION 2. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors, at any regular or
special meeting.
SECTION 3. Chairman of the Board. The Chairman of the Board of
Directors, if elected, shall be a member of the Board of Directors and shall
preside at its meetings. The Chairman shall advise and counsel with the
President, and shall perform such duties as from time to time may be assigned to
him or her by the Board of Directors.
SECTION 4. President. The President shall be the chief executive officer
of the Corporation. Subject to the directions of the Board of Directors, the
President shall have and exercise direct charge of and general supervision over
the business and affairs of the Corporation and shall perform all duties
incident to the office of the chief executive officer of a corporation and such
other duties as from time to time may be assigned to him or her by the Board of
Directors. The President may but need not be a member of the Board of Directors.
SECTION 5. Executive Vice Presidents and Vice Presidents. Each Executive
Vice President and Vice President shall have and exercise such powers and shall
perform such duties as from time to time may be assigned to him or to her by the
Board of Directors or the President.
SECTION 6. Secretary. The Secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in books provided for
the purpose; shall see that all notices are duly given in accordance with the
provisions of law and these By-Laws; the Secretary shall be custodian of the
records and of the corporate seal or seals of the Corporation; shall see that
the corporate seal is affixed to all documents the execution of which, on behalf
of the Corporation under its seal, is duly authorized, and, when the seal is so
affixed, he or she may attest the same; the Secretary may sign, with the
President, an Executive Vice President or a Vice President, certificates of
stock of the Corporation; and, in general, the Secretary shall perform all
duties incident to the office of secretary of a corporation, and such other
duties as from time to time may be assigned to him or her by the Board of
Directors.
SECTION 7. Assistant Secretaries. The Assistant Secretaries in order of
their seniority shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary and
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By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 9
shall perform such other duties as the Board of Directors shall prescribe or as
from time to time may be assigned by the Secretary.
SECTION 8. Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all monies or other valuable effects in such banks, trust companies
or other depositaries as shall, from time to time, be selected by the Board of
Directors; may endorse for collection on behalf of the Corporation checks, notes
and other obligations; may sign receipts and vouchers for payments made to the
Corporation; may sign checks of the Corporation, singly or jointly with another
person as the Board of Directors may authorize, and pay out and dispose of the
proceeds under the direction of the Board; the Treasurer shall render to the
President and to the Board of Directors, whenever requested, an account of the
financial condition of the Corporation; the Treasurer may sign, with the
President, or an Executive Vice President or a Vice President, certificates of
stock of the Corporation; and in general, shall perform all the duties incident
to the office of treasurer of a corporation, and such other duties as from time
to time may be assigned by the Board of Directors.
SECTION 9. Assistant Treasurers. The Assistant Treasurers in order of
their seniority shall, in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer and shall perform such other
duties as the Board of Directors shall prescribe or as from time to time may be
assigned by the Treasurer.
SECTION 10. Controller. The Controller, if elected, shall be the chief
accounting officer of the Corporation and shall perform all duties incident to
the office of a controller of a corporation, and, in the absence of or
disability of the Treasurer or any Assistant Treasurer, perform the duties and
exercise the powers of the Treasurer and shall perform such other duties as the
Board of Directors shall prescribe or as from time to time may be assigned by
the President or the Treasurer.
SECTION 11. Assistant Controllers. The Assistant Controllers in order of
their seniority shall, in the absence or disability of the Controller, perform
the duties and exercise the powers of the Controller and shall perform such
other duties as the Board of Directors shall prescribe or as from time to time
may be assigned by the Controller.
SECTION 12. Subordinate Officers. The Board of Directors may appoint
such subordinate officers as it may deem desirable. Each such officer shall hold
office for such period, have such authority and perform such duties as the Board
of Directors may prescribe. The Board of Directors may, from time to time,
authorize any officer to appoint and remove subordinate officers and to
prescribe the powers and duties thereof.
SECTION 13. Compensation. The Board of Directors shall fix the
compensation of all officers of the Corporation. It may authorize any officer,
upon whom the power of appointing subordinate officers may have been conferred,
to fix the compensation of such subordinate officers.
SECTION 14. Removal. Any officer of the Corporation may be removed, with
or without cause, by action of the Board of Directors.
SECTION 15. Bonds. The Board of Directors may require any officer of the
Corporation to give a bond to the Corporation, conditional upon the faithful
performance of his or her duties, with one or more sureties and in such amount
as may be satisfactory to the Board of Directors.
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 10
ARTICLE VII CERTIFICATES OF STOCK
SECTION 1. Form and Execution of Certificates. The interest of each
stockholder of the Corporation shall be evidenced by a certificate or
certificates for shares of stock in such form as the Board of Directors may from
time to time prescribe. The certificates of stock of each class shall be
consecutively numbered and signed by the Chairman or Vice Chairman of the Board,
if any, the President, an Executive Vice President or a Vice President and by
the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer
of the Corporation, and may be countersigned and registered in such manner as
the Board of Directors may by resolution prescribe, and shall bear the corporate
seal or a printed or engraved facsimile thereof. Where any such certificate is
signed by a transfer agent or transfer clerk acting on behalf of the
Corporation, the signatures of any such Chairman, Vice Chairman, President,
Executive Vice President, Vice President, Treasurer, Assistant Treasurer,
Secretary or Assistant Secretary may be facsimiles, engraved or printed. In case
any officer or officers, who shall have signed, or whose facsimile signature or
signatures shall have been used on, any such certificate or certificates, shall
cease to be such officer or officers, whether because of death, resignation or
otherwise, before such certificate or certificates shall have been delivered by
the Corporation, such certificate or certificates may nevertheless be issued and
delivered by the Corporation as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures shall
have been used thereon had not ceased to be such officer or officers.
In case the corporate seal which has been affixed to, impressed on, or
reproduced in any such certificate or certificates shall cease to be the seal of
the Corporation before such certificate or certificates have been delivered by
the Corporation, such certificate or certificates may nevertheless be issued and
delivered by the Corporation as though the seal affixed thereto, impressed
thereon or reproduced therein had not ceased to be the seal of the Corporation.
Every certificate for shares of stock which are subject to any
restriction on transfer pursuant to law, the Certificate of Incorporation, these
By-Laws, or any agreement to which the Corporation is a party, shall have the
restriction noted conspicuously on the certificate, and shall also set forth, on
the face or back, either the full text of the restriction or a statement of the
existence of such restriction and (except if such restriction is imposed by law)
a statement that the Corporation will furnish a copy thereof to the holder of
such certificate upon written request and without charge.
Every certificate issued when the Corporation is authorized to issue
more than one class or series of stock shall set forth on its face or back
either the full text of the preferences, voting powers, qualifications, and
special and relative rights of the shares of each class and series authorized to
be issued, or a statement of the existence of such preferences, powers,
qualifications and rights, and a statement that the Corporation will furnish a
copy thereof to the holder of such certificate upon written request and without
charge.
SECTION 2. Transfer of Shares. The shares of the stock of the
Corporation shall be transferred on the books of the Corporation by the holder
thereof in person or by his or her attorney lawfully constituted, upon surrender
for cancellation of certificates for the same number of shares, with an
assignment and power of transfer endorsed thereon or attached thereto, duly
executed, with such proof or guaranty of the authenticity of the signature as
the Corporation or its agents may reasonably require. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person whether or not it shall have express or other notice
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 11
thereof, save as expressly provided by law or by the Certificate of
Incorporation. It shall be the duty of each stockholder to notify the
Corporation of his or her post office address.
SECTION 3. Closing of Transfer Books. The stock transfer books of the
Corporation may, if deemed appropriate by the Board of Directors, be closed for
such length of time not exceeding fifty (50) days as the Board may determine,
preceding the date of any meeting of stockholders or the date for the payment of
any dividend or the date for the allotment of rights or the date when any
issuance, change, conversion or exchange of capital stock shall go into effect,
during which time no transfer of stock on the books of the Corporation may be
made.
SECTION 4. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
directors and which record date: (a) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof shall, unless otherwise required by law, the Certificate of
Incorporation or otherwise, not be more than sixty (60) nor less than ten (10)
days before the date of such meeting; (b) in the case of determination of
stockholders entitled to express consent to corporate action in writing without
a meeting, shall, unless otherwise required by law, the Certificate of
Incorporation or otherwise, not be more than ten (10) days from the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; and (c) in the case of any other action, shall not be more than sixty
(60) days prior to such other action. If no record date is fixed: (a) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; (b) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting when no prior action of the Board of
Directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation in accordance with applicable law, or, if prior action by the
Board of Directors is required by law, shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action; and (c) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 5. Lost or Destroyed Certificates. In case of the loss or
destruction of any certificate of stock, a new certificate may be issued under
the following conditions:
a. The owner of said certificate shall file with the Secretary or any
Assistant Secretary of the Corporation an affidavit giving the
facts in relation to the ownership, and in relation to the loss or
destruction of said certificate, stating its number and the number
of shares represented thereby; such affidavit shall be in such form
and contain such statements as shall satisfy the President, any
Executive Vice President, Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer, that
said certificate has been accidentally destroyed or lost, and that
a new certificate ought to be issued in lieu thereof.
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 12
Upon being so satisfied, any such officer may require such owner to
furnish the Corporation a bond in such penal sum and in such form
as he or she may deem advisable, and with a surety or sureties
approved by him or her, to indemnify and save harmless the
Corporation from any claim, loss, damage or liability which may be
occasioned by the issuance of a new certificate in lieu thereof.
Upon such bond being so filed, if so required, a new certificate
for the same number of shares shall be issued to the owner of the
certificate so lost or destroyed; and the transfer agent and
registrar, if any, of stock shall countersign and register such new
certificate upon receipt of a written order signed by any such
officer, and thereupon the Corporation will save harmless said
transfer agent and registrar in the premises. In case of the
surrender of the original certificate, in lieu of which a new
certificate has been issued, or the surrender of such new
certificate, for cancellation, the bond of indemnity given as a
condition of the issue of such new certificate may be surrendered;
or
b. The Board of Directors of the Corporation may by resolution
authorize and direct any transfer agent or registrar of stock of
the Corporation to issue and register respectively from time to
time without further action or approval by or on behalf of the
Corporation new certificates of stock to replace certificates
reported lost, stolen or destroyed upon receipt of an affidavit of
loss and bond of indemnity in form and amount and with surety
satisfactory to such transfer agent or registrar in each instance
or upon such terms and conditions as the Board of Directors may
determine.
SECTION 6. Uncertificated Shares. The Board of Directors of the
Corporation may by resolution provide that one or more of any or all classes or
series of the stock of the Corporation shall be uncertificated shares, subject
to the provisions of Section 158 of the Delaware General Corporation Law.
ARTICLE VIII EXECUTION OF DOCUMENTS
SECTION 1. Execution of Checks, Notes, etc. All checks and drafts on the
Corporation's bank accounts and all bills of exchange and promissory notes, and
all acceptances, obligations and other instruments for the payment of money,
shall be signed by such officer or officers, or agent or agents, as shall be
thereunto authorized from time to time by the Board of Directors, which may in
its discretion authorize any such signatures to be facsimile.
SECTION 2. Execution of Contracts, Assignments, etc. Unless the Board of
Directors shall have otherwise provided generally or in a specific instance, all
contracts, agreements, endorsements, assignments, transfers, stock powers, or
other instruments shall be signed by the President, any Executive Vice
President, any Vice President, the Secretary, any Assistant Secretary, the
Treasurer or any Assistant Treasurer. The Board of Directors may, however, in
its discretion, require any or all such instruments to be signed by any two or
more of such officers, or may permit any or all of such instruments to be signed
by such other officer or officers, agent or agents, as it shall be thereunto
authorize from time to time.
SECTION 3. Execution of Proxies. The President, any Executive Vice
President or any Vice President, and the Secretary, the Treasurer, any Assistant
Secretary or any Assistant Treasurer, or any other officer designated by the
Board of Directors, may sign on behalf of the Corporation proxies to vote upon
shares of stock of other companies standing in the name of the Corporation.
ARTICLE IX INSPECTION OF BOOKS
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 13
The Board of Directors shall determine from time to time whether, and if
allowed, to what extent and at what time and places and under what conditions
and regulations, the accounts and books of the Corporation (except such as may
by law be specifically open to inspection) or any of them, shall be open to the
inspection of the stockholders, and no stockholder shall have any right to
inspect any account or book or document of the Corporation, except as conferred
by the laws of the State of Delaware, unless and until authorized so to do by
resolution of the Board of Directors or of the stockholders of the Corporation.
ARTICLE X FISCAL YEAR
The fiscal year of the Corporation shall be determined from time to time
by vote of the Board of Directors.
ARTICLE XI AMENDMENTS
These By-Laws may be altered, amended, changed or repealed and new
By-Laws adopted by the stockholders or, to the extent provided in the
Certificate of Incorporation, by the Board of Directors, in either case at any
meeting called for that purpose at which a quorum shall be present. Any by-law,
whether made, altered, amended, changed or repealed by the stockholders or the
Board of Directors may be repealed, amended, changed, further amended, changed,
repealed or reinstated, as the case may be, either by the stockholders or by the
Board of Directors, as herein provided; except that this Article may be altered,
amended, changed or repealed only by vote of the stockholders.
ARTICLE XII INDEMNIFICATION
SECTION 1. Indemnification. a. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person who was or is a party or is
threatened to be made a party or is otherwise involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he, or a person for whom he or she is
the legal representative, is or was a director, trustee, partner, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or non-profit entity
against all liability, losses, expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action, suit or proceeding if he or she acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interest of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interest of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 14
b. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he or
she is or was a director, trustee, partner, officer, employee or
agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise or non-profit entity against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if
he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the
performance of his or her duty to the Corporation unless and only
to the extent that the Court of Chancery of the State of Delaware
or the court in which such action or suit was brought shall
determine upon application that despite the adjudication of
liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery of the State of Delaware or
such other court shall deem proper.
c. To the extent that any person referred to in paragraphs (a) or (b)
has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to therein, or in defense of
any claim, issue or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
SECTION 2. Authorization. Any indemnification under Section 1 of this
Article (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, trustee, partner, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in Section 1 of this Article. Such determination shall be made: (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (b) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in written opinion, or (c) by the
stockholders.
SECTION 3. Expense Advance. Expenses (including attorneys' fees)
incurred by an officer or director of the Corporation in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be paid
by the Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the manner provided in
Section 2 of this Article upon receipt of an undertaking by or on behalf of such
officer or director to repay such amount, unless it shall ultimately be
determined that such person is entitled to be indemnified by the Corporation as
authorized in this Article. Such expenses (including attorneys' fees) incurred
by other employees or agents of the Corporation may be so paid upon such terms
and conditions, if any, as the Board of Directors deems appropriate.
SECTION 4. Nonexclusivity. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other Sections of this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
<PAGE>
By-laws of Applied Language Technologies, Inc.
A Delaware Corporation
Page 15
SECTION 5. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, trustee, partner, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or
non-profit entity against any liability asserted against and incurred by him or
her in any such capacity, or arising out of his or her status as such, whether
or not the Corporation would have the power to indemnify such person against
such liability under the provisions of this Article or Section 145 of Title 8 of
the Delaware Code relating to the General Corporation Law of the State of
Delaware.
SECTION 6. "The Corporation", For the purposes of this Article,
references to "the Corporation" shall include the resulting corporation and, to
the extent that the Board of Directors of the resulting corporation so decides,
all constituent corporations (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers and employees or agents so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or was
serving at the request of such constituent corporation as director, trustee,
partner, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or non-profit entity shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation if its separate existence had continued.
SECTION 7. Other Indemnification. The Corporation's obligation, if any,
to indemnify any person who was or is serving at its request as a director,
trustee, partner, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or non-profit entity shall
be reduced by any amount such person may collect as indemnification from such
other corporation, partnership, joint venture, trust or other enterprise or
non-profit entity or from insurance.
SECTION 8. Other Definitions. For purposes of this Article, references
to "other enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, trustee, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director, trustee, officer, employee, or agent with respect to an employee
benefit plan, its participants, or beneficiaries; and a person who acted in good
faith and in a manner he or she reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article.
SECTION 9. Continuation of Indemnification. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, trustee, partner, officer, employee or agent
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
SECTION 10. Amendment or Repeal. No amendment or repeal of the
provisions of this Article shall adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such amendment or repeal.
<PAGE>
EXHIBIT 10.2
EXECUTION COPY
--------------
FOURTH AMENDED
AND
RESTATED
REGISTRATION RIGHTS AGREEMENT
DATED AS OF APRIL 11, 2000
BY AND AMONG
SPEECHWORKS INTERNATIONAL, INC.
AND
THE INVESTORS
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. Definitions................................................... 3
-----------
2. Required Registration......................................... 4
---------------------
3. Incidental Registration....................................... 5
--------------------------------------------------------------
4. Registration on Form S-3...................................... 6
------------------------
5. Registration Procedures....................................... 7
-----------------------
6. Expenses...................................................... 9
--------
7. Indemnification and Contribution.............................. 9
--------------------------------
8. Reporting Requirements Under Securities Exchange Act of 1934.. 12
------------------------------------------------------------
9. Stockholder Information....................................... 12
-----------------------
10. Private Offerings............................................. 12
-----------------
11. Specific Enforcement.......................................... 13
--------------------
12. Notices....................................................... 13
-------
13. Governing Law; Jury Waiver.................................... 14
--------------------------
14. Waivers: Amendments........................................... 14
-------------------
15. Other Registration Rights..................................... 14
-------------------------
16. Successors and Assigns........................................ 14
----------------------
17. Counterparts.................................................. 15
------------
18. Prior Understandings.......................................... 15
--------------------
19. Headings...................................................... 15
--------
20. Severability.................................................. 15
------------
21. Termination of Registration Obligations....................... 15
---------------------------------------
22. Consent to Third Amended and Restated Agreement............... 15
-----------------------------------------------
</TABLE>
i
<PAGE>
FOURTH AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AGREEMENT made as of the 11th day of April 2000, by and among SpeechWorks
International, Inc., a Delaware corporation (the "Company"), and each of the
persons listed on Schedule RRA hereto, as from time to time amended (the
"Investors").
WHEREAS, the Company and certain of the Investors entered into a
Registration Rights Agreement dated August 16, 1995 (the "Original Registration
Rights Agreement") in conjunction with the issuance by the Company to such
Investors of 2,475,000 of the Company's Series A Convertible Participating
Preferred Stock, $.00l par value (the "Series A Preferred Stock"), convertible
into shares of the Company's Common Stock, $.001 par value (the "Common Stock");
WHEREAS, pursuant to an Amendment dated as of January 3, 1996, the Original
Registration Rights Agreement was amended to grant such registration rights to
Lighthouse Capital Partners, L.P. ("Lighthouse") with respect to shares of
Common Stock issuable upon exercise of certain warrants of the Company owned by
Lighthouse;
WHEREAS, the Company and certain of the Investors entered into an Amended
and Restated Registration Rights Agreement dated as of October 7, 1996, as
amended by the First Amendment thereto dated as of February 14, 1997, in
conjunction with the issuance by the Company to such Investors of 2,474,500
shares of the Company's Series B Convertible Preferred Stock, $.001 par value
(the "Series B Preferred Stock"), convertible into shares of the Common Stock;
WHEREAS, the Company and certain of the Investors entered into a Second
Amended and Restated Registration Rights Agreement dated as of May 8, 1998, as
amended by the First Amendment thereto dated as of August 12, 1998, in
conjunction with the issuance by the Company to such Investors of 1,620,210
shares of the Company's Series C Convertible Preferred Stock, $.001 par value
(the "Series C Preferred Stock"), convertible into shares of the Common Stock;
WHEREAS, the Company and Brian Eberman ("Eberman") entered into a
Subscription Agreement dated January 22, 1999, pursuant to which Eberman
purchased 5,882 shares of Series C Preferred Stock;
WHEREAS, the Company and certain of the Investors entered into a Third
Amended and Restated Registration Rights Agreement dated as of April 29, 1999,
as amended by the First Amendment thereto dated as of June 21, 1999 and the
Second Amendment thereto dated as of June 29, 1999, in conjunction with the
issuance by the Company to such Investors of 2,671,389 shares of the Company's
Series D Convertible Preferred Stock, $.001 par value (the "Series D Preferred
Stock"), convertible into shares of the Common Stock;
WHEREAS, the Third Amended and Restated Registration Rights Agreement was
further amended by a Third Amendment thereto dated February 25, 2000 in
connection with the sale of certain shares of Series A Preferred Stock, Series B
Preferred Stock and Common Stock by William J. O'Farrell to Lee Capital Holdings
Inc., Citizens Capital Incorporated and Joseph Murphy to add each of such
purchasers as parties to the Third Amended and Restated Registration Rights
Agreement (the Third Amended and Restated Registration Rights Agreement
2
<PAGE>
as amended by the First Amendment thereto, the Second Amendment thereto and the
Third Amendment thereto shall be referred to as the "Third Amended and Restated
Registration Rights Agreement");
WHEREAS, the Company is issuing to certain of the Investors up to 2,544,681
shares of the Company's Series E Convertible Preferred Stock, $.001 par value
(the "Series E Preferred Stock"), convertible into shares of the Common Stock;
and
WHEREAS, the parties hereto, holding in the aggregate a sufficient number
of shares of Registrable Stock to amend the Third Amended and Restated
Registration Rights Agreement in accordance with the provisions of Section 14
thereof, desire to amend and restate the Third Amended and Restated Registration
Rights Agreement, in order to add the purchasers of the Series E Preferred Stock
as parties thereto and to grant such purchasers registration rights with respect
to the Common Stock issuable upon conversion of the Series E Preferred Stock, as
hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing, mutual covenants herein
contained and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree to amend and restate
the Third Registration Rights Agreement, as follows:
1. Definitions. The following terms shall be used in this Agreement with
-----------
the following respective meanings:
"Affiliate" means (i) any Person directly or indirectly controlling,
----------
controlled by or under common control with another Person; (ii) any Person
owning or controlling ten (l0%) percent or more of the outstanding voting
securities of such other Person; (iii) any officer, director or partner of any
Person; or (iv) if such Person is an officer, director or partner, any such
company for which such Person acts in such capacity.
"Commission" means the Securities and Exchange Commission.
-----------
"Common Stock" means and includes (a) the Company's Common Stock, $.001 par
-------------
value per share, as authorized on the date of this Agreement and (b) any other
securities into which or for which the securities described in (a) above may be
converted or exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
-------------
any successor federal statute, and the rules and regulations of the Commission
(or of any other federal agency then administering the Exchange Act) thereunder,
all as the same shall be in effect at the time.
"Holder" means any holder of Registrable Stock.
-------
"NASD" means the National Association of Securities Dealers, Inc.
-----
"Person" means any natural person, partnership, corporation, limited
-------
liability company or other legal entity.
3
<PAGE>
"Registrable Stock" means (a) the Common Stock issued or issuable upon
------------------
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, and owned
of record by any Investor or an Affiliate of any Investor, (b) all Common Stock
now or hereafter owned of record by any Investor which is acquired otherwise
than upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock,
so long as it is held by any Investor or an Affiliate of any Investor, (c) all
the shares of Common Stock issued or issuable upon exercise of any warrant now
or hereafter held by Lighthouse, and (d) any other shares of Common Stock issued
in respect of such shares by way of a stock dividend, or stock split or in
connection with a combination of shares, recapitalization, merger or
consolidation or reorganization, provided, however, that shares of Common Stock
-------- -------
shall only be treated as Registrable Stock (i) if and so long as they have not
been (x) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (y) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions and
restrictive legends with respect to such Common Stock are removed upon the
consummation of such sale.
"Registration Statement" means a registration statement filed by the
-----------------------
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8, Form S-4, or successor
forms, or any registration statement covering only securities proposed to be
issued in exchange for securities or assets of another corporation).
"Securities Act" means the Securities Act of 1933, as amended, or any
---------------
successor federal statute, and the rules and regulations of the Commission (or
of any other federal agency then administering the Securities Act) thereunder,
all as the same shall be in effect at the time.
2. Required Registration.
---------------------
(a) At any time after the earlier of (i) 180 days after the initial
registration statement covering a public offering of Common Stock of the Company
under the Securities Act having become effective and (ii) May 8, 2001, the
Holder or Holders of at least thirty seven and one half percent (37.5%) of the
Registrable Stock may request the Company to register under the Securities Act
all or any portion of shares of Registrable Stock held by such requesting Holder
or Holders for sale in the manner specified in such notice, provided that (x)
the reasonably anticipated aggregate price to the public of the sale of such
requesting Holder or Holders' shares would exceed $5,000,000; (y) if the first
request is for the Company's first firm commitment underwritten public offering
pursuant to an effective Registration Statement, the reasonably anticipated
aggregate price to the public of all shares sold in such public offering would
exceed $15,000,000 and the underwriter must be a nationally recognized
underwriter; and (z) in any underwritten public offering contemplated by this
Section 2 or Sections 3 and 4, the Holders of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock shall be entitled to sell such shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock to the underwriters for
conversion and sale of the shares of Common Stock issued upon conversion
thereof. Notwithstanding anything to the contrary contained herein, the Company
shall not be required to seek to cause a Registration Statement to become
effective pursuant to this Section 2: (A) within 180 days after the effective
date of a Registration Statement filed by the Company, provided that the Company
shall use its reasonable best efforts to achieve effectiveness of a registration
requested hereunder promptly following
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<PAGE>
such 180-day period if such request is made during such 180-day period; (B) if
the Company shall furnish to the Holders a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of Directors
it would be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future due to pending Company
events, or that it would require disclosure of material non-public information
relating to the Company which, in the reasonable opinion of the Board of
Directors, should not be disclosed, then the Company's obligation to use all
reasonable best efforts to register, qualify or comply under this Section 2
shall be deferred for a period not to exceed 120 days from the date of receipt
of written request from such Holders; provided, however, that the Company may
not utilize this right more than once in any twelve-month period; (C) in any
particular jurisdiction in which (i) the Company would be required to execute a
general consent to service of process in affecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction or (ii) as a condition to such registration or qualification
one or more holders of securities of the Company are required to escrow such
securities or are required to agree to additional resale restrictions on such
securities and such holders do not voluntarily agree to such provisions; and (D)
if such registration is not proposed to be part of a firm commitment
underwritten public offering with underwriters reasonably acceptable to the
Company.
(b) Following receipt of any notice given under this Section 2, the
Company shall immediately notify all Holders from whom notice has not been
received and shall use its reasonable best efforts to register under the
Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting Holders, the number of shares of
Registrable Stock specified in such notice (and in all notices received by the
Company from other Holders within thirty (30) days after the giving of such
notice by the Company). The Holders of a majority of the shares of Registrable
Stock to be sold in such offering may designate the managing underwriter of such
offering, subject to the approval of the Company, which approval shall not be
unreasonably withheld or delayed. The Company shall be obligated to register
Registrable Stock pursuant to a required registration in accordance with this
Section 2 on two occasions only, provided, however, that such obligation shall
be deemed satisfied only when a registration statement covering all shares of
Registrable Stock specified in notices received as aforesaid and which has not
been withdrawn by the Holder thereof, for sale in accordance with the method of
disposition specified by the requesting Holders, shall have become effective and
all such shares shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any Registration Statement
referred to in this Section 2, for sale in accordance with the method of
disposition specified by the requesting Holders, shares of Common Stock to be
sold by the Company for its own account or for the account of other
stockholders, except as and to the extent that, in the opinion of the managing
underwriter, if any, such inclusion would adversely affect the marketing of the
Registrable Stock to be sold. Except for registration statements on Form S-4, S-
8 or any successor thereto, the Company will not file with the Commission any
other registration statement with respect to its Common Stock, whether for its
own account or that of other stockholders, from the date of receipt of a notice
from requesting Holders pursuant to this Section 2 until the completion of the
period of distribution of the registration contemplated thereby.
3. Incidental Registration. Each time the Company shall determine to
-----------------------
file a Registration Statement in connection with the proposed offer and sale for
money of any of its
5
<PAGE>
securities by it or any of its security holders, the Company will give written
notice of its determination to all Holders. Upon the written request of a Holder
given within thirty (30) days after the giving of any such notice by the
Company, the Company will use its reasonable best efforts to cause all such
shares of Registrable Stock, the Holders of which have so requested registration
thereof, to be included in such Registration Statement, all to the extent
requisite to permit the sale or other disposition by the prospective seller or
sellers of the Registrable Stock to be so registered. If the Registration
Statement is to cover an underwritten distribution, the Company shall use its
reasonable best efforts to cause the Registrable Stock requested for inclusion
pursuant to this Section 3 to be included in the underwriting on the same terms
and conditions as the securities otherwise being sold through the underwriters.
If, in the good faith judgment of the managing underwriter of such public
offering, the inclusion of all of the Registrable Stock requested for inclusion
pursuant to this Section 3 and other securities would interfere with the
successful marketing of a smaller number of shares to be offered, then the
number of shares of Registrable Stock and other securities to be included in the
offering (except for shares to be issued by the Company in an offering initiated
by the Company or by any other party pursuant to registration rights granted to
such party) shall be reduced to the required level with the participation in
such offering to be pro rata among the Holders thereof requesting such
registration, based upon the number of shares of Registrable Stock and other
securities owned by such Holders; provided, however, that the right of the
underwriters to reduce the number of shares of Registrable Stock to be included
in the offering as described above shall be restricted so that the number of
shares of Registrable Stock (other than shares to be issued by the Company in an
offering initiated by the Company or by any other party pursuant to registration
rights granted to such party) included in any such registration is not reduced
below twenty percent (20%) of the aggregate number of shares being registered in
such offering. Notwithstanding the foregoing, this Section 3 and the rights
thereunder shall not apply to the Company's initial public offering of shares of
Common Stock led by Chase Securities Inc. ("Chase H&Q"), provided that such
offering is completed within nine (9) months from the date hereof (the "Chase
H&Q Public Offering").
4. Registration on Form S-3. If at any time (a) a Holder or Holders
------------------------
request that the Company file a registration statement on Form S-3 or any
successor form of "short-form" registration statement for a public offering of
all or any portion of the shares of Registrable Stock held by such requesting
Holder or Holders, (b) the reasonably anticipated aggregate price to the public
of which would exceed $2,000,000, and (c) the Company is a registrant entitled
to use Form S-3 or any successor form of "short-form" registration statement to
register such shares, then the Company shall use its reasonable best efforts to
register under the Securities Act on Form S-3 or any successor thereto, for
public sale in accordance with the method of disposition specified in such
notice, the number of shares of Registrable Stock specified in such notice.
Whenever the Company is required by this Section 4 to use its best efforts to
effect the registration of Registrable Stock, each of the procedures and
requirements of Section 2 (including but not limited to the requirement that the
Company notify all Holders from whom notice has not been received and provide
them with the opportunity to participate in the offering) shall apply to such
registration, provided, however, that there shall be no more than two
-------- -------
registrations on Form S-3 which may be requested and obtained under this Section
4 during any 12 month period unless the Holder or Holders of at least fifty
percent (50%) of the Registrable Stock request the Company to make an additional
registration on Form S-3 within such 12 month period, and provided, further,
however, that the requirements contained in the first sentence of Section 2(a)
shall not apply to any registration on Form S-3 which may be requested and
obtained under this Section 4.
6
<PAGE>
5. Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of Section 2, 3 or 4 hereof to effect the registration of shares
of Registrable Stock under the Securities Act, the Company will, at its expense,
as expeditiously as possible:
(a) In accordance with the Securities Act and the rules and regulations of
the Commission, prepare and file with the Commission a Registration Statement
with respect to such securities and use its best efforts to cause such
Registration Statement to become and remain effective until the securities
covered by such Registration Statement have been sold, and prepare and file with
the Commission such amendments to such Registration Statement and supplements to
the prospectus contained therein as may be necessary to keep such Registration
Statement effective and such Registration Statement and prospectus accurate and
complete until the earlier to occur of (i) the date by which all of the
securities covered by such Registration Statement have been sold and (ii) one
hundred twenty (120) days after the Registration Statement became effective;
(b) If the offering is to be underwritten in whole or in part, enter into
a written underwriting agreement in form and substance reasonably satisfactory
to the managing underwriter of the public offering and the Holders participating
in such offering;
(c) Furnish to the participating Holders and to the underwriters such
reasonable number of copies of the Registration Statement, preliminary
prospectus, final prospectus and such other documents as such underwriters and
participating Holders may reasonably request in order to facilitate the public
offering of such securities;
(d) Use its best efforts to register or qualify the securities covered by
such Registration Statement under such state securities or blue sky laws of such
jurisdictions (i) as shall be reasonably appropriate for the distribution of the
securities covered by such Registration Statement or (ii) as such participating
Holders and underwriters may reasonably request within twenty (20) days
following the original filing of such Registration Statement, except that (i)
the Company shall not for any purpose be required to execute a general consent
to service of process, to subject itself to taxation, or to qualify to do
business as a foreign corporation in any jurisdiction where it is not so
qualified and (ii) the Company shall not be obligated to register or qualify its
securities in any jurisdiction which requires, as a condition to such
registration or qualification, that one or more holders of securities of the
Company escrow such securities or agree to additional resale restrictions on
such securities and such holders do not agree to such restrictions;
(e) Notify the Holders participating in such registration, promptly after
it shall receive notice thereof, of the date and time when such Registration
Statement and each post-effective amendment thereto has become effective or a
supplement to any prospectus forming a part of such Registration Statement has
been filed;
(f) Notify the Holders participating in such registration promptly of any
request by the Commission or any state securities commission or agency for the
amending or supplementing of such Registration Statement or prospectus or for
additional information;
(g) Prepare and file with the Commission, promptly upon the request of any
such participating Holders, any amendments or supplements to such Registration
Statement or prospectus which, in the opinion of counsel representing the
Company in such registration (and
7
<PAGE>
which counsel is reasonably acceptable to such participating Holders), is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by such participating
Holders;
(h) Prepare and promptly file with the Commission, and promptly notify
such participating Holders of the filing of, such amendments or supplements to
such Registration Statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(i) In case any of such participating Holders or any underwriter for any
such Holders is required to deliver a prospectus at a time when the prospectus
then in circulation is not in compliance with the Securities Act or the rules
and regulations of the Commission, prepare promptly such amendments or
supplements to such Registration Statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of the
Securities Act and such rules and regulations;
(j) Advise such participating Holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
Commission or any state securities commission or agency suspending the
effectiveness of such Registration Statement or the initiation or threatening of
any proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(k) Not file any amendment or supplement to such Registration Statement or
prospectus to which counsel for such participating Holders has reasonably
objected on the grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at least
five (5) business days prior to the filing thereof (which advance furnishing of
copies the Company hereby agrees to); provided, however, that the failure of
such participating Holders or their counsel to review or object to any amendment
or supplement to such Registration Statement or prospectus shall not affect the
rights of such participating Holders or any controlling person or persons
thereof or any underwriter or underwriters therefor under Section 7 hereof;
(l) At the request of any such participating Holder (i) furnish to such
Holder on the effective date of the Registration Statement or, if such
registration includes an underwritten public offering, at the closing provided
for in the underwriting agreement, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Holder or Holders making such request, covering
such matters with respect to the registration statement, the prospectus and each
amendment or supplement thereto, proceedings under state and federal securities
laws, other matters relating to the Company, the securities being registered and
the offer and sale of such securities as are customarily the subject of opinions
of issuer's counsel provided to underwriters in underwritten public offerings
and (ii) use its best effort to furnish to such Holder letters dated each such
effective date and such closing date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and to the
Holder or Holders making such
8
<PAGE>
request, stating that they are independent certified public accountants within
the meaning of the Securities Act and dealing with such matters as the
underwriters may request, or, if the offering is not underwritten, that in the
opinion of such accountants the financial statements and other financial data of
the Company included in the Registration Statement or the prospectus or any
amendment or supplement thereto comply in all material respects with the
applicable accounting requirements of the Securities Act, and additionally
covering such other financial matters, including information as to the period
ending not more than five (5) business days prior to the date of such letter
with respect to the Registration Statement and prospectus, as such requesting
Holder or Holders may reasonably request;
(m) Refrain from making any sale or distribution of its securities except
pursuant to any stock option plan or any pre-existing agreement for the sale of
such securities for at least ninety (90) days after the date such Registration
Statement became effective (or such longer period, not to exceed one hundred
eighty (180) days, as may be required by the managing underwriter of such public
offering);
(n) Use its best efforts to ensure the obtaining of all necessary
approvals from the NASD; and
(o) Use its best efforts to list the Registrable Stock covered by such
Registration Statement with any securities exchange or other securities market
on which the Common Stock is then listed and traded.
6. Expenses.
--------
(a) With respect to each registration effected pursuant to Section 2, 3 or
4 hereof, all fees, costs and expenses of and incidental to such registration
and the public offering in connection therewith shall be borne by the Company;
provided, however, (i) that security holders participating in any such
registration shall bear their pro rata share of the underwriting discounts and
selling commissions, and (ii) any such fee, cost or expense which does not
constitute a normal fee, cost or expense of such registration and which is
attributable solely to one (1) security holder
participating in any such registration shall be borne by that holder.
(b) The fees, costs and expenses of registration to be borne by the
Company as provided in paragraph (a) above, shall include, without limitation
all registration, filing and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, fees and disbursements
of counsel for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are otherwise required to bear such fees
and disbursements), all legal fees and disbursements and other expenses of
complying with state securities or blue sky laws of any jurisdictions in which
the securities to be offered are to be registered or qualified, reasonable fees
and disbursements of one counsel for the selling security holders and the
premiums and other costs of policies of insurance insuring the Company against
liability arising out of such public offering, if the Board of Directors of the
Company elects to obtain such insurance.
7. Indemnification and Contribution.
--------------------------------
(a) To the fullest extent permitted by law, the Company will indemnify and
hold harmless each Holder of shares of Registrable Stock which are included in a
Registration Statement pursuant to the provisions of this Agreement and any
underwriter (as defined in the
9
<PAGE>
Securities Act) for such Holder, and any person who controls such Holder or such
underwriter within the meaning of the Securities Act, and each of their
successors, from and against, and will reimburse such Holder and each such
underwriter and controlling person with respect to, any and all claims, actions,
demands, losses, damages, liabilities, costs and expenses (including reasonable
attorney's fees) to which such Holder or any such underwriter or controlling
person may become subject under the Securities Act or otherwise, insofar as such
claims, actions, demands, losses, damages, liabilities, costs or expenses arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such Registration Statement, any prospectus contained
therein or any amendment or supplement thereto, or arise out of or are 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
or arise out of any violation by the Company of any rule or regulation under the
Securities Act applicable to the Company and relating to action or inaction
required of the Company in connection with such registration; provided, however,
that the Company will not be liable in any such case to the extent that any such
claim, action, demand, loss, damage, liability, cost or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in reliance upon and in strict conformity with
information furnished by such Holder, such underwriter or such controlling
person in writing specifically for use in the preparation thereof; and provided,
further, that the foregoing indemnity agreement is subject to the condition
that, insofar as it relates to any such untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in the preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the Commission
at the time the Registration Statement becomes effective or in the amended
prospectus on file with the Commission pursuant to Rule 424(b) (the "Amended
Prospectus"), such indemnity agreement shall not inure to the benefit of any
indemnitee if a copy of the Amended Prospectus was furnished to the person or
entity asserting the loss, liability, claim or damage at or prior to the time
such furnishing is required by the Securities Act; and provided, further, that
this indemnity shall not be deemed to relieve any underwriter of any of its due
diligence obligations.
(b) Each Holder of shares of the Registrable Stock which are included in a
registration pursuant to the provisions of this Agreement will, severally and
not jointly, indemnify and hold harmless the Company, each person who controls
the Company, each officer of the Company who signs the Registration Statement,
each director of the Company, each underwriter and each person who controls such
underwriter, and their respective heirs, successors and assigns, from and
against, and will reimburse the Company and such persons with respect to, any
and all losses, damages, liabilities, costs or expenses to which the Company or
such persons may become subject under the Securities Act or otherwise, to the
extent that any such loss, damage, liability, cost or expense arises out of or
is based upon any untrue or alleged untrue statement of any material fact
contained therein or any amendment or supplement thereto, or arises out of or is
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they are made, 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 so made in reliance upon
and in strict conformity with written information furnished by such Holder
specifically for use in the preparation thereof; provided that the liability of
each Holder hereunder shall be limited to the proportion of any such claim,
action, demand, loss, damage, liability, cost or expense which is equal to the
proportion that the public offering price of the shares of Registrable Stock
sold by such Holder under such Registration Statement bears to the total
offering price of all securities sold thereunder, but not, in any event, to
exceed the net
10
<PAGE>
proceeds received by such Holder from the sale of shares of Registrable Stock
covered by such Registration Statement; provided, further, that the foregoing
indemnity agreement is subject to the condition that, insofar as it relates to
any such untrue statement (or alleged untrue statement) or omission (or alleged
omission) made in the preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the Commission at the time the Registration
Statement becomes effective or in the Amended Prospectus, such indemnity
agreement shall not inure to the benefit of any indemnitee if a copy of the
Amended Prospectus was furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the Securities Act; and provided, further, that this indemnity shall not be
deemed to relieve any underwriter of any of its due diligence obligations.
(c) Promptly after receipt by a party to be indemnified pursuant to the
provisions of paragraph (a) or (b) of this Section 7 (an "indemnified party") of
notice of the commencement of any action involving the subject matter of the
foregoing indemnity provisions, such indemnified party will, if a claim thereof
is to be made against the indemnifying party pursuant to the provisions of
paragraph (a) or (b), notify the indemnifying party 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 an indemnified party otherwise than under
this Section 7 and shall not relieve the indemnifying party from liability under
this Section 7 unless such indemnifying party is prejudiced by such omission. In
case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party pursuant to the provisions of such paragraph
(a) and (b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall be liable to an indemnified
party for any settlement of any action or claim without the consent of the
indemnifying party; no indemnifying party may unreasonably withhold its consent
to any such settlement. No indemnifying party will consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any Holder
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this Section 7 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 7 provides for indemnification in
such case, or (ii) contribution under the Securities Act may be required on the
part of any such selling Holder or any such controlling person in circumstances
for which indemnification is provided under this Section 7; then, and in each
such case, the Company and such Holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that such Holder is responsible only for the
portion represented by the percentage that the public offering price of its
Registrable Stock offered by the Registration Statement bears to the public
offering price of all securities offered by such Registration Statement, and the
Company and
11
<PAGE>
other persons are responsible for the remaining portion; provided, however,
that, in any such case, (A) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation and (B) no such Holder will be required to
contribute any amount in excess of the net proceeds received by such Holder from
the sale of all such Registrable Stock offered by it pursuant to such
Registration Statement.
8. Reporting Requirements Under Securities Exchange Act of 1934. On or
------------------------------------------------------------
prior to an initial public offering of the Common Stock, the Company shall
register its Common Stock under Section 12 of the Exchange Act and shall keep
effective such registration and shall timely file such information, documents
and reports as the Commission may require or prescribe under Section 13 of the
Exchange Act. From and after the effective date of the first Registration
Statement filed by the Company, the Company shall (whether or not it shall then
be required to do so) timely file such information, documents and reports as the
Commission may require or prescribe under Section 13 or 15(d) (whichever is
applicable) of the Exchange Act. Immediately upon becoming subject to the
reporting requirements of either Section 13 or 15(d) of the Exchange Act, the
Company shall forthwith upon request furnish any Holder of Registrable Stock (i)
a written statement by the Company that it has complied with such reporting
requirements, (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the Commission as such Holder may reasonably request in availing itself of an
exemption for the sale of Registrable Stock without registration under the
Securities Act. The Company acknowledges and agrees that the purposes of the
requirements contained in this Section 8 are (a) to enable any such Holder to
comply with the current public information requirement contained in Paragraph
(c) of Rule 144 under the Securities Act should such Holder ever wish to dispose
of any of the securities of the Company acquired by it without registration
under the Securities Act in reliance upon Rule 144 (or any other similar or
successor exemptive provision), and (b) to qualify the Company for the use of
Registration Statements on Form S-3. In addition, the Company shall take such
other measures and file such other information, documents and reports, as shall
hereafter be required by the Commission as a condition to the availability of
Rule 144 under the Securities Act (or any similar or successor exemptive
provision hereafter in effect) and the use of Form S-3. The Company also
covenants to use its best efforts, to the extent that it is reasonably within
its power to do so, to qualify for the use of Form S-3. From and after the
effective date of the first Registration Statement filed by the Company, the
Company agrees to use its best efforts to facilitate and expedite transfers of
Registrable Stock pursuant to Rule 144 under the Securities Act (or any similar
or successor exemptive provision hereafter in effect), which efforts shall
include timely notice to its transfer agent to expedite such transfers of
Registrable Stock.
9. Stockholder Information. The Company may require each Holder of
-----------------------
Registrable Stock as to which any registration is to be effected pursuant to
this Agreement to furnish the Company in a timely manner such information with
respect to such Holder and the distribution of such Registrable Stock as the
Company may from time to time reasonably request in writing and as shall be
required by law or by the Commission in connection therewith.
10. Private Offerings. (a) Except in a public offering registered under
-----------------
the Securities Act, the Company shall not issue or sell any equity security
unless each recipient thereof agrees in writing with the Company not to offer to
sell or sell such equity security for at least one hundred twenty (120) days
after the closing of the initial public offering of Common Stock of the Company
registered under the Securities Act (or such longer period as may be required by
the
12
<PAGE>
managing underwriter of such public offering) or ninety (90) days after the
closing of any other public offering of securities of the Company registered
under the Securities Act.
(b) Each Investor hereby agrees, upon written request of the Company, not
to offer to sell or sell any of the Company's equity securities owned by such
Investor for at least one hundred twenty (120) days after the closing of the
initial public offering of the Common Stock of the Company registered under the
Securities Act; provided, however, (i) all officers and directors of the Company
-------- -------
and all holders of at least 5% of the Company's Common Stock are similarly bound
with regard to the initial public offering and (ii) that no Investor shall be
obligated to agree to any such "lock-up" period which exceeds the shortest time
period agreed to by any other stockholder of the Company. Notwithstanding the
foregoing 120-day period, each Investor hereby agrees not to offer to sell or
sell any of the Company's equity securities for at least one hundred eighty
(180) days after the closing of the Chase H&Q Public Offering; provided,
--------
however, (i) all officers and directors of the Company and all holders of at
- -------
least 3% of the Company's Common Stock are similarly bound with regard to the
Chase H&Q Public Offering and (ii) that no Investor shall be obligated to agree
to any such "lock-up" period which exceeds the shortest time period agreed to by
any other stockholder of the Company. Pursuant to the foregoing sentence, each
Investor agrees to execute the form of "lock-up" agreement required by Chase H&Q
in connection with the Chase H&Q Public Offering provided that such lock-up
agreement is in a form reasonably satisfactory to such Investor (the "H&Q Lock-
up"). If any shares held by a stockholder who is bound by a H&Q Lock-up are
released (the "Released Stockholder"), a number of shares held by each Investor
shall be released equal to the product of the number of shares held by such
Investor multiplied by a fraction, the numerator of which shall be equal to the
number of shares held by the Released Stockholder that were released and the
denominator of which shall be the total number of shares held by the Released
Stockholder.
11. Specific Enforcement. Each of the parties hereto acknowledges that
--------------------
the parties will be irreparably damaged in the event that this Agreement is not
specifically enforced. Upon a breach or threatened breach of the terms,
covenants or conditions of this Agreement by any of the parties hereto, the
other parties shall, in addition to all other remedies, be entitled to a
temporary or permanent injunction, without showing any actual damage, or a
decree for specific performance, in accordance with the provisions hereof.
12. Notices. Any notice required or permitted to be given hereunder shall
-------
be in writing and shall be deemed to be properly given when delivered (i) if by
hand, at the time of delivery thereof to the receiving party at the address of
such party as so designated below, (ii) if made by facsimile transmission, at
the time that receipt thereof has been acknowledged by electronic confirmation
or otherwise, (iii) if sent by overnight courier, on the next business day
following the day such notice is delivered to the courier service, or (iv) if
sent by registered or certified mail, on the fifth business day following the
day such mailing is made, addressed as follows:
If to the Company: SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, MA 02111
Attn: Rick Olin, General Counsel
Fax: (617) 757-2211
with a copy to:
13
<PAGE>
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Attn: Steven P. Rosenthal, Esq.
Fax: (617) 542-2241
If to any Investor: To the address for each such Investor set forth on
Schedule RRA hereto
and if to any other Holder at such Holder's address for notice as set forth in
the register maintained by the Company, or, as to any of the foregoing, to such
other address as any such party may give the others notice of pursuant to this
Section, provided that a change of address shall only be effective upon receipt.
13. Governing Law; Jury Waiver. This Agreement shall be governed by, and
--------------------------
construed in accordance with, the laws of the State of Delaware. The parties
hereto waive all right to trial by jury in any action or proceeding to enforce
or defend any rights under this Agreement.
14. Waivers: Amendments. No waiver of any right hereunder by any party
-------------------
shall operate as a waiver of any other right, or of the same right with respect
to any subsequent occasion for its exercise, or of any right to damages. No
waiver by any party of any breach of this Agreement shall be held to constitute
a waiver of any other breach or a continuation of the same breach. All remedies
provided by this Agreement are in addition to all other remedies provided by
law. This Agreement may not be amended except by a writing executed by the
Company and the Holders of at least a majority of the Registrable Stock.
15. Other Registration Rights. The Company shall not grant to any third
-------------------------
party any registration rights more favorable than any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect, unless the holders of Registrable Stock are granted rights to
participate together with any such third party in such registration rights.
16. Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the respective legal representatives, successors
and assigns of the parties hereto; provided, however, that the registration
-------- -------
rights conferred herein shall only inure to the benefit of a transferee of
Registrable Stock if (i) there is transferred to such transferee at least twenty
(20%) percent of the Registrable Stock originally issued by the Company to the
direct or indirect transferor of such transferee, (ii) such transferee is a
partner, shareholder, member or affiliate of a party hereto; and in each case
such transferee becomes a party to this Agreement by signing a counterpart
hereof, at which point such transferee shall become an "Investor" for the
purposes of this Agreement, or (iii) such transferee is a member of the family
(i.e., spouse, sibling, spouse's sibling, child (natural or adopted), stepchild,
----
grandchild, uncle, aunt, niece, nephew, parent, grandparent or any other lineal
ancestor or descendent) of a party or partner, shareholder, member or affiliate
of a party hereto; provided, however, that no expansion of the definition of
Holders set forth above shall be effected by this Section 16.
14
<PAGE>
17. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18. Prior Understandings. This Agreement represents the complete
--------------------
agreement of the parties with respect to the transactions contemplated hereby
and supersedes all prior agreements and understandings.
19. Headings. Headings in this Agreement are included for reference only
--------
and shall have no effect upon the construction or interpretation of any part of
this Agreement.
20. Severability. If any provision of this Agreement shall be held to be
------------
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
21. Termination of Registration Obligations. The obligations of the
---------------------------------------
Company to register shares of Registrable Stock shall terminate on the ninth
(9th) anniversary of the date of this Agreement and, if sooner, in the case of
registrations under Section 2 above, five (5) years following the effective date
of the registration statement for the Company's first firm commitment
underwritten public offering of its equity securities.
22. Consent to Fourth Amended and Restated Agreement. The parties hereto,
------------------------------------------------
holding in the aggregate a sufficient number of shares of Registrable Stock to
amend the Third Amended and Restated Registration Rights Agreement in accordance
with the provisions of Section 14 thereof, hereby consent to this amendment and
restatement thereof.
[signature pages follow]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amended
and Restated Registration Rights Agreement as of the date first above written.
SPEECHWORKS INTERNATIONAL, INC.
/s/ Stuart Patterson
By:______________________________________
Stuart Patterson, President and Chief
Executive Officer
INVESTORS:
IGATE VENTURES I, L.P.
/s/ Ajmah Noorani
By:______________________________________
Name: Ajmah Noorani
Title: General Partner
REUTERS HOLDINGS SWITZERLAND SA
/s/ J. Taysom
By:______________________________________
Name: J. Taysom
Title: CEO
CITICORP STRATEGIC TECHNOLOGY CORP.
/s/ William F. Carson
By:______________________________________
Name: William F. Carson
Title: Vice President
GE CAPITAL EQUITY INVESTMENTS, INC.
/s/ Stefan Abbruzzese
By:______________________________________
Name: Stefan Abbruzzese
Title: Vice President
MCI WORLDCOM VENTURE FUND, INC.
/s/ Susan Mayer
By:______________________________________
Name: Susan Mayer
Title: President
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
16
<PAGE>
CHARLES RIVER PARTNERSHIP VII
By: /s/ Richard M. Burnes, Jr.
-----------------------------------------
Name: Richard M. Burnes
Title: General Partner
ATLAS VENTURE FUND II, L.P.
By: Atlas Venture Associates II, L.P., its
general partner
By: /s/ Axel Bichara
-----------------------------------------
Name: Axel Bichara
Title: General Partner
QUESTMARK PARTNERS, L.P.
By: /s/ Thomas R. Hitchner
-----------------------------------------
Name: Thomas R. Hitchner
Title: General Partner
INTEL 64 FUND, LLC
By: INTEL 64 FUND OPERATIONS, INC.,
its Coordinating Member
By: /s/ Arvind Sodhani
-----------------------------------------
Name: Arvind Sodhani
Title: Vice President and Treasurer
BANK OF AMERICA VENTURES
By: /s/ Robert M. Obuch
-----------------------------------------
Name: Robert M. Obuch
Title: Principal
BA VENTURE PARTNERS III
By: /s/ Robert M. Obuch
-----------------------------------------
Name: Robert M. Obuch
Title: Principal
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
17
<PAGE>
RIGGS CAPITAL PARTNERS, LLC
/s/ J. Carter Beese, Jr.
By:_____________________________________
Name: J. Carter Beese, Jr.
Title: President
MINTZ LEVIN INVESTMENTS LLC
/s/ Steven P. Rosenthal
By:_____________________________________
Name: Steven P. Rosenthal
Title: Manager
/s/ Steven P. Rosenthal
________________________________________
Steven P. Rosenthal
/s/ Suzanne Abair and Kathleen MacDonald
________________________________________
Suzanne Abair and Kathleen MacDonald
/s/ Robert S. Fore
________________________________________
Robert S. Fore
LEE CAPITAL HOLDINGS
By:_____________________________________
Name:
Title:
CITIZENS CAPITAL INCORPORATED
By:_____________________________________
Name:
Title:
________________________________________
JOSEPH MURPHY
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
18
<PAGE>
DIGITAL BANDWIDTH LLC
/s/ David B. Weinberg
By:______________________________________
Name: David B. Weinberg
Title: President
INTEL CORPORATION
/s/ Arvind Sodhani
By:______________________________________
Name: Arvind Sodhani
Title: Vice President and
Treasurer
SAP AMERICA, INC.
By:______________________________________
Name:
Title:
_________________________________________
Paul Yovovich
_________________________________________
Ralph Mor
_________________________________________
Hedva Mor
_________________________________________
Jeffrey Mor
_________________________________________
Jean Guy Dahan
_________________________________________
Naim Murad
_________________________________________
John Meyrick
_________________________________________
Brett Phaneuf
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
19
<PAGE>
_________________________________________
William J. O'Farrell
__________________________________________
Noreen D. O'Farrell
_________________________________________
William Ledingham
_________________________________________
William Haney
__________________________________________
Anne G. Haney
LIGHTHOUSE CAPITAL PARTNERS, L.P.
By: LIGHTHOUSE MANAGEMENT
PARTNERS, L.P., its general partner
By: LIGHTHOUSE CAPITAL
PARTNERS, INC., its general partner
By:________________________________
Title:_____________________________
_________________________________________
Mark Holthouse
_________________________________________
Stephen Smith
_________________________________________
Sol Lerner
_________________________________________
Henry Lerner
_________________________________________
Leonard Epstein
_________________________________________
Bella Lerner
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
20
<PAGE>
________________________________________
Miriam Epstein
________________________________________
Brian S. Eberman
_______________________________________
Edward J. McCaffrey
_______________________________________
Joyce V. McCaffrey
SIGNATURE PAGE FOR SPEECHWORKS REGISTRATION RIGHTS AGREEMENT
21
<PAGE>
Schedule RRA
--------------
April 11, 2000
Investors and Mailing Addresses:
- -------------------------------
iGate Ventures I, L.P.
1004 McKee Road
Oakdale, PA 15071
Counsel:
Buchanan Ingersoll Professional Corporation
One Oxford Centre, 20th Floor
301 Grant Street
Pittsburgh, PA 15219
Attn: James J. Barnes, Esq.
(412) 562-1415
(412) 562-1041 (Fax)
Reuters Holdings Switzerland SA
153 Route de Thonon
1245 Collogne-Bellerive
Switzerland
(with copies to: Reuters Limited
85 Fleet Street
London EC4P 4AJ
United Kingdom
Attention: General Counsel)
<PAGE>
Citicorp Strategic Technology Corp.
909 Third Avenue,
16th Floor, New York, NY 10043
Attention: William F. Carson
GE Capital Equity Investments, Inc.
120 Long Ridge Road, Stamford, CT 06927
Attention: General Counsel
MCI WorldCom Venture Fund, Inc.
1801 Pennsylvania Avenue N.W.
6th Floor
Washington D.C. 20006
Mintz Levin Investments LLC
One Financial Center
Boston, MA 02111
Attention: Steven P. Rosenthal, Esq.
Steven P. Rosenthal
40 Bartlett Street
Marblehead, MA 01945
Suzanne Abair & Kathleen MacDonald
16 Dartmouth Street
Boston, MA 02116
Atlas Venture Fund II, L.P.
222 Berkeley Street
Boston, MA 02116
Attention: Axel Bichara
Charles River Partnership VII
1000 Winter Street
Suite 3300
Waltham, MA 02154
Attention: Richard Burnes
Digital Bandwidth LLC
One First National Plaza
Suite 3140
Chicago, IL
Attention: David B. Weinberg
Bank of America Ventures
950 Tower Lane, Suite 700
Foster City, CA 94404
Attention: Robert Obuch
2
<PAGE>
BA Venture Partners III
950 Tower Lane, Suite 700
Foster City, CA 94404
Attention: Robert Obuch
Intel Corporation
5200 N.E. Elam Young Parkway
Hillsboro, OR 07123
Attention: Ken Matthews
SAP America, Inc.
3999 WestChester Pike
Newton Square, PA 19073
Attention: Gary Fromer
QuestMark Partners, L.P.
One South Street, Suite 800
Baltimore, Maryland 21202
Attention: Tim Krongard
Riggs Capital Partners
800 17/th/ Street, N.W.
Washington, DC 20006-3944
Attention: Vicken Dombalagian
Intel 64 Fund Operations, Inc.
2200 Mission College Blvd.
Santa Clara, CA 95052
Attn: Portfolio Manager - M/S: RN6-46
With a copy to:
Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052
Attention: General Counsel
Robert S. Fore
520 Georgetown Avenue
San Mateo, CA 94402
Edward J. McCaffrey
23 Warwick Road
Winnetka, IL 60093
Joyce V. McCaffrey
23 Warwick Road
Winnetka, IL 60093
Paul Yovovich
3
<PAGE>
1007 Forest Avenue
Wilmete, IL 60091-1757
Ralph Mor
11 Brook Road
Sharon, MA 02067
Hedva Mor
Rechov Hatziporen
6-Aleph
Bet Shemesh, ISRAEL 99000
Jeffrey Mor
Rechov Hatziporen
6-Aleph
Bet Shemesh, ISRAEL 99000
Jean Guy Dahan
12 Colburne Crescent, Apt. #3
Brookline, MA 02146
Naim Murad
75 Glengarry #502
Town of Mount Royal, PQ
H3R 1A2
Canada
John Meyrick
22 Lotus Avenue
Scituate, MA 02066
Brett Phaneuf
380 Pine Street
Marshfield, MA 02050
William J. O'Farrell
76 Taber Avenue
Providence, RI 02906
Noreen D. O'Farrell
76 Taber Avenue
Providence, RI 02906
William Ledingham
15 Wingate Road
Wellesley, MA 02181
William Haney
4
<PAGE>
61 Lincoln Road
Wayland, MA 01778
Anne G. Haney
61 Lincoln Road
Wayland, MA 01778
Lighthouse Capital Partners, L.P.
100 Drake's Landing, Suite 260
Greenbrae, CA 94904-3121
Mark Holthouse
163 Upland Road
Newtonville, MA 02160
Stephen Smith
5404 Spangler Avenue
Bethesda, MD 20816
Sol Lerner
10 Flintlock Road
Sharon, MA 02067
Henry Lerner
One Celler Road
Edison, NJ
Leonard Epstein
193 Cheswick Road
Brighton, MA 02135
Bella Lerner
One Celler Road
Edison, NJ
Miriam Epstein
193 Chiswick Road
Brighton, MA 02135
Brian S. Eberman
10 LaFayette Road
Newton, MA 02162
Lee Capital Holdings, LLC
One International Place
Boston, MA 02110
Attn: Jonathan Lee
5
<PAGE>
Citizens Capital Incorporated
28 State Street, 15/th/ Floor
Boston, MA 02109
Attn: Robert Garrow
Joseph Murphy
40 Maynard Farm Road
Sudbury, MA 01776
6
<PAGE>
Exhibit 10.3
Final
Execution
695 ATLANTIC AVENUE
BOSTON, MASSACHUSETTS
Lease dated February 21, 1997
ARTICLE I REFERENCE DATA
1.1 Subjects Referred To
Each reference in this Lease to any of the following subjects shall be construed
to incorporate the data stated for that subject in this Article:
LANDLORD: LANDMAN OMNIBUS V LIMITED PARTNERSHIP, a Massachusetts limited
partnership
LANDLORD'S ORIGINAL ADDRESS: c/o Berkeley Investments, Inc.
101 Federal Street
Boston, MA 02110
LANDLORD'S REPRESENTATIVE: Peter Merrigan
TENANT: Applied Language Technologies, Inc., a Delaware corporation
TENANT'S NOTICE ADDRESS: Prior to the Commencement Date:
215 First Street
Cambridge, MA 02142
From and After the Commencement Date:
695 Atlantic Avenue
Boston, MA 02111
TENANT'S REPRESENTATIVE: Arthur Haberman
SCHEDULED TERM COMMENCEMENT DATE: May 1, 1997
TENANTS SPACE: 12,530 square feet of rentable space on the third
(3rd) floor of the Building, as shown on the floor
plan attached as Exhibit A hereto
<PAGE>
RENTABLE AREA OF TENANT'S SPACE: 12,530 rentable square feet. The Premises
shall conclusively be deemed to contain
12,530 rentable square feet for all
purposes under this Lease, and no
measurement or remeasurement of the
Premises shall be conducted or required
for any purpose under this Lease.
TERM: Sixty-one (61) calendar months (plus the partial month, if any,
immediately following the Commencement Date)
ANNUAL FIXED RENT: Rate Annual Monthly
---- Amount Amount
------ ------
Lease Year 1: $19.32 per annum per $262,252.90 $20,173.30
(thirteen months) rentable square foot
Lease Year 2: $20.32 per annum per $254,609.60 $21,217.47
(commences thirteen months, rentable square foot
plus partial month, if any,
after the Commencement Date)
Lease Year 3: $21.32 per annum per $267,139.60 $22,261.63
rentable square foot
Lease Year 4: $22.32 per annum per $279,669.60 $23,305.80
rentable square foot
Lease Year 5: $23.32 per annum per $292,199.60 $24,349.97
rentable square foot
Note: See Section 2.5 for partial rental abatement for first two months.
-2-
<PAGE>
TENANT'S OPERATING
EXPENSE AND TAX BASE: The Operating Expenses and Taxes allocable to the
Premises, on a square footage basis, during calendar
year 1997, adjusted, however, as if Tenant had been in
occupancy of the Premises for the entirety of calendar
year 1997
SECURITY DEPOSIT: $200,000 Letter of Credit (see Section 2.8)
ELECTRICITY: Paid by Tenant pursuant to Section 2.5
RENTABLE FLOOR AREA OF THE BUILDING: 173,177 Rentable Square Feet
PERMITTED USES: General office purposes only
COMMERCIAL GENERAL
LIABILITY INSURANCE: Personal Injury and Property Damage Limits -
$2,000,000 each
CONTRACTOR'S LIABILITY INSURANCE: $2,000,000
BROKER(S): Spaulding & Slye Company and
The Columbia Group
1.2 Exhibits. There are incorporated as a part of this Lease:
EXHIBIT A - Floor Plan of the Premises
EXHIBIT B - Commencement Date Agreement
EXHIBIT C - Form of Letter of Credit
EXHIBIT D - List of Plans for Leasehold Improvements
EXHIBIT E - Landlord's Services
EXHIBIT F - Rules and Regulations
EXHIBIT G - Subordination, Non-Disturbance and Attornment Agreement
-3-
<PAGE>
TABLE OF CONTENTS
ARTICLE I REFERENCE DATA
.............................................................. 1
1.1 Subjects Referred To ......................................... 1
1.2 Exhibits ..................................................... 3
ARTICLE II PREMISES, TERM AND RENT
.............................................................. 10
2.1 The Premises
.............................................................. 10
2.2 Rights to Use Common Facilities
.............................................................. 10
2.3 Landlord's Reservations
.............................................................. 10
2.4 Habendum
.............................................................. 10
2.6 Adjustments for Operating Expenses and Taxes
.............................................................. 11
2.7 Due Date of Additional Payments; Change in Accounting Period
.............................................................. 15
2.8 Letter of Credit
.............................................................. 15
ARTICLE III: ALTERATIONS AND ADDITIONS
.............................................................. 17
3.1 Initial Fit-Up
.............................................................. 17
3.2 Work Delays
.............................................................. 18
-4-
<PAGE>
3.3 Plans and Approvals
.............................................................. 18
3.4 Construction Provisions
.............................................................. 20
ARTICLE IV LANDLORD'S COVENANTS;
INTERRUPTIONS AND DELAYS
.............................................................. 22
4.1 Services Furnished by Landlord
.............................................................. 22
4.2 Additional Services Available to Tenant
.............................................................. 22
4.3 Roof, Exterior Wall, Floor Slab, and Common Facility Repair
.............................................................. 22
4.4 Access
.............................................................. 22
4.5 Heat and Air Conditioning
.............................................................. 22
4.6 Quiet Enjoyment
.............................................................. 23
4.7 Interruptions and Delays in Service and Repairs, etc.
.............................................................. 23
4.8 Indemnity.
.............................................................. 23
4.9 Insurance.
.............................................................. 24
ARTICLE V TENANT'S COVENANTS
.............................................................. 25
5.1 Payments
.............................................................. 25
-5-
<PAGE>
5.2 Repair and Yield Up
.............................................................. 25
5.3 Use
.............................................................. 26
5.4 Obstructions, Items Visible from Exterior; Rules and Regulations
.............................................................. 26
5.5 Safety Appliances
.............................................................. 26
5.6 Assignment; Sublease
.............................................................. 27
5.7 Indemnity; Insurance
.............................................................. 28
5.8 Personal Property at Tenant's Risk
.............................................................. 29
5.9 Right of Entry
.............................................................. 29
Upon
.............................................................. 29
Floor Load; Prevention of Vibration and Noise
.............................................................. 29
5.11 Personal Property Taxes
.............................................................. 30
5.12 Signs
.............................................................. 30
5.13 Compliance with Insurance Regulations
.............................................................. 30
ARTICLE VI CASUALTY AND TAKING
.............................................................. 31
6.1 Termination or Restoration; Rent Adjustment; Demolition
.............................................................. 31
-6-
<PAGE>
6.2 Eminent Domain
.............................................................. 31
6.3 Temporary Taking
.............................................................. 32
ARTICLE VII DEFAULT
.............................................................. 33
7.1 Events of Default
.............................................................. 33
7.2 Damages
.............................................................. 23
ARTICLE VIII MISCELLANEOUS
.............................................................. 36
8.1 [Intentionally omitted]
.............................................................. 36
8.2 Notice of Lease; Consent and Approval; Notices; Bind and Inure
.............................................................. 36
8.3 Landlord's Failure to Enforce
.............................................................. 36
8.4 Acceptance of Partial Payments of Rent; Delivery of Keys
.............................................................. 37
8.5 Cumulative Remedies
.............................................................. 37
8.6 Partial Invalidity
.............................................................. 37
8.7 Self-Help
.............................................................. 37
8.8 Estoppel Certificates
.............................................................. 38
8.9 Waiver of Subrogation
.............................................................. 38
-7-
<PAGE>
8.10 All Agreements Contained
.............................................................. 38
8.11 Brokerage
.............................................................. 39
8.12 Submission Not an Option
.............................................................. 39
8.13 Applicable Law
.............................................................. 39
8.14 Waiver of Jury Trial
.............................................................. 39
8.15 Holdover
.............................................................. 39
8.16 Force Majeure
.............................................................. 39
8.17 Building Rehabilitation and Repair
.............................................................. 40
8.18 Compliance with Laws and Insurance Policies
.............................................................. 40
ARTICLE IX RIGHTS OF PARTIES HOLDING PRIOR INTERESTS
.............................................................. 42
9.1 Lease Subordinate
.............................................................. 42
9.2 Modification, Termination, and Cancellation
.............................................................. 43
9.3 Rights of Holder of Mortgage
.............................................................. 43
9.4 Assignment of Rents
.............................................................. 44
-8-
<PAGE>
9.5 Implementation of Article IX
.............................................................. 44
ARTICLE X HAZARDOUS MATERIALS
.............................................................. 45
10.1 Tenant's Obligations
.............................................................. 45
10.2 Survival
.............................................................. 46
-9-
<PAGE>
ARTICLE II PREMISES, TERM AND RENT
2.1 The Premises
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
Tenant's Space in the Building (as hereinafter defined), excluding exterior
faces of exterior walls, the common stairways and stairwells, elevators and
elevator shafts, fan rooms, electric and telephone closets, janitor closets,
freight elevator vestibules, and pipes, ducts, conduits, wires and appurtenant
fixtures serving exclusively or in common other parts of the Building, but
including all tenant special installations, stairs, special flues, dumbwaiter
shafts and special air conditioning facilities, specially installed or leased
telephone or electric switchboard, and if Tenant's Space includes less than the
entire rentable area of any floor, excluding the common corridors, elevator
lobbies and any toilets located on such floor. Tenant's Space with such
exclusions is hereinafter referred to as the "Premises." The term "Building"
means the two (2) contiguous buildings, the first known as The Plymouth Rock
Building, being located at and numbered 695 Atlantic Avenue in Boston,
Massachusetts and the second being located at and numbered 20-24 East Street in
Boston, Massachusetts. "Property" means the Building and the land on which the
Building is located (the "Lot").
2.2 Rights to Use Common Facilities
Tenant shall have, as appurtenant to the Premises, rights to use in
common, subject to reasonable rules of general applicability to tenants of the
Building from time to time made by Landlord of which Tenant is given notice, the
common lobbies, corridors, stairways, elevators and loading platform of the
Building, and the pipes, ducts, conduits, wires and appurtenant meters and
equipment serving the Premises in common with others.
2.3 Landlord's Reservations
Landlord reserves the right from time to time, without unreasonable
interference with Tenant's use: (a) to install, use, maintain, repair, replace
and relocate for service to the Premises and other parts of the Building, or
either, pipes, ducts, conduits, wires and appurtenant fixtures, wherever located
in the Premises or Building, and (b) to alter or relocate any other common
facility, provided that substitutions are substantially equivalent or better.
Installations, replacements and relocations referred to in clause (a) above
shall be located so far as practicable in the central core area of the Building,
above ceiling surfaces, below floor surfaces or within perimeter walls of the
Premises.
2.4 Habendum
- 10 -
<PAGE>
Tenant shall have and hold the Premises for a period commencing on the
date (the "Commencement Date") that is the earlier of (a) the "Completion Date"
(but not earlier than May 1, 1997), as defined in Section 3.1 hereof, or (b)
that date on which Tenant commences occupancy of any portion of the Premises for
the Permitted Uses, and continuing for the Term unless sooner terminated as
provided in Section 6.1 or Article VII. If Landlord shall be unable to deliver
possession of the Premises on the Scheduled Term Commencement Date because the
Premises are not completed, or due to the holding over or retention of
possession of any tenant or occupant, or if repairs, improvements or decorations
of the Premises or of the Building to be performed by Landlord are not
completed, or for any other reason, Landlord shall not be subject to any
liability for failure to deliver possession on said date, nor shall such failure
affect the continuing validity of this Lease. Upon the Commencement of the Term
Landlord and Tenant shall execute a Commencement Date Agreement in the form
attached hereto as Exhibit C.
2.5 Monthly Fixed Rent Payments; Electricity
Tenant shall pay, without notice, demand, offset or deduction, monthly
installments of 1/12 of the Annual Fixed Rent in advance on the Commencement
Date and thereafter, on the first day of each month during the Term. Annual
Fixed Rent for any partial month shall be paid by Tenant at such rate on a pro
rata basis, and if the Term commences on a day other than the first day of a
calendar month, the first payment which Tenant shall make shall be a payment
equal to a proportionate part of such Annual Fixed Rent for the partial month
from the Commencement Date to the first day of the succeeding calendar month,
and 1/12 of the Annual Fixed Rent for such succeeding calendar month. All rent
checks shall be made payable to the order of LANDMAN 695 ATLANTIC AVENUE and
mailed to Landlord c/o LandMan Omnibus, 695 Atlantic Avenue, P.O. Box 11467,
Boston, Massachusetts 02111.
Notwithstanding the foregoing, and provided Tenant is not then in
default under this Lease, Tenant shall receive, as an inducement to enter into
this Lease, an abatement of Annual Fixed Rent in the amount of $4,025 for each
of the first two calendar months of the Term.
Landlord shall provide a separate meter which shall measure electric
consumption in the Premises. Tenant shall pay as additional rent all amounts
billed by the applicable utility company when due directly to the utility
company. If, for any reason, such utility charges are not separately metered at
any time during the Term, Tenant shall pay as additional rent all reasonably
allocated charges attributable to the furnishing of electricity to the Premises.
2.6 Adjustments for Operating Expenses and Taxes
A. Terms used herein are defined as follows:
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(a) "Fiscal Year" shall mean any twelve (12) month period elected by
Landlord for operating purposes. Landlord's current Fiscal Year commences on
January 1 of each year. If Landlord should elect to change said Fiscal Year,
Landlord shall notify Tenant thereof, and all calculations required to be made
at the end of a Fiscal Year shall be made and prorated accordingly.
(b) "Operating Expenses for the Property" means the cost of operation of
the Property which shall exclude costs of special services rendered to tenants
(including Tenant) for which a separate charge is made, but shall include,
without limitation, the following: premiums for insurance carried with respect
to the Property (including insurance against loss of rent in case of fire or
casualty, and such insurance as may be required by the holder of such first
mortgage); compensation and all fringe benefits, worker's compensation insurance
premiums and payroll taxes paid to, for or with respect to all persons engaged
in the operating, repairing, maintaining, or cleaning of the Building or Lot;
steam, water, tempered water, sewer, electric, gas, oil and telephone charges
(excluding utility charges separately chargeable to tenants pursuant to Section
2.5 or for additional or special services); costs of building and cleaning
supplies and equipment (including rental); costs of maintenance, cleaning,
decorating and repairs; costs of elevator repairs and services; costs of rubbish
removal; costs of snow removal and care of landscaping; depreciation for capital
expenditures made by Landlord to reduce operating expenses (but only to the
extent operating expenses actually are reduced), or which are required by law
after the Commencement Date, together with interest on the unamortized cost at
the average prime rate in effect from time to time at the two largest national
banks in Boston, Massachusetts plus two (2%) percent; payments under service
contracts with independent contractors or subsidiaries or affiliates of
Landlord; management fees at reasonable rates consistent with the type of
occupancy and the service rendered; and all other reasonable and necessary
expenses paid in connection with the operation, repair, cleaning and maintenance
of the Building and Lot. Any of the services may be performed by subsidiaries or
affiliates of Landlord, provided that the contracts for the performance of such
services shall be competitive with similar contracts and transaction with
unaffiliated entities for the performance of such services in comparable
buildings in the downtown Boston area.
(c) In any Fiscal Year when the Building has an average annual occupancy
rate of less than 95% then, for the purpose of this Section 2.6, those Operating
Expenses for the Property which are affected by actual occupancy levels will be
extrapolated as though the Building were 95% occupied; and the "Operating
Expenses Allocable to the Premises" shall mean the same proportion of the
Operating Expenses for the Property (as extrapolated) as the Rentable Floor Area
of Tenant's Space bears to 95% of the Rentable Floor Area of the Building.
In any Fiscal Year when the Building has an average annual occupancy
rate of 95% or more, then the "Operating Expenses for the Property" shall be the
actual Operating Expenses for the Property as defined in clause (b);and the
"Operating
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Expenses Allocable to the Premises" shall mean the same proportion of the
Operating Expenses for the Property as the Rentable Floor Area of Tenant's Space
bears to the Rentable Floor Area of the Building actually leased on an average
annual basis for said Fiscal Year.
In the case of any services which are not rendered to all areas on a
comparable basis, the proportion allocable to Tenant's Space shall be in the
same proportion which the floor area of Tenant's Space to which the service is
rendered bears to the total floor area to which such service is rendered.
(d) "Landlord's Tax Expenses" with respect to any Fiscal Year means the
aggregate Real Estate Taxes on the Property with respect to that Fiscal Year,
reduced by any abatements (after deducting all costs of recovery) actually
received with respect to that Fiscal Year.
(e) "Tax Expenses Allocable to the Premises" means the same proportion
of the Landlord's Tax Expenses as Rentable Floor Area of Tenant's Space bears to
100% of the Rentable Floor Area of the Building.
(f) "Real Estate Taxes" means all taxes, fees, water and sewer charges
and other charges, levies and assessments (special or otherwise) of every kind
and nature assessed by any governmental authority on the Lot or the Building or
the Property which the Landlord shall become obligated to pay because of or in
connection with the ownership, leasing and operation of the Lot, the Building,
and the Property and reasonable expenses of any proceedings for abatement of
taxes. The amount of special taxes or special assessments to be included shall
be limited to the amount of the installment (plus any interest, other than
penalty interest, payable thereon) of such special tax or special assessment
required to be paid during the year in respect of which such taxes are being
determined. There shall be excluded from such taxes all income, estate,
succession, inheritance and transfer taxes; provided, however, that if at any
time during the Term the present system of ad valorem tax of real property shall
be changed so that in lieu of the whole or any part of the ad valorem tax on
real property, there shall be assessed on Landlord a capital levy or other tax
on the gross rents received with respect to the Lot or Building or Property, or
a federal, state, county, municipal, or other local income, franchise, excise or
similar tax, assessment, levy or charge (distinct from any now in effect in the
jurisdiction in which the Property is located) measured by or based, in whole or
in part, upon any such gross rents, then any and all of such taxes shall be
included within the term "Real Estate Taxes" but only to the extent that the
same would be payable if the Lot, Building or Property were the only property of
Landlord.
(g) "Premises Expenses" shall mean the sum of the Operating Expenses
Allocable to the Premises and the Tax Expenses Allocable to the Premises.
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(h) The "Statement" shall mean a statement rendered to Tenant by
Landlord as soon as reasonably possible after the end of each Fiscal Year. The
Statement shall show the Premises Expenses for the Property, amounts already
paid by Tenant for Premises Expenses (including Tenant's Operating Expense and
Tax Base, amounts received for tenant electricity paid pursuant to Section 2.5
hereof, if any, and amounts paid pursuant to part C of this Section 2.6), and
the amount of Premises Expenses remaining due from or overpaid by Tenant for the
Fiscal Year or fraction thereof covered by the Statement with appropriate
prorations for fractional years.
B. If with respect to any Fiscal Year of the Term, Premises Expenses
exceed Tenant's Operating Expense and Tax Base, then Tenant shall pay to
Landlord as additional rent the amount of such excess. (Tenant's Operating
Expense and Tax Base does not include tenant electricity to be paid by Tenant
pursuant to Section 2.5.) Appropriate prorations shall be made for those periods
at the beginning or end of the Term which are less than a full Fiscal Year. Such
payments shall be made at the times and in the manner hereinafter provided in
this Section 2.6.
Within thirty (30) days after the date of delivery of such Statement,
Tenant shall pay to Landlord the balance of the amounts, if any, required to be
paid pursuant to the above provisions of this Section 2.6, or if Tenant has
overpaid Premises Expenses, Tenant shall receive a credit against the next Rent
due hereunder in an amount equal to such overpayment (or, in the case of
overpayment at the end of the Term, a refund of such overpayment). Nothing
contained herein shall require that Landlord reimburse to Tenant any amount if
the amount of Premises Expenses is less than Tenant's Operating Expense and Tax
Base.
C. In addition, commencing on the first day of the first month following
the delivery to Tenant of the Statement referred to above and on the first day
of each month thereafter until delivery to Tenant of the next such Statement,
Tenant shall pay to Landlord, on account toward Tenant's share of increases in
Premises Expenses anticipated for the then current Fiscal Year, 1/12th of the
total amount described in clause (h) above as shown on the most recent such
Statement delivered to Tenant.
To the extent that Real Estate Taxes shall be payable to the taxing
authority in installments for periods less than a Fiscal Year, the foregoing
statement shall be rendered and payments made on account of such installments
with respect to such periods rather than with respect to such full Fiscal Year.
Notwithstanding the foregoing provisions, no decrease in Landlord's Tax Expenses
with respect to any Fiscal Year shall result in a reduction of the amount
otherwise payable by Tenant if and to the extent said decrease is attributable
to vacancies in the Building rather than to any other causes.
D. Tenant shall have the right at its sole cost and expense to audit the
applicable records of Landlord relating to a Statement to confirm that the
charges billed to Tenant under this Section are proper and conform to the
provisions of this Section.
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Such right shall be exercisable by Tenant within 30 days after Tenant's receipt
of such Statement and shall apply to such Statement only. Landlord shall
cooperate with Tenant in providing Tenant reasonable access to Landlord's books
and records during normal business hours to enable Tenant to audit Landlord's
books and records as they relate to such Statement. A representative of Landlord
will be present during such audit. If the audit discloses any overpayment on the
part of Tenant, then Tenant shall be entitled to a credit on the next succeeding
installment of rent for an amount equal to the overcharge. If the audit
discloses any underpayment on the part of Tenant, then Tenant shall pay to
Landlord promptly the amount of such underpayment. In exercising its rights
hereunder, Tenant shall not employ as an auditor any firm or individual whose
compensation is based upon commission or a percentage of sums recovered.
2.7 Due Date of Additional Payments; Change in Accounting Period
Except as otherwise specifically provided herein, any sum, amount, item
or charge designated or considered as additional rent in this Lease shall be
paid by Tenant to Landlord on the first day of the month following the date on
which Landlord notifies Tenant of the amount payable or on the tenth day after
the giving of such notice, whichever shall be later. Any such notice shall
specify in reasonable detail the basis of such additional rent. Additional rent
shall be paid by Tenant to Landlord without offset or deduction.
Landlord shall have the right from time to time to change the periods of
accounting to any other annual period, and upon any such change, all items
referred to in said Section 2.6 shall be appropriately apportioned. In all
statements rendered under Section 2.6, amounts for periods partially within and
partially without the accounting periods shall be appropriately apportioned, and
any items which are not determinable at the time of a statement shall be
included therein on the basis of Landlord's estimate and with respect thereto
Landlord shall render promptly after determination a supplemental statement and
appropriate adjustment shall be made according thereto. All statements shall be
prepared on an accrual basis of accounting.
2.8 Letter of Credit
Upon the execution of this Lease and as security for Tenant's
obligations under this Lease, Tenant shall obtain and deliver to the Landlord an
Irrevocable Letter of Credit from a major New York or Boston area commercial
bank reasonably acceptable to the Landlord in Landlord's favor available at
sight for Two Hundred Thousand ($200,000.00) Dollars (the "Letter of Credit").
This Letter of Credit shall conform and be subject to the Uniform Customs and
Practice for Documentary Credits (1983 Revision), International Chamber of
Commerce Publication 400, or to Article 5 of the Uniform Commercial Code, and
shall be in the form of Exhibit C attached hereto and incorporated herein by
reference. The initial Letter of Credit shall permit partial drawings thereunder
from time to time and shall be effective for no less than one (1)
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year and Tenant must obtain and submit to Landlord no less than forty-five (45)
days prior to the termination of the initial or any replacement Letter of Credit
(if such termination occurs prior to the date on which Landlord is required by
the terms hereunder to release the Letter of Credit to Tenant) a replacement
Letter of Credit which is acceptable to Landlord and which is to be effective
for no less than one (1) year. The first replacement Letter of Credit (i.e., the
Letter of Credit for Lease Year 2) shall be for Two Hundred Thousand
($200,000.00) Dollars and subsequent replacement Letters of Credit shall be in
amounts reduced at the rate of $40,000 per Lease Year (i.e., $160,000 for Lease
Year 3, $120,000 for Lease Year 4 and $80,000 for Lease year 5). If Tenant fails
to submit a replacement Letter of Credit prior to the aforesaid forty-five (45)
day period, then Landlord shall be entitled, without more, to draw upon the full
amount of the then effective Letter of Credit, and to apply the funds as a
security deposit for the Tenant's performance under the Lease.
Landlord may draw upon the full or any partial amount of the Letter of
Credit in the event Tenant is in default (beyond any applicable notice and cure
period) of its obligations under this Lease, to the extent necessary to cure
such default.
Provided that Landlord gives Tenant written notice of the name of such
grantee or transferee, upon any conveyance by Landlord of its interest under
this Lease, the Letter of Credit shall be delivered by Landlord to Landlord's
grantee or transferee. Upon any such delivery, Tenant hereby releases Landlord
herein named of any and all liability with respect to the Letter of Credit, its
application and return, and Tenant agrees to look solely to such grantee or
transferee. It is further understood that this provision shall also apply to
subsequent grantees and transferees.
The Letter of Credit, or any part or replacement thereof, not previously
applied or returned by Landlord, shall be returned to Tenant only after the
Expiration Date, and only after Tenant has fully vacated the Premises,
notwithstanding that the Lease has been terminated by Landlord, it being the
intention of the parties that this deposit shall secure Landlord not only as to
default by Tenant before such termination, but also to secure Landlord
thereafter from any deficiency of rent or other charges payable to Landlord by
Tenant.
[END OF ARTICLE II]
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ARTICLE III: ALTERATIONS AND ADDITIONS
3.1 Initial Fit-Up
Landlord is responsible for completing the improvements to the Premises
(the "Initial Fit-up") in accordance with plans therefor already approved by
Landlord and Tenant, a list of which plans (the "Final Plans") is attached
hereto as Exhibit D at Landlord's sole cost and expense except that Tenant shall
pay to Landlord within thirty (30) days after request therefor the amount of One
Thousand Seven Hundred Dollars ($1,700) toward the cost of the Initial Fit-up
("Tenant's Share of the Initial Fit-up Costs"). Tenant may during the period
prior to March 28, 1997 propose changes to the Final Plans to reduce the cost of
the Initial Fit-up and Landlord shall not unreasonably withhold its consent to
such requested changes, provided the same will not delay completion of the
Initial Fit-up. In the event of such changes to the Plans, (a) Landlord and
Tenant shall execute an amendment to this Lease memorializing the change in the
Final Plans, and (b) Tenant's Share of the Initial Fit-up shall be reduced (but
not below zero) by the amount of savings actually resulting from Tenant's
requested changes. Landlord shall use reasonable efforts to construct the
Initial Fit-up prior to the Scheduled Term Commencement Date.
The Initial Fit-up shall be deemed completed (the "Completion Date")
when (a) the work which Landlord is obligated to perform has been completed
except for items of work and adjustment of equipment and fixtures which can be
completed after occupancy has been taken without causing substantial
interference with Tenant's use of the Premises (i.e. so-called "punch list"
items), and (b) Tenant has received Landlord's certificate of the completion;
provided, however, that in the event of any Tenant Delay (defined in Section
3.2), the Completion Date shall be the day when the Initial Fit-up would have
been completed, as aforesaid, but for such Tenant Delay, as reasonably
determined by Landlord and reflected in a certificate from Landlord to Tenant to
that effect (in the event the Completion Date is deemed, as a result of a Tenant
Delay, to have occurred prior to actual completion of the Initial Fit-up,
Tenant's covenants to pay rent under 2.6 and 2.7 shall be effective as of the
deemed Completion Date, but Tenant's covenants that relate to occupancy of the
Premises shall not become effective until actual completion of the Initial
Fit-up). Landlord shall complete within 30 days after the Completion Date all
punchlist items and Tenant shall not use the Premises in such manner as will
increase the cost of or delay such completion. Landlord shall use diligent
efforts to obtain and deliver to Tenant as soon as is practicable a certificate
of occupancy for the Premises, which shall be obtained and delivered no later
than thirty (30) days after the Completion Date. Landlord shall permit Tenant
access for installing furnishings in portions of the Premises when it can be
done without material interference with remaining work. The work required of
Landlord referred to above shall be deemed to have been completed by Landlord
and approved by Tenant when Tenant commences occupancy of the Premises for the
Permitted Uses, except for items which are then
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uncompleted or do not conform to the Final Plans and as to which, in either
case, Tenant shall have given notice to Landlord within 30 days after the date
Tenant commences occupancy, and Tenant shall from time to time upon not less
than ten (10) business days' request by Landlord, execute, acknowledge and
deliver to Landlord a statement in writing certifying that all work required of
Landlord has been completed. Failure of Tenant to respond to such request from
Landlord within such time shall be deemed an acknowledgment by Tenant that,
except for latent defects, all Landlord's work has been completed to Tenant's
satisfaction.
3.2 Work Delays
(a) Landlord shall not be required to install or permit to be installed
any improvements which are not permitted by applicable building codes and
regulations. Delays in the performance of the Initial Fit-Up due to fire, labor
disputes, unusual delays in transportation, delays in adjusting insurance
awards, adverse weather conditions, unavoidable casualties, government
regulations or inability to obtain government approvals, unusual scarcity of
labor or materials, labor difficulties, casualty or other causes beyond
Landlord's control (collectively, "Force Majeure Events"), shall extend the
Scheduled Term Commencement Date for the period of such delays.
Each day of delay in approval of any plans or authorization to proceed
or making required payment beyond the dates specified in this Lease shall
conclusively be deemed to cause at least one equivalent day of delay by Tenant
in substantially completing the work to be done by Landlord pursuant to Section
3.1. Such delays, and any other delay of Tenant, anyone employed by it, or
anyone performing services or work for it, shall be referred to herein as a
"Tenant Delay."
(b) In the event Landlord shall not have completed construction of the
Initial Fit-Up (except for items of work and adjustment of equipment and
fixtures which can be completed after occupancy without causing substantial
interference with Tenants s use of the Premises (so-called "punch list" items),
prior to the Scheduled Term Commencement Date then Landlord's sole obligation
and liability to Tenant hereunder shall be to continue to diligently prosecute
such work to completion; provided, however, that in the event the Completion
Date has not been achieved by July 1, 1997 (as such date may be extended on
account of Tenant Delays or events of force majeure), Tenant shall have the
right, exercisable by notice to Landlord delivered on or before July 8, 1997, to
terminate this Lease; provided, however, that such termination shall be deemed
void if the Completion Date is achieved on or before July 15, 1997.
3.3 Plans and Approvals
This Article III shall apply before and during the Term, but shall not
apply to the Initial Fit-Up being performed by Landlord. Tenant shall not make
alterations, additions, installations or improvements (hereinafter collectively
called "changes") to
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Tenant's Space without first obtaining Landlord's approval therefor and for all
plans and specifications therefor, which approval shall not be unreasonably
withheld or delayed. Landlord shall not be deemed unreasonable for withholding
approval of any changes which (a) involve or might affect any structural or
exterior element of the Building, any area or element outside of the Premises,
or any facility serving any area of the Building outside of the Premises, or (b)
will delay completion of any work being performed by Landlord in or on the
Premises or Building, or (c) might, in Landlord's opinion, adversely affect the
value of the Building, or (d) might adversely affect the proper functioning of
any of the mechanical, electrical, sanitary and other service systems or
installations of the Building ("Service Facilities") or might interfere with
Landlord's free access to the Service Facilities or interfere with the moving of
Landlord's equipment to or from the enclosures containing the Service
Facilities, or (e) will require unusual expense to readapt the Premises to
normal office use on expiration of termination of this Lease or increase the
cost of construction or of insurance or taxes on the Building or of the services
called for by Section 4.1 unless Tenant first gives assurance reasonably
acceptable to Landlord for payment of such increased cost and that such
readaptation will be made prior to such expiration or termination without
expense to Landlord (collectively, the "Approval Review Matters"). Before
proceeding with any change (exclusive of changes to items constituting Tenant's
personal property), Tenant shall submit to Landlord plans and specifications for
the work to be done, which shall require Landlord's approval, which will not be
unreasonably withheld or delayed. Landlord's consent shall not be required in
connection with non-structural alterations, additions, installations or
improvements which cost less than $10,000 in any twelve-month period and do not
impact Building systems, but Tenant shall notify Landlord at least ten (10)
business days prior to commencing any such work, describing the proposed work in
reasonable detail.
Landlord may confer with consultants, including without limitation,
mechanical and electrical consultants, in connection with the review of plans
and specifications. if Landlord or such consultant(s) shall disapprove of any of
Tenant's plans, Tenant shall be advised of the reasons for such disapproval.
Tenant agrees to pay to Landlord, as additional rent, the reasonable cost of
such consultation and review immediately upon receipt of invoices either from
Landlord or its consultant(s). If the proposed change requires approval by or
notice to the lessor of a superior lease or the holder of a mortgage or deed of
trust, no change shall be commenced until such approval has been received, or
such notice has been given, as the case may be, and all applicable conditions
and provisions of said superior lease or mortgage or deed of trust with respect
to the proposed change have been met or complied with at Tenant's expense; and
Landlord, if it approves the change, will request such approval or give such
notice, as the case may be. Any change for which approval has been received
shall be performed strictly in accordance with the approved plans and
specifications, and no material amendments or additions to such plans and
specifications shall be made without the prior consent of Landlord. In the event
Tenant shall propose any alterations or adjustments in the work to be performed
after the submission of the plans as required above, such alterations and
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adjustments shall be subject to the same approvals and notices as the changes
originally submitted by Tenant. Each party authorizes the other to rely in
connection with procedures under this Article III upon approvals and other
actions on the party's behalf by any Representative of the party named in
Article I or any person hereafter designated in substitution or addition by
notice to the party relying.
3.4 Construction Provisions
All of Tenant's work and changes, including without limitation, the
installation of furnishings shall (a) at all times comply with all laws, rules,
orders, ordinances, directions, regulations and requirements of all governmental
authorities, agencies, offices, departments, bureaus and boards having
jurisdiction thereof and of the applicable insurance rating Bureau, (b) be
performed in compliance therewith and with the plans and specifications
previously approved by Landlord and in good and first class workmanlike manner,
(c) be performed in such manner as not to interfere with the occupancy of any
other tenant in the Building nor delay, or impose any additional expense upon
Landlord in, the construction, maintenance or operation of the Building, (d) be
coordinated with any work being performed by Landlord and in such manner as to
maintain harmonious labor relations and not cause any work stoppage or damage
the Building or Lot or interfere with Building construction or operation and,
(e) except for installation of furnishings, be performed by contractors or
workmen first approved by Landlord, (provided such contractors charge market
rates) provided that in any event Landlord may at its sole discretion require
that all electrical and mechanical work shall be done by Landlord's contractor
(provided such contractor charges market rates).
Except for work by Landlord's contractor, Tenant, before its work is
started, shall: secure all licenses and permits necessary therefor and to
deliver copies of the same to Landlord; deliver to Landlord a statement of the
names of all its contractors and subcontractors and the estimated cost of all
labor and materials to be furnished by them and security satisfactory to
Landlord protecting Landlord against liens arising out of the furnishing of such
labor and material and to deliver to Landlord a copy of the general contractor's
license; and cause each contractor to carry worker's compensation insurance in
statutory amounts covering all the contractor's and subcontractor's employees
and comprehensive public liability insurance with such limits as Landlord may
reasonably require, but in no event less than the Contractor's Liability
Insurance (all such insurance to be written in companies approved by Landlord
and insuring Landlord and Tenant as well as the contractors), and to deliver to
Landlord certificates of all such insurance. Tenant agrees to pay promptly when
due the entire cost of any work done on the Premises by Tenant, its agents,
employees, or independent contractors, and not to cause or permit any notices of
contract or any liens for labor or materials performed or furnished in
connection therewith to attach to the Premises and immediately to discharge any
such notices or liens which may so attach. Notwithstanding the provisions of
Section 3.3, Tenant agrees that no delay by it, or anyone employed by it, in
performing work to prepare the Premises for occupancy shall delay commencement
of
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the Term or the obligation to pay rent, regardless of the reason for such delay
or whether or not it is within the control of Tenant or any such employee. All
changes and all other alterations, decorations, additions or improvements upon
the Premises, made by either party, including (without limiting the generality
of the foregoing) all wallcovering, built-in cabinet work, paneling and the
like, shall, unless Landlord elects otherwise at the time of approval under
Section 3.3 for Tenant's improvements or at the time of making the improvements
if by Landlord, become the property of Landlord, and shall remain upon and be
surrendered with the Premises, as a part thereof, at the end of the Term hereof.
If Landlord elects to require that Tenant remove any improvements installed by
Tenant, Tenant shall repair any damage to the Premises arising from such removal
or, at Landlord's option, shall pay to the Landlord all of Landlord's reasonable
costs of such removal and repair. Upon the expiration or earlier termination of
this Lease, Tenant shall at Landlord's request restore the Premises to their
condition prior to the Initial Fit-Up or the making of any changes permitted by
this Section, reasonable wear and tear excepted.
Tenant shall pay, as additional rent, one hundred percent (100%) of any
increase in real estate taxes on the Building not otherwise billed to Tenant
which shall result from any changes made to the Premises by or on behalf of
Tenant (other than the Initial Fit-Up), whether made prior to or after the
commencement of the Term of this Lease.
[END OF ARTICLE III]
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ARTICLE IV LANDLORD'S COVENANTS;
INTERRUPTIONS AND DELAYS
Landlord covenants during the Term:
4.1 Services Furnished by Landlord
To furnish, on all business days, services, facilities and supplies set
forth in Exhibit E, and also to furnish, on all business days, electricity,
water and sewer service and other utilities, in all cases equal in quality to
those customarily provided by landlords in buildings of comparable quality in
the downtown Boston area, the expense of which shall be charged in accordance
with Article II.
4.2 Additional Services Available to Tenant
To furnish, at Tenant's expense, reasonable additional Building
operation services which are usual and customary in similar office buildings in
the downtown Boston area upon reasonable advance request of Tenant at reasonable
and equitable rates from time to time established by Landlord.
4.3 Roof, Exterior Wall, Floor Slab, and Common Facility Repair
Except as otherwise provided in Article VI, to make such repairs to the
roof, foundation, exterior walls, floor slabs, base building utility,
mechanical, electrical, plumbing and life safety systems and common areas and
facilities as may be necessary to make them comply with applicable law and to
keep them in condition similar to those of comparable buildings in the downtown
Boston area, the expense of which shall be charged in accordance with Article
II.
4.4 Access
Except in case of emergency and necessary Building shutdowns, to provide
Tenant access to the Premises twenty-four hours per day, 365 days per year.
4.5 Heat and Air Conditioning
To provide tempered water to the heat pumps located on the Premises for
purposes of assisting heat pumps in heating and air conditioning the Premises
during business days (Monday through Friday between the hours of 8:00 a.m. and
6:00 p.m.) and on Saturdays between the hours of 8 a.m. and 12 p.m., except
legal holidays, in a manner that will enable the Premises to be heated and
cooled to temperatures comparable to those customary of comparable buildings in
the downtown Boston area. In the event that Tenant requests that Landlord
provide tempered water at any time
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other than as specifically stated herein, Tenant shall pay as additional rent to
Landlord an amount stated by Landlord, and such payment shall be made with the
next payment of rent.
4.6 Quiet Enjoyment
That Tenant on paying the rent and performing the tenant obligations in
this Lease shall peacefully and quietly have, hold and enjoy the Premises,
subject to all of the terms and provisions hereof.
4.7 Interruptions and Delays in Service and Repairs, etc.
Landlord shall not be liable to Tenant for any compensation or reduction
of rent by reason of inconvenience or annoyance or for loss of business arising
from the central artery construction, the necessity of Landlord or its agents
entering the Premises for any of the purposes in this Lease authorized, or for
repairing the Premises or any portion of the Building however the necessity may
occur. In case Landlord is prevented or delayed from making any repairs,
alterations or improvements, or furnishing any services or performing any other
covenant or duty to be performed on Landlord's part, by reason of any cause
reasonably beyond Landlord's control including without limitation, the causes
set forth in Section 8.16 hereof as being reasonably beyond Landlord's control,
Landlord shall not liable to Tenant therefor, nor except as expressly otherwise
provided in Section 6.1 shall Tenant be entitled to any abatement or reduction
of rent by reason thereof, nor shall the same give rise to a claim in Tenant's
favor that such failure constitutes actual or constructive, total or partial,
eviction from the Premises. Landlord agrees to use due diligence to correct any
interruption or delay in services or utilities.
Landlord reserves the right to stop any service or utility system, when
necessary by reason of accident or emergency, or until necessary repairs have
been completed; provided, however, that in each instance of stoppage Landlord
shall exercise reasonable diligence to eliminate the cause thereof. Except in
case of emergency repairs Landlord will give Tenant reasonable advance notice of
any contemplated stoppage and will use reasonable efforts to avoid unnecessary
inconvenience to Tenant by reason thereof. Landlord also reserves the right to
institute such policies, programs and measures as may be necessary, required or
expedient for the conservation or preservation of energy services or as may be
required to comply with applicable laws, codes, rules, regulations or standards.
4.8 Indemnity.
Landlord shall protect, defend, save, indemnify and forever hold
harmless Tenant from and against any and all claims, demands, liabilities,
fines, suits, actions, proceedings, orders, decrees, judgments, losses, damages,
costs and expenses (including,
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without limitation, reasonable attorney's fees) arising out of or occurring in
connection with the negligence or willful misconduct of Landlord in the
Building.
4.9 Insurance.
Landlord shall maintain in full force throughout the Term, a policy of
insurance upon the Building insuring against all risks of physical loss or
damage under an All Risk coverage endorsement in an amount at least equal to the
full replacement value of the property insured, with an Agreed Amount
endorsement to satisfy co-insurance requirements, as well as insurance against
breakdown of boilers and other machinery as customarily insured against. All
policies of insurance maintained by Landlord shall contain the same waiver of
subrogation provisions for the benefit of tenant as Tenant is required to obtain
in its insurance policies for the benefit of Landlord.
[END OF ARTICLE IV]
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ARTICLE V TENANT'S COVENANTS
Tenant covenants during the Term and such further time as Tenant
occupies any part of the Premises:
5.1 Payments
To pay when due all Annual Fixed Rent and additional rent and all
charges for utility services rendered to the Premises and, as further additional
rent, all charges for additional services rendered pursuant to Section 4.2. If
any installment of Annual Fixed Rent or additional rent is paid more than five
(5) days after the due date thereof, at Landlord's election it shall bear
interest from such due date at an annual rate equal to the then average prime
commercial rate from time to time established by the two largest national banks
in Boston, Massachusetts, plus 3% (but not in excess of the maximum rate allowed
by law), which interest shall be immediately due and payable as further
additional rent.
5.2 Repair and Yield Up
Except as otherwise provided in Article VI and Section 4.3, to keep the
Premises in good order, repair and condition, reasonable wear and tear only
excepted, and all glass in windows and doors (except glass in exterior walls of
the Building unless the damage thereto is attributable to Tenant's negligence or
misuse) of the Premises whole and in good condition with glass of the same
quality as that injured or broken, and at the expiration or termination of this
Lease peaceably to yield up the Premises and all alterations and additions
thereto in good order, repair and condition, reasonable wear and tear excepted,
first removing all goods and effects of Tenant and, if specified at the time of
plan approval, all alterations and additions made by Tenant and all partitions,
and repairing any damage caused by such removal and restoring the Premises and
leaving them clean and neat and to reimburse Landlord upon demand for the cost
of repairing any damage to the Premises, the Building or the Lot caused by
Tenant or its agents, employees, or invitees.
All articles of personal property and all trade fixtures, office
machines and equipment, furniture and movable partitions owned by Tenant or
installed by Tenant at its expense in the Premises shall be and remain the
property of Tenant and may be removed by Tenant at any time during the Term
provided Tenant is not in default hereunder, and provided further that Tenant
shall repair any damage caused by such removal. If Tenant shall fail to remove
all of its effects from the Premises upon termination of this Lease, Landlord
may, at its option, remove and store said effects without liability to Tenant
for any loss thereof, and Tenant agrees to pay Landlord upon demand any and all
reasonable expenses incurred in such removal and storage, including court costs
and attorneys' fees, and Landlord may, at its option, with notice, sell said
effects at private sale and without legal process, for such price as Landlord
may
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obtain and apply the proceeds of such sale against any amounts due under this
Lease from Tenant to Landlord and against the expense incident to the removal,
storage and sale of said effects.
5.3 Use
To use and occupy the Premises for the Permitted Uses; not to permit in
the Premises any auction, fire, "going out of business" or bankruptcy sales; not
to use or devote the Premises or any part thereof for any purpose other than the
Permitted Uses, nor any use thereof which is inconsistent with the maintenance
of the Building as an office building of the first class in the quality of its
maintenance, use and occupancy, or which is disorderly, or which will cause the
emission from the Premises of any objectionable noise or odor, or is of a
hazardous or dangerous nature, or will in any manner unreasonably interfere with
the rights of other tenants, or is liable to create a nuisance or is contrary to
law or ordinance, or which is liable to render necessary any alteration or
addition to the Building; not to inure or deface the Premises, Building or Lot;
not to make or permit any waste; not to dump, flush, or in any way introduce any
hazardous or toxic substances into the sewage or other waste disposal system
serving the Premises or the Building; and not to generate, store, use or dispose
of inflammable, hazardous or toxic substances in or on the Premises, the
Building or the Lot, except that Tenant may store and use ordinary office
supplies in accordance with applicable law.
5.4 Obstructions, Items Visible from Exterior; Rules and Regulations
Not to obstruct in any manner any portion of the Building not hereby
leased or any portion thereof or of the Lot used by Tenant in common with
others; not without prior consent of Landlord to permit the painting or placing
of any signs, curtains, blinds, shades, awnings, aerials or flagpoles, or the
like, visible from outside the Premises; and to comply with all reasonable Rules
and Regulations now or hereafter made by Landlord, of which Tenant has been
given notice (the current Rules and Regulations are set forth in Exhibit D
hereto), for the care and use of the Building and Lot and their facilities and
approaches; Landlord shall not be liable to Tenant for the failure of other
occupants of the Building to conform to such Rules and Regulations. Tenant shall
be responsible for the prompt clean-up and removal from any common area of the
Building or from any portion of the Property any trash, debris or litter
(including accumulation of cigarette butts) deposited by its employees, agents,
contractors, customers or invitees.
5.5 Safety Appliances
To keep the Premises equipped with all safety appliances required by law
or ordinance or any other regulation of any public authority because of any use
made by Tenant other than Tenant's Permitted Use, and to procure all licenses
and permits so required because of such use and, if requested by Landlord, to do
any work so required
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because of such use, it being understood that the foregoing provisions shall not
be construed to broaden in any way Tenant's Permitted Uses.
5.6 Assignment; Sublease
A. Tenant shall not without prior consent of Landlord assign, mortgage,
pledge or otherwise transfer this Lease or make any sublease, or permit
occupancy of the Premises or any part thereof by anyone other than Tenant. In
connection with any request by Tenant for such consent to assignment or
subletting, to submit to Landlord in writing ("Tenant's Sublease Notice") (i)
the name of the proposed assignee or subtenant, (ii) such information as to its
financial responsibility and standing as Landlord may reasonably require, and
(iii) all of the terms and provisions upon which the proposed assignment or
subletting is to be made.
Landlord shall not unreasonably withhold its consent to the proposed
assignment or subletting to the specific assignee or subtenant set forth in
Tenant's Sublease Notice, provided that (i) Tenant and the assignee or subtenant
set forth in Tenant's Sublease Notice have executed an assignment or sublease
including terms which do not differ materially from those set forth in Tenant's
Sublease Notice within three (3) months of the date of such Notice, (ii) the
terms and provisions of such assignment or subletting shall specifically make
applicable to the assignee or sublessee all of the provisions of this Section
5.6 so that Landlord shall have against the assignee or sublessee all rights
with respect to any further assignment and subletting which are set forth
herein; (iii) the character of the proposed assignee or subtenant is consistent
with the character of the Building and the proposed assignee or subtenant
intends to use the Premises for the Permitted Uses; (iv) the proposed assignee
or subtenant has a good reputation and relevant prior business experience; (v)
in the event of an assignment, the proposed assignee has a net worth sufficient,
in Landlord's reasonable determination, to satisfy the obligations of Tenant
under this Lease; (vi) no assignment or subletting shall affect the continuing
primary liability of Tenant (which, following assignment, shall be joint and
several with the assignee); (vii) no consent to any of the foregoing in a
specific instance shall operate as a waiver in any subsequent instance; (viii)
no consent shall be deemed unreasonably withheld by Landlord to the extent the
granting of consent might cause Landlord to be in default under any mortgage;
and (ix) no assignment shall be binding upon Landlord or any of Landlord's
mortgagees, unless Tenant shall deliver to Landlord an instrument in recordable
form which contains a covenant of assumption by the assignee running to Landlord
and all persons claiming by, through or under Landlord, but the failure or
refusal of the assignee to execute such instrument of assumption shall not
release or discharge the assignee from its liability as Tenant hereunder. In the
event Tenant and the proposed assignee or sublessee have failed to execute a
lease within three (3) months of the date of Tenant's Sublease Notice, Tenant's
right to assign or sublet shall again be subject to the provisions of Section
5.6(A). Landlord shall be entitled to receive all amounts, whether characterized
as consideration for the assignment, differences in rent, or otherwise, less all
reasonable legal fees, brokerage
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commissions, buildout costs and administrative costs incurred in connection with
the signing of the sublease or assignment, as evidenced by reasonably detailed
invoices, received by Tenant in excess of the Annual Fixed Rent and additional
rent reserved in this Lease applicable to the space being so assigned or sublet
("Excess Rent"). Excess Rent shall be payable by Tenant to Landlord in monthly
installments within three (3) days after receipt by Tenant. Tenant shall
reimburse Landlord promptly, as additional rent, for reasonable legal and other
expenses incurred by Landlord in connection with any request by Tenant for
consent to assignment or subletting. Landlord acknowledges that Tenant has a
present intention of subleasing a portion of the Premises.
Notwithstanding the foregoing, Tenant shall have the right to assign its
interest in the Premises or to sublet the whole or any part of the Premises to
any entity that controls, is controlled by, or is under common control with
Tenant, or, provided the successor entity has a creditworthiness at least equal
to that of Tenant on the day immediately preceding the transaction, in
connection with the consolidation, merger or reorganization of Tenant or the
sale by Tenant of substantially all of its stock or assets, and in none of the
foregoing events shall the consent of Landlord be required; provided, however,
that Tenant shall notify Landlord at least 30 days prior to the applicable
transaction and shall deliver to Landlord (i) the applicable assignment or
sublease document, and (ii) reasonably detailed financial information regarding
the transaction, and the assignee, subtenant, purchaser or successor entity, as
applicable. Notwithstanding any assignment or sublease, Tenant shall remain
primarily liable under this Lease.
5.7 Indemnity; Insurance
To defend with counsel first approved by Landlord, save harmless, and
indemnify Landlord from any liability for injury, loss, accident or damage to
any person or property, and from any claims, actions, proceedings and expenses
and costs in connection therewith (including, without limitation, reasonable
counsel fees), (i) arising from (a) the omission, fault, willful act, negligence
or other misconduct of Tenant or (b) from any use made or thing done or
occurring on the Premises not due to the omission, fault, willful act,
negligence or other misconduct of Landlord, or (ii) resulting from the failure
of Tenant to perform and discharge its covenants and obligations under this
Lease; to maintain in responsible companies qualified to do business, and in
good standing in Massachusetts, (i) comprehensive commercial liability insurance
covering the Premises with limits which shall, at the commencement of the Term,
be at least equal to those stated in Section 1.1 and from time to time during
the Term shall be for such higher limits, if any, as are customarily carried in
the Boston area with respect to similar properties written on an occurrence
basis and including coverage for products/completed operations, personal injury,
broad form property damage, host liquor, extended liability and broad form
contractual liability; (ii) worker's compensation insurance with statutory
limits covering all of Tenant's employees working in the Premises, and (iii)
umbrella liability with minimum limits of $1,000,000 per occurrence,
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such umbrella liability policy to apply in excess of the others required
insurance hereunder, and to deposit promptly with Landlord certificates for such
insurance, and all renewals thereof bearing the endorsement that the policies
will not be cancelled until after 30 days' written notice to Landlord. Such
insurance may be maintained by Tenant under a blanket policy. All insurance
polices, other than the worker's compensation policy, shall designate Landlord
and Spaulding & Slye Company as additional insureds.
5.8 Personal Property at Tenant's Risk
That all of the furnishings, fixtures, equipment, inventory, effects and
property of every kind, nature and description of Tenant and all persons
claiming by, through or under Tenant which, during the continuance of this Lease
or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may
be on the Premises or elsewhere in the Building or on the Lot, shall be at the
sole risk and hazard of Tenant, and if the whole or any part thereof shall be
destroyed or damaged by fire, water or otherwise, or by the leakage or bursting
of water pipes, steam pipes, or other pipes, by theft or from any other cause,
no part of said loss or damage is to be charged to or be borne by Landlord,
except that Landlord shall in no event be indemnified or held harmless or
exonerated from any liability to Tenant or to any person, for any injury, loss,
damage or liability to the extent such indemnity, hold harmless or exoneration
is prohibited by law.
5.9 Right of Entry
Upon reasonable prior notice to Tenant, except in the case of emergency,
in which event notice shall be given as soon as is practicable, to permit
Landlord and its agents: to examine the Premises at reasonable times and in such
fashion as to avoid interference with Tenant's business and, if Landlord shall
so elect, to make any repairs or replacements Landlord may deem necessary; to
remove, at Tenant's expense, any alterations, additions, signs, awnings,
aerials, flagpoles, or the like not consented to in writing; and to show the
Premises to prospective Tenants during the six (6) months preceding expiration
of the Term and to prospective purchasers and mortgagees at all reasonable
times. In case of emergency, Landlord or its representatives may enter the
Premises at any time.
5.10 Floor Load; Prevention of Vibration and Noise
Not to place a load upon the Premises exceeding an average rate of 80
pounds of live load per square foot of floor area (partitions shall be
considered as part of the live load); not to move any safe, vault or other heavy
equipment into, about or out of the Premises except in such manner and at such
time as Landlord shall in each instance authorize; not to install or operate in
the Premises any equipment or other machinery other than usual office equipment
without obtaining the prior consent of Landlord, who may condition such consent
upon the payment by Tenant of additional rent as
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compensation for additional wiring or electricity needed for the equipment or
machinery; not to install any equipment or machinery which may necessitate any
changes, replacements or additions to, or in the use of, the heating, air
conditioning, plumbing or electrical systems of the Building without obtaining
Landlord's prior consent; Tenant's business machines and mechanical equipment
which cause vibration or noise that may be transmitted to the Building structure
or to any other space in the Building shall be so installed, maintained and used
by Tenant as to eliminate such vibration or noise.
5.11 Personal Property Taxes
To pay promptly when due all taxes which may be imposed upon personal
property (including without limitation, fixtures and equipment) in the Premises
to whomever assessed.
5.12 Signs
Not to erect any signs or lettering visible from the exterior of the
Premises or attach any awnings or canopies to the exterior of the Premises
without obtaining Lessor's prior written consent. Tenant shall be identified on
the Building directory.
5.13 Compliance with Insurance Regulations
Not to do or permit to be done any act or thing upon the Premises which
will invalidate or be in conflict with the terms of the Massachusetts standard
form of fire, boiler, sprinkler, water damage or other insurance policies
covering the Building and the fixtures and property therein; Tenant shall, in
its use of the Premises, at its own expense, comply with all rules, regulations,
and requirements of the National Board of Fire Underwriters or any state or
other similar body having jurisdiction, and shall not knowingly do or permit
anything to be done in or upon the Premises in a manner which increases the rate
of fire insurance upon the Building or on any property or equipment located
therein.
[END OF ARTICLE V]
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ARTICLE VI CASUALTY AND TAKING
6.1 Termination or Restoration; Rent Adjustment; Demolition
In case during the Term all or any substantial part of the Premises or
the Building or the Lot are damaged materially by fire or other casualty or by
action of public or other authority in consequence thereof, or are taken by
eminent domain or Landlord receives compensable damage by reason of anything
lawfully done in pursuance of public or other authority, this Lease shall
terminate at Landlord's election, which may be made notwithstanding that
Landlord's entire interest may have been divested, by notice given to Tenant
within ninety (90) days after the election to terminate arises specifying the
effective date of termination. The effective date of termination specified by
Landlord shall not be less than fifteen (15) nor more than thirty (30) days
after the date of notice of such termination. Unless terminated pursuant to the
foregoing provisions this Lease shall remain in full force and effect following
any such damage or taking, subject, however, to the following provisions. If in
any such case the Premises are rendered unfit for use and occupation and this
Lease is not so terminated, Landlord shall use due diligence (following the
expiration of the period in which Landlord may terminate this Lease pursuant to
the foregoing provisions of this Section 6.1) to put the Premises, or in case of
taking what may remain thereof (excluding in case of both casualty and taking
any items installed or paid for by Tenant) into the condition existing
immediately prior to such casualty or taking, subject to zoning and building
codes and other laws, rules and regulations then in effect. A just proportion of
the Annual Fixed Rent and additional rent according to the nature and extent of
the injury shall be abated from the date of such casualty or taking until the
Premises or such remainder shall have been put by Landlord in such condition;
and in case of a taking which permanently reduces the area of the Premises, a
just proportion of the Annual Fixed Rent and additional rent shall be abated for
the remainder of the Term. In the event restoration cannot, in Landlord's
reasonable judgment, be completed within 270 days after the date of the casualty
or taking, each of Landlord and Tenant shall have the right, exercisable by
notice to the other delivered within 30 days after the date of the casualty or
taking, to terminate this Lease, effective as of the date specified in such
notice, which date shall be no sooner than 30 days nor later than 60 days after
the date of delivery of such notice. In the event Landlord is required to or has
elected to restore the Premises and such restoration has not been completed
within 270 days after the date of the casualty (as extended on account of the
occurrence of events of force majeure), Tenant shall have the right, exercisable
by notice delivered to Landlord not later than five (5) business days after
expiration of such 270-day period, as the same may have been extended, to
terminate this Lease; provided, however, that such termination shall be deemed
void if restoration is completed within 30 days after delivery of such notice.
6.2 Eminent Domain
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Landlord reserves to itself any and all rights to receive awards made
for damages to the Premises and Building and Lot and the leasehold hereby
created, or any one or more of them, accruing by reason of exercise of eminent
domain or by reason of anything lawfully done in pursuance of public or other
authority. Tenant hereby releases and assigns to Landlord all Tenant's rights to
such awards, and covenants to deliver such further assignments and assurances
thereof as Landlord may from to time request. Tenant hereby irrevocably
designates and appoints Landlord as its attorney-in-fact to execute and deliver
in Tenant's name and on its behalf all such further assignments thereof. Nothing
contained herein shall be deemed to preclude Tenant from obtaining, or to give
Landlord any interest in, any separate award to Tenant for loss or damage to
Tenant's removable personal property or Tenant's relocation costs.
6.3 Temporary Taking
In the event of a taking of the Premises or any part thereof for
temporary use, (i) this Lease shall be and remain unaffected thereby and rent
shall not abate, and (ii) Tenant shall be entitled to receive for itself such
portion or portions of any award made for such use with respect to the period of
the taking which is within the Term, provided that if such taking shall remain
in force at the expiration or earlier termination of this Lease, Tenant shall
then pay to Landlord a sum equal to the reasonable cost of performing Tenant's
obligations under Section 5.2 with respect to surrender of the Premises and upon
such payment shall be excused from such obligations.
[END OF ARTICLE VI]
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ARTICLE VII DEFAULT
7.1 Events of Default
If any default by Tenant continues after notice, in case of Annual Fixed
Rent or additional rent for more than ten (10) days, or in any other case for
more than thirty (30) days and such additional time, not to exceed ninety (90)
days, as is reasonably necessary to cure the default if the default is of such a
nature that it cannot reasonably be cured in thirty (30) days, provided, Tenant
commenced curing during the 30-day grace period and thereafter diligently
prosecutes the cure to completion; or if Tenant becomes insolvent or fails to
pay its debts as they fall due; or if Tenant makes any trust mortgage or
assignment for the benefit of creditors; or if Tenant proposes any composition,
arrangement, reorganization or recapitalization with creditors; or if Tenant's
leasehold hereunder or any substantial part of the property of Tenant is taken
on execution or other process of law or is attached or subjected to any other
voluntary encumbrance; or if a receiver, trustee, custodian, guardian,
liquidator or similar agent is appointed with respect to Tenant, or if any such
person or a mortgagee, secured party or other creditor takes possession of the
Premises or of any substantial part of the property of Tenant, and, in either
case, if such appointment or taking of possession is not terminated within
thirty (30) days after it first occurs; or if a petition is filed by or with the
consent of Tenant under any federal or state law concerning bankruptcy,
insolvency, reorganization, arrangement, or relief from creditors; or if a
petition is filed against Tenant under any federal or state law concerning
bankruptcy, insolvency, reorganization, arrangement, or relief from creditors,
and such petition is not dismissed within thirty (30) days thereafter, or if
Tenant dissolves or is dissolved or liquidated or adopts any plan or commences
any proceeding, the result of which is intended to include dissolution or
liquidation; then in any such case, whether or not the Term shall have begun,
Landlord may immediately, or at any time while such default exists and without
further notice, terminate this Lease by notice to Tenant, specifying a date not
less than ten (10) days after the giving of such notice on which this Lease
shall terminate and this Lease shall come to an end on the date specified
therein as fully and completely as if such date were the date herein originally
fixed for the expiration of the Term, and Tenant shall then quit and surrender
the Premises to Landlord, but Tenant shall remain liable as hereinafter
provided. The preceding notwithstanding, any notice required to be given by
Landlord for Tenant's failure to pay Annual Fixed Rent or any other amount
(prior to said failure being deemed an actionable default) shall be deemed
satisfied by the serving by Landlord upon Tenant at the Premises of a "notice to
quit" so long as such notice provides Tenant with the right to cure such default
within ten (10) days of service.
7.2 Damages
In the event that this Lease is terminated under any of the provisions
contained in Section 7.1 or shall be otherwise terminated for breach of any
obligation of Tenant,
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Tenant covenants to pay forthwith to Landlord, as compensation, all sums which
were due prior to the date of such termination and Tenant shall pay on the days
originally fixed herein for the payment thereof amounts equal to the several
installments of rent, adjusted rent, additional rent and any and all other
charges as they would have become due if this Lease had not been terminated.
As a second alternative, at the election of Landlord, Tenant will, at
the time of such termination, pay to Landlord, as liquidated damages, the amount
of the excess, if any, of the present value at the time of termination of the
total rent and other benefits which would have accrued to Landlord under this
Lease over and above the fair market value (in advance) of the Premises for the
balance of the Term. For the purpose of this paragraph, the total rent shall be
computed by assuming that Tenant's share of real estate taxes and other charges
would be the amount thereof (if any) for the immediately preceding year of the
term.
In addition to the foregoing (and whether or not the Lease is terminated
upon a default), Tenant agrees (i) to indemnify and save Landlord harmless from
and against all expenses together with interest at the rate of 1.5% per month
which Landlord may incur in collecting such amount or in obtaining possession
of, or in re-letting the Premises, or in defending any action arising as a
result of or in connection with a default, including, without limitation, legal
expenses, attorneys' fees, brokerage fees, and the cost of putting the Premises
in good order or preparing the same for rental; (ii) that Landlord may re-let
the Premises or any part or parts thereof, either in the name of Landlord or
otherwise for a term or terms which may, at Landlord's option, be less than or
exceed the period which would otherwise have constituted the balance of the term
and may grant concessions or free rent for a reasonable time. The failure of
Landlord to re-let the Premises or any part thereof shall not release or affect
Tenant's liability for damage. Any suit brought to collect the amount of
deficiency for any month shall not prejudice the right of Landlord to collect
the deficiency for any subsequent month by a similar proceeding. Landlord may
make such alterations, repairs, replacements and decorations on the Premises,
and the making of such alterations or decorations shall not release Tenant from
any liability. In the event the Premises are re-let by Landlord, Tenant shall be
entitled to a credit in the net amount of rent received by Landlord, after
deduction of all expenses incurred in connection with Tenant's default,
re-letting the Premises and in collecting the rent, except in the event Landlord
has chosen the second or third alternative as a remedy in which event Tenant
shall not be entitled to any credit.
Tenant further agrees that, if on the Expiration Date or other
termination date, Tenant does not surrender the Premises or fails to remove any
of its property from the Premises and Landlord obtains an order of eviction then
Landlord may enter the Premises for the purpose of removing Tenant's goods and
effects, without prejudice to any other remedies, and Landlord may remove and
store such goods and effects at Tenant's expense, Tenant hereby granting
Landlord an irrevocable power of attorney to accomplish the same.
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Nothing contained in this Lease shall limit or prejudice the right of
Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by
reason of the termination of this Lease, an amount equal to the maximum allowed
by any statute or rule of law in effect at the time when, and governing the
proceedings in which, the damages are to be proved, whether or not the amount be
greater, equal to, or less than the amount of the loss or damages referred to
above.
Landlord shall use reasonable efforts to mitigate its damages resulting
from Tenant's default hereunder.
[END OF ARTICLE VII]
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ARTICLE VIII MISCELLANEOUS
8.1 [Intentionally omitted]
8.2 Notice of Lease; Consent and Approval; Notices; Bind and Inure
The titles of the Articles are for convenience only and are not to be
considered in construing this Lease. Tenant agrees not to record this Lease, but
upon request of either party both parties shall execute and deliver a notice of
this Lease in form appropriate for recording or registration, an agreement
setting forth the Commencement Date in the form of Exhibit E, and if this Lease
is terminated before the term expires, an instrument in such form acknowledging
the date of termination. Whenever any notice, approval, consent, request or
election is given or made pursuant to this Lease it shall be in writing.
Communications and payments shall be addressed if to Landlord at Landlord's
Original Address, Attention: Mr. Peter Merrigan, with a copy to Joel H. Sirkin,
Esq., Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, or at such
other address as may have been specified by prior notice to Tenant, and if to
Tenant prior to the Commencement Date, at Tenant's Notice Address or following
the Commencement Date, at the Premises, or at such other place as may have been
specified by prior notice to Landlord. Any communication so addressed shall be
deemed duly served if hand delivered by a recognized courier or overnight
delivery service or if mailed by registered or certified mail, return receipt
requested and shall be deemed given when so delivered or deposited with the U.S.
Postal Service. The obligations of this Lease shall run with the land, and this
Lease shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, except that only the original Landlord
named herein shall be liable for obligations accruing before the beginning of
the Term, and thereafter the original Landlord named herein and each successive
owner of the Premises shall be liable only for obligations accruing during its
period of ownership. Tenant shall look only to Landlord's interest in the
Property for satisfaction of Landlord's obligations hereunder, and neither
Landlord nor any successor owner of the Premises nor any trustee, beneficiary or
partner of Landlord or such successor shall have any personal liability
hereunder.
8.3 Landlord's Failure to Enforce
The failure of Landlord to seek redress for violation of, or to insist
upon strict performance of, any covenant or condition of this Lease, or with
respect to such failure of Landlord to enforce any of the Rules and Regulations
referred to in Section 5.4, whether heretofore or hereafter adopted by Landlord,
shall not be deemed a waiver of such violation nor prevent a subsequent act
which would have originally constituted a violation, from having all the force
and effect of an original violation, nor shall the failure of Landlord to
enforce any of said Rules and Regulations against any other tenant of the
Building be deemed a waiver of any such Rule or Regulation. The receipt by
Landlord of Annual Fixed Rent or additional rent with knowledge of the breach of
any
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<PAGE>
covenant of this Lease shall not be deemed a waiver of such breach. No provision
of this Lease shall be deemed to have been waived by Landlord, or by Tenant,
unless such waiver be in writing signed by the party to be charged. No consent
or waiver, express or implied, by Landlord or Tenant, to or of any breach of any
agreement or duty shall be construed as a waiver or consent to or of any other
breach of the same or any other agreement or duty.
8.4 Acceptance of Partial Payments of Rent; Delivery of Keys
No acceptance by Landlord of a lesser sum than the Annual Fixed Rent and
additional rent then due shall be deemed to be other than on account of the
earliest installment of such rent due, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent 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 installment or
pursue any other remedy in this Lease provided. The delivery of keys to any
employee of Landlord or to Landlord's agent or any employee thereof shall not
operate as a termination of this Lease or surrender of the Premises.
8.5 Cumulative Remedies
The specific remedies to which Landlord may resort under the terms of
this Lease are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which it may be lawfully entitled in case of any
breach or threatened breach by Tenant of any provisions of this Lease. In
addition to other remedies provided in this Lease, Landlord shall be entitled to
the restraint by injunction of the violation or attempted or threatened
violation of any of the covenants, conditions or provisions of this Lease or to
a decree compelling specific performance of any such covenants, conditions or
provisions.
8.6 Partial Invalidity
If any term of this Lease, or the application thereof to any person or
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such term to persons or circumstances other
than those as to which it is invalid or unenforceable shall not be affected
thereby, and each term of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
8.7 Self-Help
If Tenant shall at any time default in the performance of any obligation
under this Lease, Landlord shall have the right but shall not be obligated, to
enter upon the Premises and to perform such obligation notwithstanding the fact
that no specific provision for such substituted performance by Landlord is made
in this Lease with
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<PAGE>
respect to such default. In performing such obligation, Landlord may make any
payment of money or perform any other act as may be reasonable. All sums so paid
by Landlord (together with interest at an annual rate equal to the then average
prime commercial rate from time to time established by the two largest national
banks in Boston, Massachusetts plus 3%, but not in excess of the maximum rate
allowed by law) and all necessary reasonable incidental costs and expenses in
connection with the performance of any such act by Landlord, shall be deemed to
be additional rent under this Lease and shall be payable to Landlord immediately
on demand. Landlord may exercise the foregoing rights without waiving any other
of its rights or releasing Tenant from any of its obligations under this Lease.
8.8 Estoppel Certificates
Each of Landlord and Tenant agrees from time to time, upon not less than
fifteen (15) days prior written request by the other, to execute, acknowledge
and deliver to the other a statement in writing certifying that this Lease is
unmodified and in full force and effect and that (in the case of Tenant as
certifying party) Tenant has no defenses, offsets or counterclaims against its
obligations to pay the Annual Fixed Rent and additional rent and to perform its
other covenants under this Lease, and that, to the knowledge of the certifying
party, there are no uncured defaults of Landlord or Tenant under this Lease (or,
if there have been any modifications that the same is in full force and effect
as modified and stating the modifications and, if there are any defenses,
offsets, counterclaims, or defaults, setting them forth in reasonable detail),
and the dates to which the Annual Fixed Rent, additional rent and other charges
have been paid. Any such statement delivered pursuant to this Section 8.8 may be
relied upon by a prospective purchaser or mortgagee of the Premises or any
prospective assignee of any mortgagee of the Premises, or by a prospective
purchaser of or investor in Tenant.
8.9 Waiver of Subrogation
Any insurance carried by either party with respect to the Premises or
property therein or occurrences thereon shall include a clause or endorsement
denying to the insurer rights of subrogation against the other party to the
extent rights have been waived by the insured prior to occurrence of injury or
loss. Each party, notwithstanding any provisions of this Lease to the contrary,
hereby waives any rights of recovery against the other for injury or loss due to
hazards covered by such insurance to the extent of the indemnification received
thereunder.
8.10 All Agreements Contained
This Lease contains all of the agreements of the parties with respect to
the subject matter thereof and supersedes all prior dealings between them with
respect to such subject matter.
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<PAGE>
8.11 Brokerage
Tenant warrants that it has had no dealings with any broker or agent
other than the Broker(s) in connection with the Lease and covenants to defend,
hold harmless and indemnify Landlord from and against any and all cost, expense
or liability for any compensation, commissions and charges claimed by any other
broker or agent claiming by or through Tenant with respect to dealings in
connection with this Lease or the negotiation thereof. Landlord will pay a
commission to Brokers pursuant to a separate agreement.
8.12 Submission Not an Option
The submission of this Lease or a summary of some or all of its
provisions for examination does not constitute a reservation of or option for
the Premises or an offer to lease, and it is not effective as a lease or
otherwise until the execution by and delivery to both Landlord and Tenant.
8.13 Applicable Law
This Lease, and the rights and obligations of the parties hereto, shall
be construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts.
8.14 Waiver of Jury Trial
Landlord and Tenant hereby waive trial by jury in any action, proceeding
or counterclaim brought by either of the parties hereto against the other, on or
in respect to any matter whatsoever arising out of or in any way connected with
this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use or
occupancy of the Premises, and/or claim of injury or damages.
8.15 Holdover
Should Tenant holdover in occupancy of the Premises after the expiration
of the Term of this Lease, it shall be liable to Landlord for rent equal to the
greater of twice the Annual Fixed Rent rate in effect at the end of the Term or
twice the then Fair Market Rental for the space, and if such holdover exceeds 10
days, for all damages sustained by Landlord on account of such holding over. The
provisions of this Section shall not operate as a waiver of any right of
re-entry provided in this Lease, and Tenant shall be considered a Tenant at
sufferance only.
8.16 Force Majeure
Except as otherwise expressly set forth in this Lease, in any case where
either party hereto is required to do any act, delays caused by or resulting
from Acts of God,
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<PAGE>
war, civil commotion, fire, flood or other casualty, labor difficulties,
shortages of labor, materials or equipment, government regulations, unusually
severe weather, or other causes beyond such party's reasonable control shall not
be counted in determining the time during which such act shall be completed,
whether such time be designated by a fixed date, a fixed time or a "reasonable
time," and such time shall be deemed to be extended by the period of such delay.
8.17 Building Rehabilitation and Repair
During the term, Landlord may, at its sole discretion, choose to
undertake rehabilitation, renovation, and/or repair of the Building, including,
without limitation, remodeling the storefronts and installation of new windows,
HVAC systems, stairwells, bathrooms, sprinkler systems, detection systems, etc.
(collectively or singly referred to as "Rehabilitation"). Such Rehabilitation,
which may be minor or major in nature, shall be undertaken solely at the
Landlord's option and expense, and does not in any way constitute part of the
Tenant's consideration under this Lease and does not in any way obligate
Landlord to perform the same.
Tenant recognizes and agrees that during the time that any
Rehabilitation is made to the Building, Tenant may experience interruptions
(including reasonable interruptions to services) due to such construction and
rehabilitation work and agrees to cooperate fully with the Landlord's efforts to
make such repairs and rehabilitation and further agrees that Tenant shall have
no liability for said reasonable interruptions. In prosecuting such work,
Landlord shall use diligent efforts to prevent or minimize interruption of and
inconvenience to Tenant's use and enjoyment of and access to the Premises.
8.18 Compliance with Laws and Insurance Policies
Tenant, at its own expense, shall comply with (and Landlord makes no
representation with respect to) all laws, orders and regulations of Federal,
State, County and City Authorities relating to its use of the Premises and its
operations therein, provided, however, that Tenant shall have no obligation to
make the structural components or mechanical, electrical, plumbing, HVAC or life
safety systems of the Building or Premises or to comply with any law, order or
regulation of Federal, State, County and City authorities, including, without
limitation, the Americans with Disabilities Act, so called, except to the extent
that said structural components or mechanical systems are installed by Tenant
after the execution and delivery of this Lease. Tenant acknowledges that
Landlord has made no warranties or representations about the permissibility of
Tenant's proposed use under applicable zoning laws. Tenant, at its sole expense,
shall comply with all rules, orders, regulations or requirements of the Board of
Fire Underwriters or any other similar body pertaining to Tenant's particular
use of the Premises, and shall not do or permit anything to be done or kept on
the Premises, except as permitted by the Fire Department, Board of Fire
Underwriter, Fire
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<PAGE>
Insurance Rating Organization, or other authority having jurisdiction. Except
for those items necessary for the cleaning and maintenance of Tenant's business,
which shall be properly stored to minimize the risk of fire and explosion, there
shall not be brought or kept in or on the Premises any inflammable, combustible
or explosive fluid, material, chemical or substance, nor shall any unusual or
other objectionable odors permeate or emanate from the Premises. If the
insurance premiums for the building increase because of anything Tenant does or
permits to be done on the Premises, Tenant shall pay the full amount of such
increase, That the Premises are being used for the Permitted Uses shall not
relieve Tenant from the foregoing duties.
[END OF ARTICLE VIII]
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<PAGE>
ARTICLE IX RIGHTS OF PARTIES HOLDING PRIOR INTERESTS
9.1 Lease Subordinate
Provided Landlord obtains on behalf of Tenant a commercially reasonable
nondisturbance agreement from the applicable mortgagee, this Lease shall be
subject and subordinate to any mortgage now or hereinafter placed on the Lot or
Building, or both, or any portion or portions thereof which are separately and
together hereinafter in this Article IX referred to as "the mortgaged premises",
and to each advance made or hereafter to be made under any mortgage, and to all
renewals, modifications, increases, consolidations, replacements and extensions
thereof and all substitutions therefor. The foregoing provision shall be
self-operative and no further instrument of subordination shall be required. In
confirmation of such subordination, Tenant shall execute and deliver promptly
any certificate that Landlord or any mortgagee may request. In the event that
any mortgagee or its respective successor in title shall succeed to the interest
of Landlord, then, at the option of such mortgagee or successor, this Lease
shall nevertheless continue in full force and effect and Tenant shall and does
hereby agree to attorn to such mortgagee or successor and to recognize such
mortgagee or successor as its Landlord. Any mortgagee shall have the election to
subordinate its mortgage to this Lease, exercisable by sending a notice of such
election to Tenant, which notice may be recorded at the option of the mortgagee.
Provided that Tenant is not in default under any of the terms of this
Lease, Landlord shall use diligent efforts to obtain from any such mortgagee on
Tenant's behalf an agreement on the part of such mortgagee to recognize this
Lease and all of Tenant's rights hereunder as though this Lease were prior to
any such mortgage, such agreement to be in form and substance of the
Subordination, Non-Disturbance and Attornment Agreement attached hereto as
Exhibit E and incorporated herein by reference (the "Non-Disturbance
Agreement"), subject to the execution and delivery by Tenant, at the time of
execution of this Lease, of the Non-Disturbance Agreement (and Tenant
acknowledges that the execution of such Non-Disturbance Agreement by Landlord's
mortgagee shall be at the sole discretion of such mortgagee), provided, however,
that the mortgagee, or any purchaser at a foreclosure sale or otherwise, shall
not be:
(a) liable for any act or omission of a prior Landlord (including
the Landlord); or
(b) subject to any offset or defenses which the Tenant might have
against any prior landlord (including the Landlord); or
(c) bound by any rent or additional rent which the Tenant might have
paid in advance to any prior landlord (including Landlord) for
any period beyond the month in which foreclosure or sale occurs;
or
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<PAGE>
(d) bound by any security deposit which Tenant may have paid to any
prior landlord (including Landlord), unless such deposit is in
an escrow fund available to the mortgagee; or
(e) bound by any agreement or modification of the Lease made without
the consent of the mortgagee; or
(f) bound by any notice of termination given by any prior landlord
(including Landlord) without the mortgagee's written consent
thereto; or
(g) personally liable under this Lease and the mortgagee's liability
under the Lease shall be limited to the ownership interest of
the mortgagee in the Premises; or
(h) liable for any fact or circumstance or condition to the extent
existing or arising prior to the mortgagee's (or such
purchaser's) succession to the interest of the Landlord under
the Lease and such mortgagee or such purchaser further shall not
be liable except during that period of time, if any, in which
such mortgagee or purchaser and Tenant are in privity of estate.
Any claim by Tenant under the Lease against the mortgagee or such
successor shall be satisfied solely out of the mortgagee's or such successor's
interest in the Premises and Tenant shall not seek recovery against or out of
any other assets of mortgagee or such successor.
9.2 Modification, Termination, and Cancellation
No assignment of the Lease and no agreement to make or accept any
surrender, termination or cancellation of this Lease and no agreement to modify
so as to reduce the rent, change the Term, or otherwise materially change the
rights of Landlord under this Lease, to relieve Tenant of any obligations or
liability under this Lease, shall be valid unless consented to by Landlord's
mortgagees of record, if any. No fixed rent, additional rent, or any other
charge shall be paid more than ten (10) days prior to the due date thereof and
payments made in violation of this provision shall (except to the extent that
such payments are actually received by a mortgagee) be a nullity as against any
mortgagee and Tenant shall be liable for the amount of such payments to such
mortgagee.
9.3 Rights of Holder of Mortgage
No act or failure to act on the part of Landlord which would entitle
Tenant under the terms of this Lease, or by law, to be relieved of Tenant's
obligations hereunder or to terminate this Lease, shall result in a release or
termination of such obligations or a
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<PAGE>
termination of this Lease unless (i) Tenant shall have first given written
notice of Landlord's act or failure to act to Landlord's mortgagees of record,
if any, specifying the act or failure to act on the part of Landlord which could
or would give basis to Tenant's rights; and (ii) such mortgagees, after receipt
of such notice, have failed or refused to correct or cure the condition
complained of within a reasonable time thereafter; but nothing contained in this
Section 9.3 shall be deemed to impose any obligation on any such mortgagees to
correct or cure any condition. "Reasonable time" as used above means and
includes a reasonable time to obtain possession of the mortgaged premises if the
mortgagee elects to do so and a reasonable time to correct or cure the condition
if such condition is determined to exist.
9.4 Assignment of Rents
With reference to any assignment by Landlord of Landlord's interest in
this Lease, or the rents payable hereunder, conditional in nature or otherwise,
which assignment is made to the holder of a mortgage on property which includes
the Premises, Tenant agrees
(a) that the execution thereof by Landlord, and the acceptance
thereof by the holder of such mortgage, shall never be treated
as an assumption by such holder of any of the obligations of
Landlord hereunder, unless such holder shall, by notice sent to
Tenant, specifically otherwise elect; and
(b) that, except as aforesaid, such holder shall be treated as
having assumed Landlord's obligations hereunder only upon
foreclosure of such holder's mortgage (or the acceptance of a
deed in lieu of foreclosure) and the taking of possession of the
Premises.
9.5 Implementation of Article IX
Tenant agrees on request of Landlord to execute and deliver from time to
time any agreement which may reasonably be deemed necessary to implement the
provisions of this Article IX.
[END OF ARTICLE IX]
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<PAGE>
ARTICLE X HAZARDOUS MATERIALS
10.1 Tenant's Obligations
As used herein, the following definitions shall apply:
1. "Hazardous Substance" means any substance, waste or material which is
deemed hazardous, toxic, a pollutant or contaminant under any federal state or
local statute, law, ordinance, rule, regulation, or judicial or administrative
order or decision, now or hereafter in effect.
2. "Hazardous Substance on the Premises" means any hazardous substance
present in, on, near or emanating from the Premises or at the surface or below
the surface thereof.
3. "Applicable Law" shall mean all federal, state and local statutes,
laws, ordinances, rules and regulations and judicial and administrative orders,
rulings and decisions that are applicable now or in future to the Premises or
any portion thereof or to any activity which shall take place thereon.
Tenant shall not generate, store, release, dispose of or otherwise
handle any Hazardous Substance on the Premises, the Building or the Lot;
moreover, Tenant shall not take any action, conduct any activity or fail to take
any action which causes, contributes, or is likely to cause or contribute to, a
threat of release of any Hazardous Substance on the Premises, the Building or
the Lot.
Tenant furthermore shall not install or cause to be installed any
chemical, oil or gasoline storage tank(s) on, under or around the Premises, the
Building or the Lot and it shall not install or cause to be installed on, around
or under the Premises, the Building or the Lot any transformers or other
equipment which contain PCBs or other Hazardous Substances.
Tenant shall defend, indemnify and hold harmless Landlord and any
mortgagee of the Premises from and against any and all liability, loss, suits,
claims, actions, causes of action, proceedings, demands, costs, penalties, fines
and expenses, including without limitation, expenses of attorneys' fees,
consultants' fees, and clean-up costs, resulting from the presence of, release
of, or threat of release of, any Hazardous Substance on the Premises, or arising
out from the action or inaction of Tenant, its employees, invitees, contractors,
and agents, or arising out of the generation, storage, treatment, handling,
transportation, disposal or release (or threat of release) by Tenant its
employees, invitees, contractors and agents of any Hazardous Substance at or
near the Premises, or arising out of any violation(s) by the same of any
Applicable Law regarding Hazardous Substances.
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<PAGE>
Tenant shall remove, clean-up and remedy any Hazardous Substance on the
Premises, or any threat of release of Hazardous Substances on the Premises to
the extent required by Applicable Law, and Tenant shall be obligated to continue
to pay Annual Fixed Rent, additional rent and other sums due under the Lease
until such removal, clean-up or remedy is completed in accordance with
Applicable Laws, whether or not the term of this Lease shall terminate or
expire. Tenant hereby grants Landlord the right to inspect the Premises
throughout the term of this Lease, to determine that Tenant is in compliance
with Applicable Laws and Tenant agrees to provide Landlord with all information
necessary to ascertain that Tenant is in compliance with Applicable Laws.
Tenant shall comply with all provisions of Massachusetts General Laws
Chapter 21E, the Massachusetts Oil and Hazardous Material Release Prevention Act
(the "Act"), and in that regard shall comply with all "operator" obligations
therein including the reporting and requirements of Section 7 thereof.
Any release or threat of release of any Hazardous Substance on the
Premises, the Building or the Lot arising from the action or inaction of Tenant,
its employees, invitees, contractors, or agents, any breach by Tenant of its
obligations under this Addendum, or any violation by Tenant of the provisions of
the Act shall constitute a default by Tenant under the Lease. In the event of
such a default, notwithstanding any contrary provision contained herein,
Landlord shall have the additional right, but not the obligation, to take any
action or perform any act required by this Article X of the Tenant to such
extent and in such manner as Landlord deems appropriate, including paying
necessary costs, fees and attorneys' fees. The making of any such payment or the
performing of any such act by the Landlord shall not waive or release the Tenant
from its obligations and agreements hereunder. All amounts so paid by Landlord
shall be immediately due and payable by Tenant to Landlord on demand, as
additional rent with interest thereon at the rate of three (3) percent over the
prime rate of interest announced from time to time by the First National Bank of
Boston.
Landlord, in addition and not in limitation of its rights in the
preceding paragraph, shall have the right to enforce Tenant's obligations under
this Article X by taking legal action seeking, without limitation, injunctive
relief.
10.2 Survival
The provision of this Article X shall survive the expiration or
termination of this Lease.
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<PAGE>
EXECUTED as a sealed instrument in two or more counterparts on the day
and year first above written.
LANDLORD:
LANDMAN OMNIBUS V LIMITED PARTNERSHIP
By: LANDMAN V CORPORATION, its general partner
By:
----------------------------------
Name: Lorenz Reibung
Its: President
TENANT:
APPLIED LANGUAGE TECHNOLOGIES, INC.,
a Delaware corporation
By:
----------------------------------
Name: Michael S. Phillips
Title: Secretary/VP Eng
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<PAGE>
FIRST AMENDMENT TO LEASE
------------------------
This First Amendment to Lease is dated as of the 28th day of September,
1999, and is by and between Speechworks International, Inc., successor in
interest to Applied Language Technologies, Inc. ("Tenant") and 695 Atlantic
Avenue Company, L.L.C., successor in interest to Landman Omnibus V Limited
Partnership ("Landlord").
WITNESSETH:
WHEREAS, Landlord and Tenant are parties to a certain Lease dated
February 21, 1997 (the "Lease") with respect to a portion of the third floor of
two contiguous buildings located at 695 Atlantic Avenue and 20-24 East Street,
Boston, MA (the "Tenant's Space");
WHEREAS, Tenant is the sublessee of the entire second floor of such
buildings pursuant to a certain sublease dated as of the 1st day of April, 1998
by and between Exchange Applications, Inc. and Tenant (the "Subleased
Premises");
WHEREAS, Landlord and Tenant wish to amend the Lease in various respects
as set forth below, including, without limitation by adding the entire tenth and
eleventh floors of such building (the "Expansion Premises") to the space thereby
demised to Tenant;
WHEREAS, Landlord wishes to grant Tenant certain rights to directly
lease the Subleased Premises from Landlord upon the expiration of the Prime
Lease (as hereafter defined) and to grant Tenant certain rights to lease a
portion of the fourth floor of such buildings (the "Substitute Premises") upon
the terms and conditions set forth below; and
WHEREAS, Landlord and Tenant wish to amend the Lease in certain other
respects, as set forth below.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
I. All capitalized terms used herein and not herein defined shall have
the meanings set forth in the Lease.
2. Section 1.1 of the Lease is hereby amended by adding the following to
the end thereof:
<PAGE>
EXPANSION PREMISES: 25,060 square feet of rentable space on the tenth and
eleventh floor of the Building, as shown on the floor
plan attached as Exhibit A-1 hereto.
SUBLEASED PREMISES: Approximately 16,114 square feet of rentable space on
the second floor of the Building, as shown on the floor
plan attached as Exhibit A-2 hereto.
SUBSTITUTE PREMISES: Approximately 12,530 square feet of rentable space on
the fourth floor of the Building as shown on the floor
plan attached as Exhibit A-3 hereto.
PRIME LEASE: That certain lease dated July 9, 1996 by and between
Landman Omnibus V Limited Partnership and Grant and
Partners Limited Partnership with respect to the second
floor of the Building.
CONSOLIDATED PREMISES: So much of the Premises, the Expansion Premises, the
Subleased Premises and the Substitute Premises as shall
have been leased to Tenant pursuant to the terms
hereof.
3. Section 1.1 of the Lease is further amended by deleting therefrom
the definition of the "Term" and substituting the following therefor:
The period commencing upon the Commencement Date and ending upon
September 30, 2004.
4. Section 1.1 is hereby further amended by deleting the defined term
"ANNUAL FIXED RENT" and substituting therefor "ANNUAL FIXED RENT FOR TENANT'S
SPACE" and by adding the following to the end of such portion of Section 1.1:
The period commencing $34 per annum per $426,020 $35,501.67
upon the expiration of rentable square foot
Lease Year 5 and ending
upon September 30, 2004:
5. Section 1.1 is further amended by adding the following definition
directly after the definition of Annual Fixed Rent for Tenant's Space:
2
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FIXED RENT FOR Rate Annual Monthly
THE EXPANSION PREMISES: ---- Amount Amount
------ -------
<S> <C> <C> <C>
The period commencing upon $33.00 per annum per $826,980.00 $68,915.00
September 1, 1999 and expiring rentable square foot
May 31, 2001:
The period commencing upon $34.00 per annum per $852,040.00 $71,003.34
June 1, 2001 and ending upon rentable square foot
September 30, 2004:
<CAPTION>
ANNUAL FIXED RENT FOR Rate Annual Monthly
THE SUBLEASED PREMISES: ---- Amount Amount
------ -------
<S> <C> <C> <C>
The period commencing upon $34.00 per annum per $547,876.00 $45,656.34
November 1, 2001 and ending rentable square foot
September 30, 2004:
<CAPTION>
ANNUAL FIXED RENT FOR THE Rate Annual Monthly
SUBSTITUTE PREMISES: ---- Amount Amount
------ -------
<S> <C> <C> <C>
The period commencing upon $34.00 per annum per $426,020.00 $35,501.67
July 1, 2002 and ending rentable square foot
September 30, 2004:
</TABLE>
6. Section 1.1 is further amended by deleting the section thereof
captioned "TENANT'S OPERATING EXPENSE AND TAX BASE" and replacing it with the
following:
TENANT'S OPERATING
EXPENSE AND TAX BASE
FOR TENANT'S SPACE: For the period expiring upon June 30, 2002, the
Operating Expenses and Taxes allocable to the
Premises, on a square footage basis, during
calendar year 1997, adjusted, however, as if
Tenant had been in occupancy of the Premises for
the entirety of calendar year 1997. For the period
commencing July 1, 2002 and ending September 30,
2004, the Operating Expenses allocable to the
Premises, on a square footage basis, during
calendar 2001 and the Taxes allocable to the
Premises on a square footage basis, during tax
fiscal year 2002.
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TENANT'S OPERATING EXPENSE The Operating Expenses allocable to the Expansion
AND TAX BASE FOR THE Premises, on a square foot basis, during calendar
EXPANSION PREMISES: year 1999 and the Taxes allocable to the Expansion
Premises, on a square foot basis, during tax
fiscal year 2000.
TENANT'S OPERATING EXPENSE For the period beginning November 1, 2001 and
AND TAX BASE FOR THE ending September 30, 2004, Operating Expenses
SUBLEASED PREMISES: allocable to the Subleased Premises, on a square
foot basis, during calendar year 2000 and the
Taxes allocable to the Subleased Premises, on a
square footage basis, during tax fiscal year 2001.
TENANT'S OPERATING EXPENSE The Operating Expenses allocable to the Expansion
AND TAX BASE FOR THE Premises, on a square foot basis, during calendar
SUBSTITUTE PREMISES: year 2001 and the Taxes allocable to the expansion
premises, on a square foot basis, during tax
fiscal 2002.
Each such Base shall be adjusted, however, as if Tenant had been in
occupancy of the space in question for the entirety of the relevant base year.
7. Section 2.1 of the Lease is hereby amended by adding the following to
the end thereof:
The inclusions and exclusions set forth herein with respect to the
Premises shall also be applicable to the Expansion Premises, the
Subleased Premises and the Substitute Premises.
Effective as of October 1, 1999, Landlord leases to Tenant, and Tenant
hires from Landlord, the Expansion Premises, subject to and with the
benefit of the above inclusions and exclusions, provided, however, that
until the Commencement Date (as such term is hereafter defined) with
respect to the Expansion Premises, Tenant shall have no obligation to
pay Annual Fixed Rent for the Expansion Premises or any other charges
related thereto.
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8. Sections 2.2 and 2.3 are hereby amended by deleting the word
"Premises" wherever it appears and substituting therefor the phrase
"Consolidated Premises".
9. Section 2.4 is hereby deleted in its entirety and replaced with the
following:
Tenant shall have and hold such portions of the Consolidated Premises as
have been delivered to Tenant pursuant to this Lease, as amended, for a
period commencing upon the date of such delivery by Landlord, (which
date shall, with respect to such space, be the "Commencement Date") and
continuing for the Term, unless sooner terminated as provided in Section
6.1 or Article VII. If Landlord shall be unable to deliver any portion
of the Consolidated Premises on the date scheduled therefor due to the
holding over or retention of possession of any tenant or occupant, or if
repairs, improvements or decorations of such portion of the Consolidated
Premises or of the Building to be performed by Landlord are not
completed, or for any other reason, Landlord shall use commercially
reasonable efforts to remedy such inability, but shall not be subject to
any liability for failure to deliver possession on said date, nor shall
such failure affect the continuing validity of this Lease.
The Commencement Date with respect to the Expansion Premises is
scheduled to be October 1, 1999. In the event that Landlord shall be
unable to deliver the Expansion Premises to Tenant on or before March
31, 2000, (the "Drop Dead Date") then notwithstanding anything herein to
the contrary, either party may, by notice to the other within ten days
following the Drop Dead Date, cause this Lease to be amended so that
neither party shall have any further rights or obligations with respect
to the Expansion Premises. In such event, the parties shall cooperate to
cause such amendment to be reduced to writing in form and substance
reasonably acceptable to both parties.
Upon the commencement of the Term with respect to any portion of the
Consolidated Premises, at the request of either party, the other party
shall execute a Commencement Date Agreement in the form attached hereto
as Exhibit C, modified to take into account that it shall be applicable
only to a portion of the Consolidated Premises.
10. Section 2.5 is hereby amended by deleting the first sentence of the
third paragraph, and is further amended by deleting the word "Premises" wherever
it appears and substituting therefor the phrase "Consolidated Premises".
11. Section 2.6(A)(c) is hereby deleted in its entirety and replaced
with the following:
In any Fiscal Year when the Building has an average annual occupancy
rate of Less than 95% then, for purposes of this Section 2.6, those
Operating Expenses for the Property which are affected by actual
occupancy levels will be extrapolated as though the Building were 95%
occupied; and the "Operating Expenses Allocable to the Premises",
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the "Operating Expenses Allocable to the Expansion Premises", the
"Operating Expenses Allocable to the Subleased Premises", and the
"Operating Expenses Allocable to the Substitute Premises" shall mean the
same proportion of Operating Expenses for the Property (as extrapolated)
as the Rentable Floor Area of any such space bears to 95% of the
Rentable Floor Area of the Building.
In any Fiscal Year when the Building has an average annual occupancy
rate of 95% or more, then the "Operating Expenses for the Property"
shall be the actual Operating Expenses for the Property as defined in
clause (b); and the "Operating Expenses Allocable to the Premises", the
"Operating Expenses Allocable to the Expansion Premises", the "Operating
Expenses Allocable to the Subleased Premises" and the "Operating
Expenses Allocable to the Substitute Premises" shall mean the same
proportion of the Operating Expenses for the Property as the Rentable
Floor Area of such space bears to the Rentable Floor Area of the
Building actually leased on an average annual basis for said Fiscal
Year.
In the case of any services which are not rendered to all areas on a
comparable basis, the proportion allocable to the Consolidated Premises
shall be in the same proportion which the floor area of the Consolidated
Premises to which the service is rendered bears to the total floor area
to which such service is rendered.
12. Section 2.6(A)(e) is hereby deleted in its entirety and replaced
with the following:
"Tax Expenses Allocable to the Premises", "Tax Expenses Allocable to the
Expansion Premises", "Tax Expenses Allocable to the Subleased Premises", and
"Tax Expenses Allocable to the Substitute Premises" means the same proportion of
the Landlord's Tax Expenses as the Rental Floor Area of such space bears to 100%
of the Rentable Floor Area of the Building.
13. Section 2.6(A)(g) is hereby amended by adding the following thereto:
"Expansion Premises Expenses" shall mean the sum of Operating Expenses
Allocable to the Expansion Premises and the Tax Expenses Allocable to the
Expansion Premises.
"Subleased Premises Expenses" shall mean the sum of Operating Expenses
Allocable to the Subleased Premises and the Tax Expenses Allocable to the
Subleased Premises.
"Substitute Premises Expenses" shall mean the sum of Operating Expenses
Allocable to the Substitute Premises and the Tax Expenses Allocable to the
Substitute Premises.
14. Sections 2.6(A)(h), 2.6(B) and 2.6(C) are hereby amended by (a)
adding the phrase "Expansion Premises Expense, Subleased Premises Expense or
Substitute Premises Expense, as applicable" directly after the phrase "Premises
Expense" in each place where such phrase appears, and (b) by deleting the phrase
"Tenant's Operating Expense and Tax Base"
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wherever it appears and substituting therefor the phrase "Tenant's Operating
Expense and Tax Base for Tenant's Space, Tenant's Operating Expense and Tax Base
for the Expansion Premises, Tenant's Operating Expense and Tax Base for the
Subleased Premises, or Tenant's Operating Expense and Tax Base for the
Substitute Premises, as applicable" in each place where such phrase appears.
15. Section 2.8 of the Lease is hereby amended by adding the following
to the end thereof:
In addition to the Letter of Credit, upon execution of this First
Amendment of Lease and as security for Tenant's obligations under this
Lease, Tenant shall deliver to Landlord another letter of credit (the
"Additional LOC") in the amount of $413,500.00. So long as Tenant shall
not then be in default beyond the expiration of any period of grace
and/or cure set forth in Article XII hereof, Tenant may reduce the
balance of the Additional LOC to the amounts set forth below:
From and after September 1,2001: $313,500; and
From and after September 1, 2002: $213,500.
To the extent applicable, all terms and provisions of this Lease with
respect to the Letter of Credit shall be equally applicable to the Additional
LOC, except as hereby amended.
16. Landlord and Tenant agree that Sections 3.1 and 3.2 shall be
inapplicable to the Expansion Premises, the Subleased Premises and Substitute
Premises.
17. Sections 3.3 and 3.4 are hereby amended by deleting therefrom each
reference to Tenant's Space and the Premises and substituting therefor the
phrase "Consolidated Premises".
18. A new Section 3.5 is hereby added as follows:
Landlord shall use commercially reasonable efforts, consistent
with the rights of existing tenants, within ten (10) business days after
Tenant's request, to allow Tenant to inspect the Subleased Premises
and/or the Substitute Premises, in order for Tenant to determine the
condition thereof. Notwithstanding anything in this Lease to the
contrary, the Expansion Premises, when delivered to Tenant, and the
Subleased Premises or the Substitute Premises, if delivered to Tenant
shall be delivered broom clean and free of all movable personal property
not owned by Tenant (except as Tenant may otherwise agree) but
otherwise, in their condition as of the date that Tenant inspected such
premises, if any, "as is", with all faults and defects of every kind and
nature, whether patent or latent.
19. Articles IV, V, VI, VII, VIII, and X are hereby amended by deleting
therefrom each reference to the "Premises" and substituting therefore a
reference to the "Consolidated Premises". Notwithstanding the foregoing, such
articles shall be applicable to the Expansion
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Premises, the Substitute Premises and the Subleased Premises only from and after
such spaces shall be made available for Tenant's occupancy thereof pursuant to
this Lease.
20. Section 7.1 is hereby amended by deleting the phrase "Annual Fixed
Rent" wherever it appears and substituting therefore the phrase "Annual Fixed
Rent for Tenant's Space. Annual Fixed Rent for the Expansion Premises, Annual
Fixed Rent for the Subleased Premises, or Annual Fixed Rent for the Substitute
Premises".
21. A new article is hereby added to the Lease, as follows:
ARTICLE XI
OPTION TO EXTEND
11.1 TENANT'S OPTION. Provided that at the time of exercise by Tenant
under this Section 11.1, (i) there then exists no Default of Tenant
under this Lease, (ii) this Lease is then in full force and effect,
(iii) Tenant or a permitted assignee is in actual occupancy of at least
51% of the Consolidated Premises demised hereunder (or such portions
thereof as Tenant shall have occupied at any time during the Term) and
(iv) neither The Plymouth Rock, Inc., Landlord nor any affiliate of
either such entity nor their related companies desires to use the
Consolidated Premises upon expiration of the Term of this Lease (as
evidenced by written notice of same by Landlord to Tenant given no later
than thirty days after Tenant's notice of its intent to extend the Term)
Tenant shall have the right and option to extend the Term for one (1)
extended term of five (5) years (the "Extended Term"). The Extended Term
shall commence on the day immediately succeeding the last day of the
initial Term and shall end on the day immediately preceding the fifth
(5th) anniversary of the first (1st) day of the Extended Term. Tenant
shall exercise such option to extend by giving notice to Landlord of its
desire to do so not later than nine (9) months prior to the expiration
of the initial Term. Provided that the conditions set forth in this
Section shall have been satisfied, the giving of such notice by Tenant
shall automatically extend the Term for the Extended Term, and no
instrument of renewal need be executed. In the event that Tenant fails
to give such notice to Landlord, this Lease shall automatically
terminate at the end of the initial Term and Tenant shall have no
further option to extend the Lease Term, it being agreed that time is of
the essence with respect to the giving of such notice. The Extended Term
shall be on all the terms and conditions of this Lease, except that
Tenant shall have no further options to extend, and the Annual Fixed
Rent for the Extended Term shall be determined pursuant to Section 11.3
below.
11.2 EXTENDED TERM RENT. The Annual Fixed Rent (as hereinafter defined)
for the Extended Term shall be the Fair Market Rent for the Consolidated
Premises (or so much thereof as shall be available for Tenant's
occupancy upon the commencement of the Extended Term) as of the
commencement date of the Extended Term. In no event
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shall the Annual Fixed Rent for the Extended Term be less than the
Annual Fixed Rent in effect on the last day of the initial Term. Tenant
shall in all events pay Tenant's Share of Taxes and Operating Expenses
as Additional Rent in accordance with this Lease. For purposes hereof,
the term "Annual Fixed Rent" shall mean the total of the Annual Fixed
Rent for Tenant's Space and the Annual Fixed Rent for the Expansion
Premises, along with the Annual Fixed Rent for the Subleased Premises or
the Annual Fixed Rent for the Substitute Premises, if either such space
shall have been delivered to Tenant as provided in this Lease.
11.3 EXTENDED TERM RENT DETERMINATION. (a) If, pursuant to the
provisions of Section 11.1 hereof, Tenant has exercised validly its
option to extend the Term, a determination of the Fair Market Rent
payable for the Consolidated Premises during the Extended Term shall be
made in the manner described in Sections 11.3(b), (c) and (d) below.
(b) At any time during the sixth (6th) month prior to the expiration of
the initial Term, Landlord, in a notice given to Tenant, shall specify
its determination of Fair Market Rent during the Extended Term. Within
thirty (30) days after receipt of such determination, Tenant shall
notify Landlord whether it disputes such determination of the Fair
Market Rent. If Tenant shall fail to so dispute such determination, the
Fair Market Rent determined by Landlord shall be conclusive and binding
on Landlord and Tenant. If, within thirty (30) days after receipt of
Landlord's notice, Tenant notifies Landlord that it disputes Landlord's
determination of the Fair Market Rent, and Landlord and Tenant fail to
reach agreement on the determination of the Fair Market Rent to be paid
by Tenant during the Extended Term within thirty days after receipt by
Landlord of Tenant's notice then either Landlord or Tenant (the
"Initiating Party") shall initiate the proceedings for such
determination by notice to the other, and by designating in such notice
the name and address of a commercial real estate broker, consultant or
appraiser willing to act in such determination and having at least five
(5) years' experience in the leasing of first class office space in the
financial district of Boston, Massachusetts (hereinafter called a
"Qualified Appraiser"). Within ten (10) days after receipt by the other
party (the "Responding Party") of such notice, the Responding Party, by
notice given to the Initiating Party, shall designate the name and
address of another Qualified Appraiser willing so to act in such
determination. If the Responding Party shall fail, neglect or refuse
within said 10-day period to designate another Qualified Appraiser
willing so to act, the Qualified Appraiser designated by the Initiating
Party shall alone conduct the determination of the Fair Market Rent
during the Extended Term. If two (2) Qualified Appraisers have been
designated as aforesaid, such Qualified Appraisers shall appoint an
additional Qualified Appraiser (the "Third Qualified Appraiser") who is
willing so to act in such determination, and notice of such designation
shall be given both to the Initiating Party and to the Responding Party.
If the two (2) Qualified Appraisers do not, within a period often (10)
days after the appointment of the latter of them, agree upon and
designate a Third Qualified Appraiser willing so to act, either
Qualified Appraiser
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previously designated may request the Boston, Massachusetts Office of
the American Arbitration Association to designate a Third Qualified
Appraiser willing so to act and a Third Qualified Appraiser so appointed
shall, for all purposes, have the same standing and powers as though the
Third Qualified Appraiser had been originally appointed by the Qualified
Appraisers first appointed. In case of the inability or refusal to serve
of any person designated as a Qualified Appraiser, or in case any
Qualified Appraiser for any reason ceases to be such, a Qualified
Appraiser to fill such vacancy shall be appointed by the Initiating
Party, Responding Party, the Qualified Appraisers first appointed or the
Boston, Massachusetts office of the American Arbitration Association, as
the case may be, whichever made the original appointment, or, if the
party which made the original appointment fails to fill such vacancy,
upon application of any Qualified Appraiser who continues to act or by
the Initiating Party. the Responding Party or the Boston Office of the
American Arbitration Association, and any Qualified Appraiser so
appointed to fill such vacancy shall have the same standing and powers
as though appointed originally. The resulting board of Qualified
Appraisers, forthwith upon their appointment, shall (i) hear the parties
to this Lease and their respective witnesses, (ii) examine the records
relating to the Building and such other documents and records as may, in
their judgment, be necessary and (iii) determine the Fair Market Rent to
become applicable during the Extended Term.
(c) If, pursuant to the preceding provisions, there is only one (1)
Qualified Appraiser, a determination of Fair Market Rent by such sole
Qualified Appraiser shall be final and binding upon the parties. Where,
however, there exists a board of three (3) Qualified Appraisers, as is
contemplated hereby, then the Fair Market Rent during the Extended Term
shall be determined separately and independently by each of the three
(3) Qualified Appraisers (such determinations being hereinafter referred
to, individually, as an "Appraisal" and collectively, as the
"Appraisals"), and the average resulting from such Appraisals shall,
except as specifically provided otherwise in the next succeeding
sentence, constitute the Fair Market Rent during the Extended Term. If,
however, any one Appraisal is ten percent (10%) more or less than the
Fair Market Rent resulting from the averaging of the three (3) Fair
Market Rent Appraisals (an "Excluded Appraisal"), then the Excluded
Appraisal shall be eliminated, as if never made, and the Fair Market
Rent during the Extended Term shall be the average of the remaining two
(2) Fair Market Rent Appraisals. Moreover, if by application of the
provisions of the preceding sentence there are two (2) Excluded
Appraisals, then the Fair Market Rent Appraisal which is not an Excluded
Appraisal shall constitute the Fair Market Rent during the Extended
Term. Further, if all three (3) Appraisals are Excluded Appraisals, then
the Excluded Appraisal which is closest to the average of the three (3)
Excluded Appraisals shall constitute the Fair Market Rent during the
Extended Term. Fair Market Rent Appraisals made in accordance with the
foregoing provisions shall be binding upon the parties to this Lease.
(d) Each of the Landlord and Tenant shall pay the costs and fees of the
Qualified Appraiser chosen by it, and Landlord and Tenant shall share
the costs and fees of any
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Third Qualified Appraiser. Each of the Landlord and Tenant shall pay the
legal fees and expenses of their respective counsel.
22. A new article is hereby added to the Lease, as follows:
ARTICLE XII
OPTION TO EXPAND
12.1 Provided that at the time of exercise by Tenant under this Section
12.1, (i) there exists no Default of Tenant under this Lease, (ii) this
Lease is then in full force and effect, (iii) Tenant or a permitted
assignee is in actual occupancy of at least 90% of the Consolidated
Premises demised hereunder (or such portions thereof as Tenant shall
have occupied at any time during the Term), and (iv) neither Exchange
Applications, Inc. nor any assignee or sublessee or affiliate thereof
shall have any right to occupy the Subleased Premises (as evidenced by
written notice of the same from Landlord to Tenant given prior to May
31, 2001)' then Tenant shall have the right and option to lease from
Landlord the Subleased Premises commencing November 1, 2001 in
accordance with, and subject to, the terms hereof for the balance of the
Term, as the same may be extended. Tenant shall exercise such option to
expand by giving notice to Landlord of its desire to do so not later
than January 31, 2001. Provided that the conditions set forth in this
section shall have been satisfied, the giving of such notice by Tenant
shall automatically cause the Subleased Premises to become part of the
Consolidated Premises, and into separate instrument need be executed by
the parties, provided, however, that upon the request of either party,
the other party shall execute any reasonable instrument or document to
memorialize the addition of the Subleased Premises to the Consolidated
Premises. In the event that Tenant fails to give such notice to
Landlord, Tenant's rights under this Section 12.1 shall automatically
terminate. and Tenant shall have no further option to expand into the
Subleased Premises, it being agreed that time is of the essence with
respect to the giving of such notice. Tenant's occupancy of the
Subleased Premises shall be on all of the terms and conditions of this
Lease, including, without limitation, the obligation to pay.. Annual
Fixed Rent for the Subleased Premises and Tenant's Operating Expenses
and Taxes for the Subleased Premises.
12.2 In the event that the Subleased Premises shall be unavailable to
Tenant due to the failure of condition (iv), above, then Tenant shall
have the rights set forth in this Section 12.2.
Provided that at the time of exercise by Tenant under this Section 12.2,
(i) there exists no Default of Tenant under this Lease, (ii) this Lease
is then in full force and effect, (iii) Tenant or a permitted assignee
is in actual occupancy of at least 90% of the Consolidated Premises
demised hereunder (or such portions thereof as Tenant shall have
occupied at
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any time during the Term), (iv) neither The Plymouth Rock, Inc.,
Landlord nor any affiliate of either such entity nor their related
companies desires to use the Substitute Premises upon expiration of the
term of that certain Lease by and between Landlord and Internet Security
with respect to the Substitute Premises (as evidenced by written notice
of the same by Landlord to Tenant given no later than 60 days after
Tenant's notice of its intent to expand) and (v) neither Exchange
Applications, Inc. nor any assignee or sublessee or affiliate thereof
shall have any right to occupy the Substitute Premises (as evidenced by
the notice set forth above), then Tenant shall have the right and option
to lease from Landlord the Substitute Premises commencing upon July 1,
2002 in accordance with, and subject to, the terms hereof for the
balance of the Term, as the same may be extended. Tenant shall exercise
such option to expand by giving notice to Landlord of its desire to do
so not later than July 1, 2001. Provided that the conditions set forth
in this section shall have been satisfied, the giving of such notice by
Tenant shall automatically cause the Substitute Premises to become part
of the Consolidated Premises, and no separate instrument need be
executed by the parties, provided, however, that upon the request of
either party, the other party shall execute any reasonable instrument or
document to memorialize the addition of the Substitute Premises to the
Consolidated Premises. In the event that Tenant fails to give such
notice to Landlord, Tenant's rights under this Section 12.2 shall
automatically terminate, and tenant shall have no further option to
expand into the Substitute Premises, it being agreed that time is of the
essence with respect to the giving of such notice. Tenant's occupancy of
the Substitute Premises shall be on all of the terms and conditions of
this Lease, including, without limitation, the obligation to pay Annual
Fixed Rent for the Substitute Premises and Tenant's Operating Expenses
and Taxes for the Substitute Premises.
In the event that Tenant shall have effectively exercised its option to
expand into the Substitute Premises, and Landlord shall be unable to, or
shall fail to, deliver the Substitute Premises to Tenant on or before
January 1, 2003, then Tenant may rescind such exercise by notice to
Landlord given prior to January 10, 2003, and thereupon, neither party
shall have any obligations to the other with respect to the Substitute
Premises.
23. This First Amendment to Lease, and all rights and obligations of the
parties hereunder, is conditioned upon the execution by Landlord and Prism Rehab
Systems, Inc., of a certain Lease Surrender and Termination Agreement with
respect to the Expansion Premises on terms and conditions mutually acceptable to
such parties.
24. Except as hereby amended, the Lease shall remain in full force and
effect and is hereby ratified and confirmed.
25. Notwithstanding anything to the contrary herein, any provision
hereof creating rights or obligations on the part of Tenant with respect to the
Subleased Premises, the Expansion Premises or the Substitute Premises shall only
be operative, and shall only be binding
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upon Landlord and Tenant from and after such time as Landlord shall make such
space available for Tenant's occupancy.
26. Landlord agrees that it shall take no action (including, without
limitation, the granting of any additional rights to Exchange Applications or
Internet Security) which would impair or defeat the rights granted to Tenant
pursuant to Sections 21 or 22 hereof.
Executed as a sealed instrument in two or more counterparts on the day
and year first above written.
LANDLORD: 695 ATLANTIC AVENUE
COMPANY, L.L.C.
By: /s/ James M. Baily
---------------------------
Name:
Title:
TENANT: SPEECUWORKS
INTERNATIONAL, INC.
By: /s/ Richard Westeman
---------------------------
Name: Richard Westeman
Title: Treasurer & CEO
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Exhibit 10.4
SUBLEASE
This SUBLEASE entered into as of this 1st day of April 1998, by and between
Exchange Applications, Inc., with an address at 695 Atlantic Avenue, Boston, MA
02111, ("Sublessor") and Applied Language Technologies, Inc. ("Sublessee").
Recitals:
A lease was made on July 9, 1996 (the "Prime Lease" attached hereto as Exhibit
"A") between Landman Omnibus V Limited Partnership ("Landman") and Grant &
Partners Limited Partnership ("Grant") for 16,114 rentable square located on the
2nd floor of the two contiguous buildings (herein, collectively the "Building"),
known respectively as 695 Atlantic Avenue and 20-24 East Street, Boston, MA. 695
Atlantic Avenue Company, L.L.C. ("Landlord") has succeeded to Landman's interest
under the Prime Lease. Grant assigned its interest in the Prime Lease to
Sublessor pursuant to an Assignment and Assumption Agreement dated November 15,
1996.
Sublessee desires to sublease from Sublessor the premises located on the 2nd
floor of the Building and containing 16,114 rentable square feet (the
"Premises") (which are shown on the plan attached hereto as Exhibit "B"), in
accordance with and subject to the terms and conditions of the Prime Lease and
this Sublease.
NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto agree as follows:
1. Sublease. Subject to the terms and conditions stated herein, Sublessor
hereby subleases to Sublessee the Premises and Sublessee hereby subleases
from the Sublessor the Premises for three (3) years and five (5) months
commencing on June 1, 1998 ("Commencement Date") and expiring on October
31, 2001 ("Sublease Term"). Sublessor agrees to use best efforts to vacate
the Premises by June 1, 1998. If Sublessor has not vacated the Premises by
June 1, 1998, the Commencement Date shall be delayed until such date as
Sublessor vacates the Premises. If Sublessor has not vacated the Premises
by August 1, 1998, Sublessee may terminate this Sublease by notice to
Sublessor and upon such termination this Sublease shall become null and
void and the parties shall have no further obligations hereunder.
2. Consent of Landlord. Attached hereto as Exhibit C is a copy of the Consent
of Landlord to this Sublease. In case of any conflict between the
<PAGE>
2
provisions of the Consent and this Sublease, the provisions of the Consent
shall prevail unaffected by the Sublease.
3. Use. Sublessee will use the Premises of business offices and for no other
purpose.
4. Base Rental Payments.
Date Monthly Annually
6/1/98 - 10/31/2001 $29,542.33 $354,508.00
Sublessee shall pay annual rent payable in monthly installments on the
first day of each month and such payments shall be paid by Sublessee to:
Exchange Applications
695 Atlantic Avenue
Boston, MA 02111
or any such address as Sublessor may designate in writing to Sublessee. If
the date of this Sublease is other than the first day of a month, then
rent for such partial month shall be prorated on a per diem basis. Rent
for the first month or partial month, as the case may be, shall be due
upon Sublessee's execution of this Sublease, Sublessee shall pay all of
the foregoing sums without prior demand by Sublessor or setoff by
Sublessee except as otherwise provided herein.
If base rent is not paid after the seventh (7th) day of the month,
interest will accrue on such sum at the rate of 1 1/2% per month until
such time as it is paid.
5. Additional Rent. Base year for operating expenses shall be calendar year
1998. Base year for taxes shall be fiscal year 1998.
In addition to the Base rent and subject to the cap set forth below, on
the first day of each month beginning January 1, 1999, the Sublessee shall
pay as "Additional Rent," Sublessee's increased share of Operating
Expenses as defined in Addendum 6 and "taxes" as defined in Article IV of
the Prime Lease over and above the actual amounts for the calendar year
1998 and fiscal year 1998, respectively (the Base Year) during the term
hereof. Sublessee shall pay to the Sublessor pro rata monthly installments
for projected Operating Expenses and taxes for the lease year beginning
January 1, 1999, calculated by the Sublessor on the basis of the most
recent data for Operating Expenses and taxes for actual operating
<PAGE>
3
costs for the prior year. If the total of such monthly installment amount
in any lease year is greater than Lessee's share of such Operating
Expenses or taxes for such year, Sublessee shall be entitled to a credit
against Sublessee's next due Base Rent obligations hereunder in the amount
of such difference. If the total such monthly installment amount is less
than Lessee's Share of such Operating Expenses or taxes for such year, the
Sublessor shall notify Sublessee no later than 90 days after the first of
the year and Sublessor shall pay to the Sublessee the amount of such
difference within 30 days of receipt of a bill therefore.
6. Utilities: Sublessee pays all electricity used at the Premises pursuant to
the terms of Article XI of the Prime Lease.
7. Security Deposit. Sublessee has deposited a security deposit equivalent to
two (2) months base rent in the amount of $59,084.67 (the "Security
Deposit") with Sublessor. Sublessor shall hold the Security Deposit as
security for the full and faithful payment or performance by Sublessee of
its obligations under this Sublease and not as prepayment of Rent.
Sublessor shall not commingle the Security Deposit with other funds of
Sublessor but shall not be liable to Sublessee for the payment of interest
thereon or profits therefrom. Sublessor may expend such amounts from the
Security Deposit as may be necessary to cure an Event of Default and, in
such case, Sublessee shall pay to Sublessor the amount so expended, on
demand. As soon as reasonably practicable after the expiration of the
Sublease Term, Sublessor shall (i) inspect the Premises, (ii) make such
payments from the Security Deposit as may be required to cure any
outstanding Events of Default hereunder and (iii) if no Event of Default
is then continuing, pay the balance of the Security Deposit to Sublessee.
8. Condition of Premises. Sublessee acknowledges that it has inspected the
Premises and is familiar with the physical condition thereof, and accepts
the Premises in their "As Is" condition, except that on the Commencement
Date, the Premises shall be delivered in clean, "broom-swept" condition
and Sublessor shall be responsible for repairing any damage to the
Premises caused by Sublessor's move from the Premises. Sublessee
acknowledges that Sublessor has made no representations or warranties
regarding the Premises, and that it has relied on no such representations
or warranties in accepting the Premises. Sublessee acknowledges that
Sublessor shall have no obligation to do any work in or to the Premises or
to incur any expense in connection therewith, in order to make the
Premises suitable and ready for occupancy and use by Sublessee. Sublessee
shall not be responsible for the removal of any erections, additions,
alterations or fixtures installed in the Premises by Sublessor.
<PAGE>
4
9. Default. The occurrence of any of the following shall constitute an Event
of Default under this Sublease:
(i.) Delinquency in the payment when due of Base Rent including
Additional Rent or any other amount payable by Sublessee under
this Sublease, or any part thereof and such failure shall continue
for five (5) days after written notice thereof (provided, however,
that there shall be no grace period if Sublessee has received two
(2) written notices of payment default in the preceding 12 month
period).
(ii.) Delinquency by Sublessee in the performance or compliance with any
of the terms, covenants or agreements to be performed under this
Sublease or the Prime Lease, and failure to rectify or remove said
default(s) within twenty (20) days after written notice of such
default has been received by Sublessee or, if such default shall
reasonably require longer than twenty (20) days to cure, such
period shall be extended for the lesser of (i) sixty (60) days or
sooner if practicable, provided that Sublessee has commenced
curing within such time period and thereafter diligently
prosecutes the curing of such default, or (ii) until such a
default becomes a default under the Prime Lease which entitles
Landlord to terminate the Prime Lease.
(iii.) Filing by or against Sublessee in any court pursuant to any
federal or state statute or a petition in bankruptcy or
insolvency, or for reorganization or rearrangement, or for the
appointment of a receiver or trustee of all or a portion of
Sublessee's property, or any assignment of the property of
Sublessee for the benefit of creditors; provided, that Sublessee
shall have sixty (60) days to obtain a dismissal of any
involuntary proceeding.
(iv.) Assignment or encumbrance of this Sublease or subletting of the
Premises other than in accordance with the terms of this Sublease.
10. Right to Re-Enter. Upon default, after applicable notice and the
expiration cure period, Sublessor shall have the immediate right to
reenter and remove all persons and property within the Premises. Such
property may be removed and stored in a public warehouse or elsewhere at
the cost of, and for the account of Sublessee, all without service of
notice and without Sublessor being deemed guilty of trespass, or liable
for any loss or damage. All of the rights and remedies of Sublessor under
this Sublease are cumulative and shall be in addition to any other rights
or remedies accorded Sublessor by law. Sublessor shall have all rights of
Landlord in an Event of Default as set forth in Article XV and XVII of the
Prime Lease.
<PAGE>
5
11. Right to Relet. Should Sublessor elect to reenter, or take possession by
summary proceeding or other appropriate level action or proceedings, or
pursuant to notice provided for by law, it may either terminate this
Sublease or from time to time, without terminating this Sublease, make
such alterations and repairs necessary to relet, and relet the Premises or
any part thereof for such term or terms, and at such rental or rentals and
upon such other terms and conditions as Sublessor in its sole discretion
may deem advisable. Upon each such reletting, all rentals and other sums
received by Sublessor shall be applied;
(i) to the payment of any indebtedness other than rent due;
(ii) to the payment of any costs and expenses of reletting, including
brokerage and reasonable attorneys' fees, and costs of alterations
and repairs;
(iii) to the payment of rent and other charges due and unpaid hereunder.
12. Assignment And Subletting. Sublessee shall not assign its rights under the
Sublease in whole or in part or sublet all or any part of the Premises or
assign, transfer or hypothecate by operation of law or otherwise all or
any part of the Prime Lease or this Sublease without Sublessors' and
Landlords' express prior written consent which consent of Sublessor shall
not be unreasonably withheld or delayed. All of the terms and provisions
of Article X.5 of the Prime Lease shall apply to any proposed Transfer (as
defined in the Prime Lease), including, without limitation, the factors
which Landlord and Sublessor may consider in determining its consent to a
Transfer.
13. Notices. Any notice, requests, demands and other communications between
the parties relating to the Sublease shall be in writing and -addressed as
follows:
If to Sublessor:
Exchange Applications
695 Atlantic Avenue
Boston, MA 02210
Attention: Chief Financial Officer
If to Sublessee:
Applied Language Technologies, Inc.
695 Atlantic Avenue
Boston, MA 02210
Attention: Chief Financial Officer
<PAGE>
6
No notice from Sublessee to the Landlord shall be effective as to
Sublessor unless Sublessee delivers a copy of such notice in the manner
set forth in this section to Sublessor simultaneously with delivery of
such notice to Landlord. No notice from Sublessee to Sublessor shall be
effective as to Sublessor or Landlord unless Sublessee delivers a copy of
such notice in the manner set forth in this Section to Landlord
simultaneously with delivery of such notice to Sublessor. Any notice shall
be deemed duly given (i) when delivered by hand, if so delivered and a
receipt obtained, or (ii) the next day after being delivered to an
overnight courier with acceptance signature required.
14. Terms Subject to Prime Lease. This is a Sublease. Sublessor's interest in
the Premises is as a tenant under the Prime Lease and Sublessee's rights
pursuant to this Sublease are subject and subordinate at all times to the
Prime Lease and to all the covenants and agreements of the Prime Lease,
except as to those matters no longer applicable or superseded by this
Sublease. The rental payments required hereunder are substituted for the
rental payment requirements under the Prime Lease and Addendums 3, 4 and 5
are not applicable to this Sublease and Sublessee shall not be entitled to
any rights under Addendums 3, 4 and 5.
Sublessee acknowledges that it has read and understands the terms and
conditions of the Prime Lease and Sublessee expressly assumes and
covenants to Landlord and Sublessor to keep, perform and fulfill all of
the duties, obligations, terms and conditions which are to be kept,
performed and fulfilled by Sublessor as tenant under the Prime Lease,
whether or not expressly set forth in this Sublease, and agrees to be
bound by the terms of the Prime-Lease as fully and to the same extent as
if Sublessee were tenant under the Prime Lease. Sublessee shall not do,
permit or tolerate anything to be done in, or in connection with
Sublessee's use or occupancy of the Premises which would violate any
covenant or agreement set forth in the Prime Lease. Sublessor shall have
the same rights against Sublessee with respect to the Sublease as the
Landlord has against the Sublessor as tenant pursuant to the Prime Lease
and Sublessee shall have the rights and obligations of tenant of the Prime
Lease, except where such rights and obligations are deleted, modified or
altered herein. In addition, if Sublessor receives an abatement of rent
under the Prime Lease, Sublessee shall also receive a pro rata abatement
of its rent hereunder.
If Sublessee receives from Sublessor a notice of payment default under the
Prime Lease, Sublessee may, at its option, cure such payment default on
behalf of Sublessor provided no default exists at such time under this
<PAGE>
7
Sublease and that Sublessor's default is capable of being cured under the
terms of the Prime Lease. If any such payment made by Sublessee in
accordance with the foregoing sentence is accepted by Landlord as a cure
of Sublessor's default, Sublessee may offset the amount of such payment
against the next installment of rent due hereunder.
The Landlord under the Prime Lease or Sublessor may enforce against
Sublessee, each in its own capacity, any of the rights granted to Landlord
pursuant to the Prime Lease, except as specifically provided in this
Sublease. Sublessor may not grant to Sublessee, and nothing in this
Sublease shall be construed or interpreted to grant, any greater rights
than Sublessor has received as tenant from Landlord pursuant to the Prime
Lease.
15. Sublessor's Covenants. Sublessor warrants and represents that Exhibit A is
a true, correct and accurate copy of the Prime Lease. There have been no
modifications or amendments of or changes to the Prime Lease. The Prime
Lease is in full force and effect and to the best of Sublessor's
knowledge, there are no defaults or violations thereunder on the part of
either Sublessor or Landlord.
Sublessor shall (i) perform its obligation to pay rent under the Prime
Lease, (ii) perform its obligations under Article 15 to deliver estoppel
certificates and under Sections 11.1 and 11.5 to deliver certificates
requested by Landlord or any mortgagee, (iii) not do or cause to be done
or suffer or permit any act or thing to be done or fail to do any act
which would or might cause a default by tenant under the Prime Lease or
would cause the rights of Sublessor as tenant thereunder to be canceled,
terminated or forfeited, and (iv) deliver to Sublessee as soon as possible
-but in all events within two (2) business days of receipt, copies of any
notices it receives from Landlord under the Prime Lease. Sublessor agrees
not to exercise any termination rights it holds in the event of a fire or
other casualty pursuant to Article XIV of the Prime Lease. The foregoing
covenants of Sublessor shall survive the date of any termination of this
Sublease resulting from a termination of the Prime Lease by Landlord after
a default of Sublessor thereunder provided Sublessee brings a claim for
breach within one (1) year of such termination.
16. Limitations of Sublessor's Obligations. Sublessee hereby acknowledges that
Sublessee will look solely to Landlord for the performance of all the
Landlords' obligations under the Prime Lease and agrees and acknowledges
that Sublessor shall have no obligation or responsibility whatsoever to
provide or perform any service, repair, alteration or other similar
obligations which is the obligations of Landlord
<PAGE>
8
to provide or perform pursuant to the terms of the Prime Lease, provided
however Sublessee may look to Sublessor for the prompt and proper payment
to the Landlord of all rents received hereunder. Sublessee may exercise in
Sublessor's name, any rights of Sublessor as tenant to enforce obligations
of Landlord under the Prime Lease.
17. Insurance and Indemnities. Sublessee hereby agrees to indemnify and hold
each of Landlord and Sublessor harmless with regard to its leasing and use
of the Premises, to the same extent that Sublessor as tenant, is required
to indemnify and hold Landlord harmless with respect to the Premises.
Likewise, Sublessee hereby agrees to obtain and provide evidence
satisfactory to Sublessor, on or before the date of this Sublease, that
Sublessee is carrying insurance in the same amounts and of the same types
required to be carried by tenant under the Prime Lease with regard to the
Premises. Any insurance required to be carried by Sublessee pursuant to
the provisions of the Prime Lease shall name Landlord, Minuteman Real
Estate Management Corporation and Spaulding and Slye Services Limited
Partnership and Sublessor as additional insured.
18. Sublessee's Records. Sublessee's records of operation are and shall remain
confidential. All of Sublessee's records and files, including computerized
records, shall be the sole property of Sublessee, and Sublessor waives any
right to attach or lien such records and files and agrees that such
records shall remain confidential.
19. No Waiver. Failure of either party to complain of any act or omission on
the part of the other party, no matter how long the same may continue,
shall not be deemed to be a waiver by such party of any of its rights
hereunder. No waiver by any party at any time of any other provision of
this Sublease shall be deemed a waiver or breach of any other provision of
this Sublease or a consent to any subsequent breach of the same or any
other provision hereunder. If any act or omission by any party shall
require the consent or approval of another party, such consent or approval
of such act or omission shall not operate as consent or approval on the
same or any subsequent occasion.
20. Partial Invalidity. If any provision of this Sublease is held by a court
of competent jurisdiction to be invalid, void or unenforceable in any
manner, the remaining provisions of the Sublease shall nonetheless
continue in full force and effect without being impaired or invalidated in
any way. In addition, if any provision of this Sublease may be modified by
a court of
<PAGE>
9
competent jurisdiction such that it may be enforced, then said provision
shall be so modified and as modified shall be fully enforced.
21. Corporate Authority. Sublessee warrants that the person executing this
Sublease on behalf of Sublessee has authority to do so and fully obligate
Sublessee to all terms and provisions of this Sublease.
22. Governing Law. This Sublease is being executed and delivered in the
Commonwealth of Massachusetts and the laws of that state shall govern the
validity, construction, enforcement and interpretation of this Sublease.
23. Entire Agreement. This Sublease contains the entire understanding of the
parties hereto with respect to the subject matter contained herein,
supersedes all prior and contemporaneous agreements, understandings, and
negotiations, and no parole evidence of prior or contemporaneous
agreements, understandings and negotiations shall govern or be used to
construe or modify this Sublease. No modification or alteration hereof
shall be deemed effective unless in writing and signed by the parties
hereto.
24. Brokerage. Sublessee represents and warrants to Sublessor that it has
dealt solely with Whittier Partners in connection with is transaction.
Sublessor represents and warrants to Sublessee that it has dealt with
Whittier Partners in connection with this transaction. Sublessor shall be
responsible for any brokerage fee owed Whittier Partners.
25. Marginal Headings. The marginal headings hereof are inserted merely for
the convenience of the parties and shall not be used to construe or modify
the terms of this Sublease in any respect.
26. Terms. Capitalized terms used in this Sublease but not defined herein
shall have the meaning ascribed to them in the Prime Lease.
27. Holding Over. If Sublessee remains in possession of the Premises after the
end of this Sublease, Sublessee will occupy the Premises as a subtenant on
a day-to-day basis at a rental rate of 200% of then current rental rate,
subject to all conditions, provisions and obligations of this Sublease in
effect on the last day of the term.
28. Third Party Beneficiary. Sublessee acknowledges that the Landlord is a
third party beneficiary entitled to receive the benefits of the
representations, warranties and covenants made by, and the responsibility
of, Sublessee under this Sublease.
<PAGE>
10
29. No Renewal. Sublessee shall have no renewal options.
30. Parties Bound. This Sublease shall be binding up and insure to the benefit
of Sublessor and Sublessee and their respective heirs, personal
representatives, successors and assigns.
This SUBLEASE is executed as of the date set forth above.
SUBLESSOR:
Exchange Applications, Inc.
By: /s/ John O'Brien
---------------------------------
John O'Brien
Its: VP and CFO
SUBLESSEE:
Applied Language Technologies, Inc.
By: /s/ Arthur Haleman
---------------------------------
Its: Director of Finance
<PAGE>
Exhibit 10.5
Applied Language Technologies, Inc.
AMENDED AND RESTATED
1995 STOCK OPTION PLAN
<PAGE>
Applied Language Technologies, Inc.
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
TABLE OF CONTENTS
Page
----
1. PURPOSE .......................................................... 1
2. ADMINISTRATION OF THE PLAN ....................................... 1
3. AVAILABLE SHARES ................................................. 2
4. AUTHORITY TO GRANT STOCK RIGHTS .................................. 2
5. WRITTEN AGREEMENT ................................................ 2
6. ELIGIBILITY ...................................................... 2
7. PURCHASE PRICE ................................................... 3
8. DURATION OF OPTIONS .............................................. 4
9. RESTRICTION ON EXERCISE OF OPTIONS ............................... 4
10. EXERCISE OF STOCK RIGHTS ......................................... 4
11. NONTRANSFERABILITY OF OPTIONS .................................... 5
12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT WITH THE COMPANY ........ 6
13. REQUIREMENTS OF LAW .............................................. 6
14. NO RIGHTS AS STOCKHOLDER ......................................... 7
15. EMPLOYMENT OBLIGATION ............................................ 7
16. FORFEITURE AS A RESULT OF TERMINATION FOR CAUSE .................. 8
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE ....................... 8
18. AMENDMENT OR TERMINATION OF PLAN .................................10
19. CERTAIN RIGHTS OF THE COMPANY ....................................10
20. EFFECTIVE DATE AND DURATION OF THE PLAN ..........................11
<PAGE>
Applied language Technologies, Inc.
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
1. PURPOSE
The purpose of this Amended and Restated 1995 Stock Option Plan (the
"Plan") is to encourage directors, consultants and key employees of Applied
Language Technologies, Inc., a Delaware corporation (the "Company") and its
Subsidiaries (as hereinafter defined) to continue their association with the
Company, by providing favorable opportunities for such persons to participate in
the ownership of the Company and in its future growth through (a) the granting
of stock options (the "Options") which may either be options designed to qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") (an "ISO") or options not intended
to qualify for any special tax treatment under the Code (a "NQO"), or (b) the
granting of awards of stock in the Company ("Awards") which may either be
subject to conditional repurchase rights by the Company ("Restricted Awards") or
which may be free of such repurchase rights ("Unrestricted Awards"). Options and
Awards are sometimes collectively referred to herein as "Stock Rights." The term
"Subsidiary" as used in the Plan means a corporation of which the Company owns,
directly or indirectly through an unbroken chain of ownership, fifty percent
(50%) or more of the total combined voting power of all classes of stock.
Persons to whom an Option or Award has been granted pursuant to the Plan (each a
"Holder" and collectively the "Holders") are sometimes hereinafter referred to
as an "Optionee" or "Grantee," respectively.
The Plan is a successor to the Applied Language Technologies, Inc. 1994
Stock Option Plan (the "1994 Plan") which was adopted by the Company's parent
corporation, Applied Language Technologies, Inc., a Massachusetts Corporation
("Applied Massachusetts"). Applied Massachusetts was subsequently merged with
and into the Company with the Company was the surviving corporation (the
"Merger"). The Plan is substantially the same as the 1994 Plan, but has been
modified (i) to provide for the grant of Awards and (ii) to provide for a larger
pool of option shares.
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Board of Directors, which shall have
the authority to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan. All questions of
interpretation and application of such rules and regulations, of the Plan or of
the Stock Rights granted thereunder shall be subject to the determination, which
shall be final and binding, of a majority of the Board of Directors. The Plan
shall be administered in such a manner as to permit those Options granted
hereunder and specially designated under Section 4 hereof to qualify as
"incentive stock options" as described in Section 422A of the Code.
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 2
3. AVAILABLE SHARES
The stock subject to Stock Rights under the Plan shall be shares of the
Company's common stock, par value $0.001 per share (the "Stock"). At no time
shall the number of shares of Stock with respect to which outstanding Stock
Rights have been granted plus the number of shares of Stock issued as a result
of the exercise of Stock Rights under the Plan and which are still outstanding
exceed in the aggregate 2,736,951 shares of Stock (the "Stock Pool"); provided
that such aggregate number of shares of Stock shall be subject to adjustment in
accordance with the provisions of Section 17. In the event that any outstanding
Stock Rights shall expire for any reason or shall terminate by reason of the
death or severance of employment of the Holder, the surrender of any such Stock
Right, or any other cause, the shares of Stock allocable to the unexercised
portion of such Stock Right may again be subject to an Option or Award under the
Plan. Should the Company repurchase any shares of Stock which were acquired
pursuant to the exercise of Stock Rights granted under the Plan, such shares may
be returned to the Stock Pool pursuant to a vote of the Board of Directors,
subject, however, to the Stock Pool size limitation set forth above.
4. AUTHORITY TO GRANT STOCK RIGHTS
The Board of Directors may grant from time to time, to such eligible
individuals as it shall from time to time determine, a Stock Right or Stock
Rights to buy a stated number of shares of Stock under the terms and conditions
of the Plan, any Option or Options of which shall be designated at the time of
grant as either an ISO or a NQO. Subject only to any applicable limitations set
forth elsewhere in the Plan, the number of shares of Stock to be covered by any
Stock Right shall be as determined by the Board of Directors.
5. WRITTEN AGREEMENT
Stock Rights granted hereunder shall be embodied in written agreements
(which need not be identical) in such forms as the Board of Directors may from
time to time approve (each an "Agreement"). Agreements shall be subject to the
terms and conditions prescribed herein and shall be signed by the Holder and by
the President or any Vice President of the Company for and in the name and on
behalf of the Company. An Option Agreement shall indicate whether the subject
Option has been designated an ISO or a NQO. The written Agreement may contain
such provisions not inconsistent with this Plan as the Board of Directors in its
discretion may deem advisable.
6. ELIGIBILITY
The individuals who shall be eligible for grant of Stock Rights under the
Plan shall be key employees (including officers who may be members of the
Board), directors who are not employees and other individuals who render
services of special importance to the management, operation, or development of
the Company or a Subsidiary, and who have contributed or may be expected to
contribute materially to the success of the Company or a Subsidiary. No Option
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 3
designated as an ISO shall be granted to any individual who is not an employee
of the Company or a Subsidiary.
If required to insure compliance with Section 16 of the Securities
Exchange Act of 1934 (the " Exchange Act"), the selection of a director as a
participant and the number of shares for which a Stock Right or Stock Rights may
be granted to such director shall be determined either (i) by the Board of
Directors, (ii) by, or in accordance with, the recommendations of a committee of
two or more Non-Employee Directors (as such term is defined under Rule 16b-3
under the Exchange Act, or any successor rule), or (iii) in a transaction that
otherwise complies with Section 16(b) of the Exchange Act, and the Rules
promulgated thereunder, as then in effect.
7. PURCHASE PRICE
The price at which shares of Stock may be purchased pursuant to a Stock
Right shall be specified by the Board of Directors at the time the Stock Right
is granted, but shall in no event be less than the par value of such shares and,
in the case of an incentive stock option, except as set forth in the following
sentence, shall not be less than one hundred percent (100%) of the fair market
value of the shares of Stock on the date the ISO is granted.
In the case of any employee who owns (or is considered under Section
424(d) of the Code as owning) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
Subsidiary, the price at which shares of Stock may be so purchased pursuant to
an incentive stock option shall be not less than one hundred ten percent (110%)
of the fair market value of the Stock on the date the ISO is granted.
For purposes of the Plan, the "fair market value" of a share of Stock on
any date specified herein shall mean (a) the last reported sales price, regular
way, or, in the event that no sale takes place on such day, the average of the
reported lowest closing bid and asked prices, regular way, in either case (i) as
reported on the New York Stock Exchange Composite Tape, or (ii) if the Stock is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which such security is listed or
admitted to trading, or (iii) if not then listed or admitted to trading on any
national securities exchange, on the NASDAQ National Market System; or (b) if
the stock is not quoted on such National Market System, (i) the average of the
closing bid and asked prices on each such day in the over-the-counter market as
reported by NASDAQ, or (ii) if bid and asked prices for such security on each
such day shall not have been reported through NASDAQ, the average of the bid and
asked prices for such day as furnished by any New York Stock Exchange member
firm regularly making a market in such security selected for such purpose by the
Board of Directors; or (c) if the Stock is not then listed or admitted to
trading on any national exchange or quoted in the over-the-counter market, the
fair value thereof determined in good faith by the Board of Directors as of a
date which is within thirty (30) days of the date as of which the determination
is to be made; provided however that any method of determining fair market value
employed by the Board of Directors with respect to an ISO shall be consistent
with any applicable laws or regulations pertaining to "incentive stock options."
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 4
8. DURATION OF OPTIONS
The duration of any Option shall be specified by the Board of Directors in
the Option Agreement, but no ISO shall be exercisable after the expiration of
ten (10) years from the date such Option is granted. In the case of any employee
who owns (or is considered under Section 424(d) of the Code as owning) stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any Subsidiary, no ISO shall be exercisable
after the expiration of five (5) years from the date such Option is granted. The
Board of Directors, in its sole and absolute discretion, may extend any Option
theretofore granted subject to the aforesaid limits and may provide that an
Option shall be exercisable during its entire duration or during any lesser
period of time.
9. RESTRICTION ON EXERCISE OF OPTIONS
Notwithstanding any other provision of the Plan, the aggregate fair market
value (determined as of the time the Option is granted) of the Stock with
respect to which ISOs may be exercisable for the first time by an Optionee
during any calendar year (under the Plan or any other incentive stock option
plan(s) of the Company or any Subsidiary) shall not exceed $100,000. Subject to
the foregoing, each Option may be exercised so long as it is valid and
outstanding from time to time, in part or as a whole, in such manner and subject
to such conditions as the Board of Directors, in its sole and absolute
discretion, may provide in the Option Agreement.
10. EXERCISE OF STOCK RIGHTS
Each Stock Right may be exercised from time to time in such amounts as is
provided in the Agreement by the delivery of written notice to the Company
setting forth the number of shares with respect to which the Stock Right is to
be exercised, accompanied by payment of the exercise price of such shares as
stated in the Agreement, which payment shall be made, subject to the alternative
provisions of this Section, in cash or by such cash equivalents, payable to the
order of the Company in an amount in United States dollars equal to the such
price, as the Board of Directors in its discretion shall consider acceptable.
Such notice shall be delivered in person to the Secretary of the Company or
shall be sent by registered mail, return receipt requested, to the Secretary of
the Company, in which case delivery shall be deemed made on the date such notice
is deposited in the mail.
Alternatively, payment of the exercise price may be made, in whole or in
part, in shares of Stock owned by the Holder; provided, however, that the Holder
may not make payment in shares of Stock that he acquired upon the earlier
exercise of any ISO, unless he has held the shares until at least two (2) years
after the date the ISO was granted and at least one (1) year after the date the
ISO was exercised. If payment is made in whole or in part in shares of Stock,
then the Holder shall deliver to the Company in payment of the option price of
the shares with respect of which such Stock Right is exercised (i) certificates
registered in the name of such Holder representing a number of shares of Stock
legally and beneficially owned by such Holder, free of
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 5
all liens, claims and encumbrances of every kind and having a fair market value
on the date of delivery of such notice equal to the exercise price of the shares
with respect to which such Stock Right is to be exercised, such certificates to
be accompanied by stock powers duly endorsed in blank by the record holder of
the shares represented by such certificates; and (ii) if the exercise price of
the shares with respect to which such Stock Right is to be exercised exceeds
such fair market value, cash or such cash equivalents payable to the order to
the Company, in an amount in United States dollars equal to the amount of such
excess, as the Board of Directors in its discretion shall consider acceptable.
Notwithstanding the foregoing provisions of this Section, the Board of
Directors, in its sole discretion, may refuse to accept shares of Stock in
payment of the exercise price of the shares with respect to which such Stock
Right is to be exercised and, in that event, any certificates representing
shares of Stock which were delivered to the Company with such written notice
shall be returned to such Holder together with notice by the Company to such
Holder of the refusal of the Board of Directors to accept such shares of Stock.
Alternatively, if the Agreement so specifies, payment of the exercise
price may be made in part by a promissory note executed by the Holder and
collaterally secured by the Stock obtained upon exercise of the Stock Right,
providing for repayment at such time or times as the Board of Directors shall
specify; provided, however, (a) that such promissory note shall provide for
repayment no later than five (5) years from the date of exercise and for
interest at a rate not less than the rate announced on the date of exercise by
The Wall Street Journal (Eastern Edition) as the "prime rate" or "base rate" of
corporate loans at large U.S. money center commercial banks, (b) that in any
event an amount not less than the par value of the shares of Stock with respect
to which the Holder is being exercised must be paid in cash, cash equivalents,
or shares of Stock in accordance with this Section and (c) the payment of such
exercise price by promissory note does not violate any applicable laws or
regulations, including, without limitation, margin lending rules. The decision
as to whether to permit partial payment by a promissory note for Stock to be
issued upon exercise of any Stock Right granted shall rest entirely in the
discretion of the Board of Directors.
As promptly as practicable after the receipt by the Company of (i) written
notice from the Holder setting forth the number of shares with respect to which
such Stock Right is to be exercised and (ii) payment of the exercise price of
such shares in the form required by the foregoing provisions of this Section,
the Company shall cause to be delivered to such Holder certificates representing
the number of shares with respect to which such Stock Right has been so
exercised.
11. NONTRANSFERABILITY OF OPTIONS
No Stock Right shall be transferable by the Holder, either voluntarily or
by operation of law, except by will or pursuant to the laws of descent and
distribution. During the life of an Holder, a Stock Right shall be exercisable
only by such Holder.
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 6
12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT WITH THE COMPANY
For purposes of this Section, employment by or involvement with (in the
case of an Holder who is not an employee) a Subsidiary shall be considered
employment by or involvement with the Company. NQOs, Restricted Awards and
Unrestricted Awards shall be exercisable following a Holder's termination of
employment or involvement with the Company to the extent provided below with
respect to ISOs unless otherwise set forth in the Agreement for such Stock
Rights. Except as may be otherwise expressly provided herein, ISO's shall be
exercisable after the Holder's termination of employment with the Company only
within the period of three (3) months after the date the Holder ceases to be in
the employ of the Company, and only to the extent to which the Holder was
entitled to exercise the ISO immediately prior to the termination of his or her
employment. If, before the date of expiration of the Stock Right, the Holder
shall be retired in good standing from the employ of the Company for reasons of
age under the then established rules of the Company, the Stock Right shall
terminate on the earlier of such date of expiration or three (3) months after
the date of such retirement. In the event of the death of the Holder before the
date of expiration of such Stock Right and while in the employ of the Company or
during the three (3) month period described in the preceding sentence, or in the
event of the retirement of the Holder for reasons of disability (within the
meaning of Section 22(e)(3) of the Code), such Stock Right shall terminate on
the earlier of such date of expiration or one (1) year following the date of
such death or retirement. After the death of the Holder, his or her executors,
administrators or any persons to whom his or her Stock Right may be transferred
by will or by the laws of descent and distribution shall have the right at any
time prior to such termination to exercise the Stock Right to the extent to
which the Holder was entitled to exercise the Stock Right on the date of his or
her death.
Authorized leave of absence or absence on military or government service
shall not constitute severance of the employment relationship between the
Company and the Holder for purposes of the Plan, provided that either (i) such
absence is for a period of no more than ninety (90) days or (ii) the Holder's
right to re-employment after such absence is guaranteed either by statute or by
contract.
13. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any shares of Stock
upon the exercise of any Stock Right if the issuance of such shares shall
constitute or result in a violation by the Holder or the Company of any
provisions of any law, statute or regulation of any governmental authority.
Specifically, in connection with the Securities Act of 1933, as amended (the
"Securities Act"), and any applicable state securities or "blue sky" law (a
"Blue Sky Law"), upon exercise of any Stock Right the Company shall not be
required to issue such shares unless the Board of Directors has received
evidence satisfactory to it to the effect that the Holder of such Stock Right
will not transfer such shares except pursuant to a registration statement in
effect under the Securities Act and Blue Sky Laws or unless an opinion of
counsel satisfactory to the Company has been received by the Company to the
effect that such registration and compliance is not required. Any determination
in this connection by the Board of Directors shall be final,
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 7
binding and conclusive. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of a Stock Right or the
issuance of shares of Stock pursuant thereto to comply with any law or
regulations of any governmental authority, including, without limitation, the
Securities Act or applicable Blue Sky laws.
Notwithstanding any other provision of the Plan to the contrary, the
Company may refuse to permit transfer of shares of Stock if in the opinion of
its legal counsel such transfer would violate federal or state securities laws
or subject the Company to liability thereunder. Any sale, assignment, transfer,
pledge or other disposition of shares of Stock received upon exercise of any
Stock Right (or any other shares or securities derived therefrom) which is not
in accordance with the provisions of this section shall be void and of no effect
and shall not be recognized by the Company.
The Company shall not be required to sell or issue any Stock upon the
exercise of any Stock Right if the Board of Directors is advised by counsel that
the issuance of such Stock would result in the termination of any then effective
election of the Company to be taxed as a Subchapter S corporation pursuant to
the Code.
Legend on Certificates. The Board of Directors may cause any certificate
representing shares of Stock acquired upon exercise of a Stock Right (and any
other shares or securities derived therefrom) to bear a legend to the effect
that the securities represented by such certificate have not been registered
under the Securities Act or any applicable state securities laws, and may not be
sold, assigned, transferred, pledged or otherwise disposed of except in
accordance with the Plan and applicable agreements binding the holder and the
Company or any of its stockholders.
14. NO RIGHTS AS STOCKHOLDER
No Holder shall have rights as a stockholder with respect to shares
covered by his or her Stock Rights until the date of issuance of a stock
certificate for such shares. Except as otherwise provided in Section 17 no
adjustment for dividends or other rights shall be made if the record date
therefor is prior to the date of issuance of such certificate.
15. EMPLOYMENT OBLIGATION
Nothing in this Plan nor the granting of any Stock Right under this Plan
shall (i) impose upon the Company or any Subsidiary any obligation to employ or
continue to employ any Holder, or to engage or retain the services of any
person, (ii) diminish or affect the right of the Company or any Subsidiary to
terminate the employment or services of any person or (iii) affect the ability
of the Company to increase or decrease the compensation of any person. The
existence of any Stock Right shall not be taken into account in determining any
damages relating to termination of employment for any reason.
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 8
16. FORFEITURE AS A RESULT OF TERMINATION FOR CAUSE
Notwithstanding anything to the contrary in the Plan, if the Board of
Directors determines, after full consideration of the facts presented on behalf
of both the Company and a Holder, that
a. the Holder has been engaged in fraud, embezzlement, theft, commission
of a felony or proven dishonesty in the course of his or her employment by or
involvement with the Company or a Subsidiary, which damaged the Company or a
Subsidiary, or has made unauthorized disclosure of trade secrets or other
proprietary information of the Company or a Subsidiary or of a third party who
has entrusted such information to the Company or a Subsidiary, or
b. the Holder's employment or involvement was otherwise terminated for
"cause," as defined in any employment agreement with the Holder, if applicable,
or if there is no such agreement, as determined by the Board of Directors, which
may determine that "cause" includes among other matters the failure or inability
of the Holder to carry out his or her assigned duties diligently and in a manner
satisfactory to the Company,
then the Holder's right to exercise a Stock Right shall terminate as of the date
of such act (in the case of (a)) or such termination (in the case of (b)) and
the Holder shall forfeit all unexercised Stock Rights. If a Holder whose
behavior the Company asserts falls within the provisions of (a) or (b) above has
exercised or attempts to exercise a Stock Right prior to a decision of the Board
of Directors, the Company shall not be required to recognize such exercise until
the Board of Directors has made its decision and, in the event of any exercise
shall have taken place, it shall be of no force and effect (and void ab initio)
if the Board of Directors makes an adverse determination; provided, however, if
the Board of Directors finds in favor of the Holder then the Holder will be
deemed to have exercised such Stock Rights retroactively as of the date he or
she originally gave written notice of his or her attempt to exercise or actual
exercise, as the case may be. The decision of the Board of Directors as to the
cause of an Holder's discharge and the damage done to the Company or a
Subsidiary shall be final, binding and conclusive. No decision of the Board of
Directors, however, shall affect in any manner the finality of the discharge of
such Holder by the Company or a Subsidiary.
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
The existence of outstanding Stock Rights shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business or any merger or consolidation of
the Company or any issue of bonds, debentures, preferred or preference stock,
whether or not convertible into the Stock or other securities, ranking prior to
the Stock or affecting the rights thereof, or warrants, rights or options to
acquire the same, or the dissolution or liquidation of the Company or any sale
or transfer of all or any part of its assets or business or any other corporate
act or proceeding, whether of a similar character or otherwise.
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 9
The number of shares of Stock in the Stock Pool (less the number of shares
theretofore delivered upon exercise of Stock Rights) and the number of shares of
Stock covered by any outstanding Stock Rights and the price per share payable
upon exercise thereof (provided that in no event shall the option price be less
than the par value of such shares) shall be proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of Stock
resulting from the subdivision, split, combination or consolidation of shares of
Stock or any other capital adjustment, the payment of a Stock dividend or any
other increase in such shares effected without receipt of consideration by the
Company or any other decrease therein effected without a distribution of cash or
property in connection therewith, provided, however, that no adjustment shall be
made that would constitute a modification as defined in Section 424(h)(3) of the
Code.
In the event the Company merges or consolidates with a wholly-owned
subsidiary for the purpose of reincorporating itself under the laws of another
jurisdiction, the Holders will be entitled to acquire shares of the common stock
of the reincorporated Company upon the same terms and conditions as were in
effect immediately prior to such reincorporation (unless such reincorporation
involves a change in the number of shares, in which case proportional
adjustments shall be made as provided above) and the Plan, unless otherwise
rescinded by the Board, will remain the Plan of the reincorporated Company.
Except as otherwise provided in the preceding paragraph, if the Company is
merged or consolidated with another corporation, whether or not the Company is
the surviving entity, or if the Company is liquidated or sells or otherwise
disposes of all or substantially all of its assets to another entity while
unexercised Stock Rights remain outstanding under the Plan, or in other
circumstances in which the Board in its sole and absolute discretion deems it
appropriate for the provisions of this paragraph to apply, (a) subject to the
provisions of clause (c) below, after the effective date of such merger,
consolidation, liquidation, sale or other event (in each case, an "Applicable
Event," as the case may be, each holder of an outstanding Stock Right shall be
entitled, upon exercise of such Stock Right, to receive in lieu of shares of
Stock, such stock or other securities or property as he or she would have
received had he exercised such Stock Right immediately prior to the Applicable
Event; (b) the Board may, in its sole and absolute discretion, waive, generally
or in more specific cases, any limitations imposed pursuant to Section 9 (even
if the effect of such waiver is to disqualify the Stock Right as an ISO) or
Section 19 so that some or all Stock Rights from and after a date prior to the
effective date of such Applicable Event specified by the Board, in its sole and
absolute discretion, shall be exercisable in full; and (c) all outstanding and
unexercised Stock Rights may, in its sole and absolute discretion, be canceled
by the Board as of the effective date of any such Applicable Event; provided,
however, notice of any such cancellation shall be given to each Holder not less
than thirty (30) days preceding the effective date of such Applicable Event; and
provided further, however, that the Board may in its sole and absolute
discretion, waive, generally or in one or more specific instances, any
limitations imposed pursuant to Section 9 (even if the effect of such waiver is
to disqualify the Stock Right as an ISO) or Section 19 with respect to any Stock
Right so that such Stock Right shall be exercisable in full or in part, as the
Board may, in its sole and absolute discretion, determine, during such thirty
(30) day period.
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 10
Except as expressly provided herein, the issue by the Company of shares of
Stock or other securities of any class or securities convertible into or
exchangeable or exercisable for shares of Stock or other securities of any class
for cash or property or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number, class or price of shares of Stock then subject to
outstanding Stock Rights.
18. AMENDMENT OR TERMINATION OF PLAN
The Board may, in its sole and absolute discretion, modify, revise or
terminate the Plan at any time and from time to time; provided, however, that
without the further approval of the holders of at least a majority of the
outstanding shares of Stock, the Board may not (a) materially increase the
benefits accruing to Holders under the Plan or make any "modifications" as that
term is defined under Section 424(h)(3) (or its successor) of the Code if such
increase in benefits or modifications would adversely affect (i) the
availability to the Plan of the protections of Section 16(b) of the Securities
Exchange Act, if applicable to the Company, or (ii) the qualification of the
Plan or any Options for "incentive stock option" treatment under Section 422 of
the Code; (b) change the aggregate number of shares of Stock which may be issued
under Stock Rights pursuant to the provisions of the Plan; (c) reduce the
exercise price at which ISOs may be granted to an amount less than the fair
market value per share, or 110% of fair market value as the case may be, at the
time the Option is granted; or (d) change the class of persons eligible to
receive ISOs. Notwithstanding the preceding sentence, the Board shall in all
events have the power and authority to make such changes in the Plan and in the
regulations and administrative provisions hereunder or in any outstanding Option
as, in the opinion of counsel for the Company, may be necessary or appropriate
from time to time to enable any Option granted pursuant to the Plan to qualify
as an ISO or such other stock option as may be defined under the Code, as
amended from time to time, so as to receive preferential federal income tax
treatment. The termination or any modification or amendment of the Plan shall
not, without the consent of a Holder, affect his or her rights under an Stock
Right previously granted to him or her. With the consent of the Holder affected,
the Board may amend outstanding Agreements in a manner not inconsistent with the
Plan.
19. CERTAIN RIGHTS OF THE COMPANY
Unless an Agreement specifically provides to the contrary, or a Holder has
entered into an employment, stockholder or other agreement with the Company
which provides for the repurchase of options or stock in the event such Holder's
employment or involvement with the Company terminates, the provisions of this
Section 19 shall apply to each Stock Right granted under the Plan and to the
shares of Stock acquired on exercise thereof.
a. Voluntary or Involuntary Transfers of Stock. Shares of Stock acquired
by an Holder pursuant to the exercise of a Stock Right or Stock Rights granted
under the Plan shall not be voluntarily transferred by the Holder without the
written consent of the Board which consent
<PAGE>
Applied Language Technologies, Inc.
Amended and Restated 1995 Stock Option Plan
Page 11
may be withheld or conditioned as the Board in its sole discretion determines.
If such Stock is subject to an involuntary transfer, including by reason of
death, a divorce settlement or judicial proceeding, the Company shall have the
right to repurchase all or any shares of such Stock (including any Stock
subsequently acquired by the Holder upon exercise of a Stock Right if the Stock
so acquired is subject to such involuntary transfer) at a price equal to the
Repurchase Price at the time of the involuntary transfer event. The Company may
exercise its repurchase right no later than 180 days following the later of (a)
the date of such involuntary transfer of such shares of Stock, (b) the date of
any such subsequent acquisition of Stock upon exercise of a Stock Right and (c)
the Board of Director's receipt of written notice of the occurrence of such
transfer event. Any such shares of Stock as to which the Company does not
exercise its repurchase rights within such period shall thereafter be free of
the restrictions of this Section 19.
Repurchase Price. As used herein the term "Repurchase Price" shall mean
the fair market value of a share of Stock as determined in good faith by a
majority of the disinterested members of the Board of Directors of the Company.
In making their determination of fair market value of a share of Stock the
Directors will not take into account that the Stock may be illiquid or may
constitute a minority interest in the Company.
b. Securities Laws; Transfers In Violation of Plan. Notwithstanding any
other provision of this Plan the Company may refuse to permit transfer of shares
of Stock if in the opinion of its legal counsel such transfer would violate
securities laws or subject the Company to liability thereunder. Any sale,
transfer, pledge or other disposition of shares of Stock which is not in
accordance with the provisions of this Section 19 shall be void and of no effect
and shall not be recognized by the Company.
20. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective and shall be deemed to have been adopted
on August 1, 1995 subject only to ratification by the holders of at least a
majority of the outstanding shares of Stock within twelve (12) months after such
date. Unless the Plan shall have terminated earlier, the Plan shall terminate on
the tenth (10th) anniversary of its effective date, and no Stock Right shall be
granted pursuant to the Plan after the day preceding the tenth (10th)
anniversary of its effective date.
<PAGE>
================================================================================
Exhibit 1 to Stock Option Plan
Form of Incentive Stock Option Certificate
Applied Language Technologies, Inc.
Incentive Stock Option Agreement
Option Certificate Number: ________________
Specific Terms of the Option
Subject to the terms and conditions hereinafter set forth and the terms
and conditions of the Applied Language Technologies, Inc. 1995 Stock Option Plan
(the "Plan"), Applied Language Technologies, Inc., a Delaware corporation (the
"Company") hereby grants the following option to purchase Common Stock, par
value $0.001 per share (the "Stock") of the Company:
1. Name of Person to Whom the Option is granted (the "Optionee"):
2. Date of Grant of Option: _______.
3. An Option for _______ shares of Common Stock.
4. Option Exercise Price (per share): $_____.
5. Term of Option: Subject to Section 9 below, this Option expires at 5:00 pm
Eastern Time on _____________.
6. Exercise Schedule: Provided that on the dates set forth below the Optionee is
still employed by the Company or, if the Optionee is not employed by the Company
the Optionee is still actively involved in the Company (as determined by the
Board of Directors) the Option will become exercisable as follows and as
provided in Section 9 below:
The Option will Cumulative
On This Become Exercisable as Number
Date To This Number of Shares Exercisable
------- ------------------------ -----------
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
Does Section 19 of the Plan apply to Stock covered by this Option?
Yes X No .
--- ---
================================================================================
<PAGE>
================================================================================
APPLIED LANGUAGE TECHNOLOGIES, INC.
By: X
Title: (Signature of Optionee)
Date:
Optionee's Address:
================================================================================
<PAGE>
Applied Language Technologies, Inc.
Form of Incentive Stock Option Certificate
Page 3
OTHER TERMS OF THE OPTION
WHEREAS, the Board of Directors (the "Board") has authorized the grant of
stock options upon certain terms and conditions set forth herein; and
WHEREAS, the Board has authorized the grant of this stock option pursuant
and subject to the terms of the Plan, a copy of which is available from the
Company and is hereby incorporated herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the Company and the Optionee agree as set forth
above and as follows:
7. Grant. Pursuant and subject to the Plan, the Company does hereby grant
to the Optionee a stock option (the "Option") to purchase from the Company the
number of shares of its Common Stock set forth in Section 3 upon the terms and
conditions set forth in the Plan and upon the additional terms and conditions
contained herein. This Option is intended to qualify for special federal income
tax treatment as an "incentive stock option" pursuant to Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code").
8. Option Price. This Option may be exercised at the option price per
share of Stock set forth in Section 4 hereof, subject to adjustment as provided
herein and in the Plan.
9. Term and Exercisability of Option. This Option shall expire on the date
determined pursuant to Section 5 hereof and shall be exercisable prior to that
date in accordance with and subject to the conditions set forth in the Plan and
those conditions, if any, set forth in Section 6 hereof. In addition in the
event that before this Option has been exercised in full, the Optionee ceases to
be an employee of the Company for any reason other than death or a termination
for dishonesty or other "cause" as provided in Section 16 of the Plan, the
Optionee may exercise this Option to the extent that he or she might have
exercised it on the date of termination of his or her employment, during the
period ending on the earlier of (i) the date on which the Option expires in
accordance with Section 5 of this Agreement or (ii) three months after the date
of termination of the Optionee's employment by the Company. In the event of the
death of the Optionee before this Option has been exercised in full, the
personal representative of the Optionee may exercise this Option to the extent
that the Optionee might have exercised it on the date of his or her death,
during the period ending on the earlier of (i) the date on which the Option
expires in accordance with Section 5 of this Agreement or (ii) the first
anniversary of the date of the Optionee's death.
10. Method of Exercise. To the extent that the right to purchase shares of
Stock has accrued hereunder, this Option may be exercised from time to time by
written notice to the Company substantially in the form attached hereto as
Exhibit A, stating the number of shares with respect to which this Option is
being exercised, and accompanied by payment in full of the option price for the
number of shares to be delivered, by means of payment acceptable to the
<PAGE>
Applied Language Technologies, Inc.
Form of Incentive Stock Option Certificate
Page 4
Company in accordance with Section 10 of the Plan. As soon as practicable after
its receipt of such notice, the Company shall, without transfer or issue tax to
the Optionee (or other person entitled to exercise this Option), deliver to the
Optionee (or other person entitled to exercise this Option), at the principal
executive offices of the Company or such other place as shall be mutually
acceptable, a certificate or certificates for such shares out of theretofore
authorized but unissued shares or reacquired shares of its Stock as the Company
may elect; provided, however, that the time of such delivery may be postponed by
the Company for such period as may be required for it with reasonable diligence
to comply with any applicable requirements of law. Payment of the option price
may be made in cash or cash equivalents, [or, in accordance with the terms and
conditions of Section 10 of the Plan, (a) in whole or in part in shares of
Common Stock of the Company, or (b) in part by promissory note of the Optionee
in the form attached hereto as Exhibit B; provided, however, that the Board
reserves the right upon receipt of any written notice of exercise from the
Optionee to require payment in cash with respect to the shares contemplated in
such notice](1). If the Optionee (or other person entitled to exercise this
Option) fails to pay for and accept delivery of all of the shares specified in
such notice upon tender of delivery thereof, his or her right to exercise this
Option with respect to such shares not paid for may be terminated by the
Company.
11. Non-assignability of Option Rights. This Option shall not be
assignable or transferable by the Optionee except by will or by the laws of
descent and distribution. During the life of the Optionee, this Option shall be
exercisable only by him or her.
12. Compliance with Securities Act. The Company shall not be obligated to
sell or issue any shares of Stock or other securities pursuant to the exercise
of this Option unless the shares of Stock or other securities with respect to
which this Option is being exercised are at that time effectively registered or
exempt from registration under the Securities Act of 1933, as amended, and
applicable state securities laws. In the event shares or other securities shall
be issued which shall not be so registered, the Optionee hereby represents,
warrants and agrees that he or she will receive such shares or other securities
for investment and not with a view to their resale or distribution, and will
execute an appropriate investment letter satisfactory to the Company and its
counsel.
13. Legends. The Optionee hereby acknowledges that the stock certificate
or certificates evidencing shares of Stock or other securities issued pursuant
to any exercise of this Option will bear a legend setting forth the restrictions
on their transferability described in Section 12 hereof and, if applicable to
this Option, in Section 19 of the Plan.
14. Rights as Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of Stock or other securities covered by
this Option until the date of issuance of a certificate to him or her for such
shares or other securities. No adjustment shall
- ----------
(1) Review.
<PAGE>
Applied Language Technologies, Inc.
Form of Incentive Stock Option Certificate
Page 5
be made for dividends or other rights for which the record date is prior to the
date such stock certificate is issued.
15. Notice to Company of Disqualifying Disposition. The Optionee hereby
agrees that he or she will promptly give notice to the Company in the event that
he or she sells, transfers, exchanges or otherwise disposes of any shares of
Stock or other securities obtained pursuant to any exercise of this Option
before the day after the later of (a) the second anniversary of the date of
grant set forth at the conclusion of this Agreement and (b) the first
anniversary of the date on which the shares of Stock or other securities were
transferred to him or her pursuant to his or her exercise of this Option.
16. Termination or Amendment of Plan. The Board may in its sole and
absolute discretion at any time terminate or from time to time modify and amend
the Plan, but no such termination or amendment will affect rights and
obligations under this Option.
17. Effect Upon Employment. Nothing in this Option or the Plan shall be
construed to impose any obligation upon the Company to employ the Optionee or to
retain the Optionee in its employ, or continue its involvement with, the
Optionee.
18. Time for Acceptance. Unless the Optionee shall evidence his acceptance
of this Option by execution of this Agreement within seven (7) days after its
delivery to him or her, the Option and this Agreement shall be null and void.
19. General Provisions.
a. Amendment; Waivers. This Agreement, including the Plan, contains the
full and complete understanding and agreement of the parties hereto as to the
subject matter hereof and may not be modified or amended, nor may any provision
hereof be waived, except by a further written agreement duly signed by each of
the parties. The waiver by either of the parties hereto of any provision hereof
in any instance shall not operate as a waiver of any other provision hereof or
in any other instance.
b. Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, representatives, successors and assigns.
c. Construction. This Agreement is to be construed in accordance with the
terms of the Plan. In case of any conflict between the Plan and this Agreement,
the Plan shall control. The titles of the sections of this Agreement and of the
Plan are included for convenience only and shall not be construed as modifying
or affecting their provisions. The masculine gender shall include both sexes;
the singular shall include the plural and the plural the singular unless the
context otherwise requires.
<PAGE>
Applied Language Technologies, Inc.
Form of Incentive Stock Option Certificate
Page 6
d. Notices. Any notice in connection with this Agreement shall be deemed
to have been properly delivered if it is in writing and is delivered in hand or
sent by registered mail to the party addressed as follows, unless another
address has been substituted by notice so given:
To the Optionee: To his or her address as listed on the books of the
Company.
To the Company: Applied Language Technologies, Inc.
695 Atlantic Avenue, 3rd Floor
Boston, Massachusetts 02111
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attention: John A. Piccione, Esq.
<PAGE>
Applied Language Technologies, Inc.
Form of Incentive Stock Option Certificate
Page 7
EXHIBIT A to Incentive Stock Option
[FORM FOR EXERCISE OF INCENTIVE STOCK OPTION]
Applied Language Technologies, Inc.
215 First Street
Cambridge, Massachusetts 02142
RE: Exercise of Incentive Stock Option under Applied Language Technologies,
Inc. 1995 Stock Option Plan
Gentlemen:
Please take notice that the undersigned hereby elects to exercise the
stock option granted to _____________ on _______, 199_ by and to the extent of
purchasing ________ shares of the Common Stock of Applied Language Technologies,
Inc. for the option price of $_________ per share, subject to the terms and
conditions of the Incentive Stock Option Agreement between ______________ and
Applied Language Technologies, Inc. dated as of __________ 199_.
The undersigned encloses herewith payment, in cash or in such other
property as is permitted under the Plan, of the purchase price for said shares.
If the undersigned is making payment of any part of the purchase price by
delivery of shares of Common Stock of Applied Language Technologies. Inc., he or
she hereby confirms that he or she has investigated and considered the possible
income tax consequences to him or her of making such payments in that form.
The undersigned hereby specifically confirms to Applied Language
Technologies, Inc. that he or she is acquiring said shares for investment and
not with a view to their sale or distribution, and that said shares shall be
held subject to all of the terms and conditions of said Incentive Stock Option
Agreement.
Very truly yours,
Date (Signed by ____________ or other party
duly exercising option)
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of September 2,1997, between Applied Language
Technologies, a Delaware corporation ("ALTech" or the "Company"), and Stuart
Patterson (hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS, the Board of Directors of ALTech believes that the services of Employee
would be of value to ALTech and is desirous of retaining his services; and
WHEREAS, Employee is willing to accept employment by ALTech upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained and of the mutual benefits herein provided, ALTech and Employee hereby
agree as follows:
1. TERM OF EMPLOYMENT
Subject to termination as provided in Section 5 hereof, the Company shall employ
Employee, and Employee accepts employment by the Company, on the terms and
conditions herein contained, for a period commencing as of September 2, 1997
(the "Employment Date") and ending on the third anniversary thereof (the period
from the date hereof through such third anniversary being hereinafter referred
to as the "Employment Period").
2. DUTIES
2.1. General Duties. During the Employment Period, Employee shall serve the
Company as President. In this capacity Employee shall be generally responsible
for marketing and sales, and shall, with the CEO, participate in the Company's
financial planning and decision making. Employee shall also participate with
senior management in setting strategic goals and operating plans for the
Company. The Company agrees that it shall not substantially and materially
lessen these general duties and responsibilities without the consent of
Employee.
2.2. Primary Activity. During the Employment Period, Employee shall devote
substantially all of his working time and energy to the interests and business
of the Company provided, however, that Employee shall be excused from performing
any services for the Company or its subsidiaries hereunder during periods of
temporary illness or incapacity and during reasonable vacations. During the
Employment Period, Employee shall, to the best of his skill and ability, use his
best efforts and endeavors to the extension and promotion of the business of the
Company and its subsidiaries, to the proper servicing of such business and to
the protection of the goodwill of such business, both as now enjoyed and
hereafter acquired.
3. COMPENSATION
As full compensation to Employee for performance of his services hereunder, the
Company agrees to pay Employee and Employee agrees to accept the following
salary and other benefits during the Employment Period:
(a) Salary: Until January 1,1998, the Company shall pay the Employee a
salary at an annual rate of $125,000. Thereafter the Company shall
pay the Employee a salary at an annual rate of $150,000 (the "Base
Salary").
<PAGE>
(b) Performance Bonus: Beginning January 1,1998, Employee shall be
eligible to earn an annual performance bonus (the "Performance
Bonus"), targeted at $50,000. The Performance Bonus shall be based
upon Employee and the Company attaining certain goals which shall be
decided upon by management at the beginning of each calendar year,
acceptable to Employee, and approved by ALTech's Board of Directors.
(c) Health Insurance: The Company shall, during the Employment Period,
pay 80% of the premium for the Employee and 50% for all dependents
of the health insurance plan carried by the Company.
(d) Incentive Stock Options: The Company shall grant Employee 475,000
qualified incentive stock options to purchase shares of the
Company's common stock, 1/5 of which shall vest upon the first
anniversary of the Employee's Employment date. The remainder shall
vest in 48 equal monthly increments. The stock options shall have an
exercise price of $.50. During the Employment Period, in the event
of an acquisition or merger in which ALTech is not the surviving
entity (a "Corporate Transaction"), Employee shall have the right to
exercise 50% of all unvested options as of the effective date of the
Corporate Transaction. The other terms and conditions of the options
shall be in accordance with the Company's 1995 Stock Option Plan, as
amended, and the related stock option grants and agreements.
(e) Other Benefits: Employee shall be entitled to one vacation day per
each month employed and three personal days each calendar year.
ALTech shall pay for term life insurance up to $1,000,000 in
coverage and long-term disability insurance, or, at Employee's
option, reimburse Employee's out-of-pocket costs for life and
disability insurance up to an amount approximately equivalent to
that expended by the Company to provide similar benefits to ALTech's
other senior management. Employee shall also fully participate in
any present or future insurance, pension, retirement, profit-sharing
or other compensation or incentive plans adopted by the Company, for
the general overall benefit of senior management of the Company, the
extent and manner of participation to be determined by the Board of
Directors of the Company.
4. CERTAIN COVENANTS
In order to induce the Company to enter into this Agreement Employee hereby has
executed an Employee Confidentiality and Intellectual Property Assignment and
Agreement, attached as Exhibit A, which is made a part hereof, and an Employee
Non-Competition Agreement, attached as Exhibit B, which is made a part hereof.
5. TERMINATION OF EMPLOYMENT
The Employment Period shall cease and terminate upon the earliest date on which
one of the events specified below occurs (the Date of Termination):
(a) The close of business on the last day of the Employment Period;
(b) The death of Employee;
(c) A material breach by Employee (if the Company elects to terminate
this Agreement) or the Company (if the Employee elects to terminate
this Agreement) of this Agreement;
<PAGE>
(d) Termination of Employee's employment by the Company for Good Cause,
which shall be defined as any of the following:
(i) Material misrepresentations knowingly made by Employee to the
Company or the Company's partners, affiliates or customers;
(ii) Chronic absenteeism not caused by disability;
(iii) Mental or physical disability rendering employee substantially
incapable of performing his duties for a continuous period greater
than six months;
(iv) Conviction for a criminal offense;
(v) Drug or alcohol abuse;
(vi) Conduct constituting sexual harrassment or bias based on race,
creed or gender;
(vii) Repeated and documented failure or refusal to perform the
duties and responsibilities of Employee's post.
(e) Employee's voluntary serverance of employment with the Company for
any reason.
6. SEVERANCE PAYMENT
6.1. Termination by the Board of Directors. The Board of Directors may at any
time, in its sole discretion, terminate Employee for any cause, including, but
not limited to failure to perform adequately his responsibilities as President.
In the event of any such termination, provided such termination is not due to
reason specificied in Section 5 hereof, the Company shall, within 15 days
following the effective date of such termination, pay Employee a severance
payment of $75,000 (the "Severance Payment").
6.2. Appointment of Third Party as Chief Executive Officer. In the event that
the Board of Directors appoints a third party other than Employee as Chief
Executive Officer to replace William O'Farrell the Employee may, within one year
of such appointment, voluntarily terminate his employment with the Company and
the Company shall pay Employee the Severance Payment within 15 days following
the effective date of termination; provided, however, that the Company shall be
under no obligation to make the Severance Payment if such voluntarily
termination occurs within less than one year of the Employment Date.
6.3. Termination as Chief Executive Officer. The Company shall also pay the
Severance Payment in the event that Employee is appointed Chief Executive
Officer to replace William O'Farrell, but is terminated by the Board of
Directors in less than six months following such appointment (other than
termination for a reason specified in Section 5 hereof. The Severance Payment
shall be paid within 15 days of such termination.
6.4. Expiration of this Agreement. The Company shall also pay the Severance
Payment in the event this Agreement expires at the close of the Employment
Period, as defined in Section One hereof, and there exists no other employment
agreement between Employee and the Company.
7. ASSIGNMENT
This Agreement shall not be assigned by the Employee. The Company shall have the
right to assign its rights hereunder pursuant to any merger, acquisition,
consolidation or other event in which the Company is not the surviving entity,
provided that the surviving entity is bound by the terms hereof.
<PAGE>
8. MISCELLANEOUS
8.1. Entire Agreement. This Agreement supersedes any prior agreements and
embodies the entire understanding between the parties hereto respecting the
subject matter hereof and no change, alteration or modification hereof may be
made except in writing signed by both parties hereto.
8.2. Headings. The headings in this Agreement are for convenience of reference
only and shall not be considered as part of this Agreement or to limit or
otherwise affect the meaning hereof.
8.3. Severability. If any provision of this Agreement shall be held invalid,
illegal or unenforceable in whole or in part, neither the validity of the
remaining part of such provision nor the validity of any other provision of this
Agreement shall in any way be affected thereby. Additionally, any and all
covenants not to compete shall be construed as separate and independent
covenants so that, in case any one or more of the covenants or any part of a
covenant shall for any reason be held to be invalid, illegal or unenforceable in
any respect in any jurisdiction, such invalidity, illegality or unenforceability
shall be deemed not to affect any other jurisdiction or any other covenant or
part of a covenant, but any and all such covenants not to compete shall be
reformed and construed in such jurisdiction as if such covenant or part of a
covenant held to be invalid or illegal or unenforceable had never been contained
herein and such covenant or part shall be reformed so that, it would be valid,
legal and enforceable in such jurisdiction to the maximum extent possible.
8.4. Governing Law. This Agreement shall in all respects be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts
without regard to principles of conflicts of laws.
8.5. Additional Assurances. Each party shall execute, acknowledge and deliver
such additional documents, writing or assurances as the other may periodically
require so as to give full force and effect to the provisions of this Agreement.
IN WITNESS WHEREOF, The parties have hereto executed this Agreement as of the
date first above written.
Employee Applied Language Technologies
/s/ Stuart R. Patterson /s/ W. J. O'Farrell
- -------------------------- ------------------------------
By: STUART R. PATTERSON By: W. J. O'FARRELL
- -------------------------- ------------------------------
Title: CEO
------------------------------
<PAGE>
APPLIED LANGUAGE TECHNOLOGIES, INC.
695 Atlantic Ave.
Boston, Massachusetts 02111
EMPLOYEE CONFIDENTIALITY AND INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT
Name: Stuart R. Patterson Employment Date: 9/2/97 (Type or Print)
------------------- ------
In consideration of my employment, continued employment and the
salary/wages paid to me by Applied Language Technologies, Inc. or any of its
parent, subsidiary or affiliate companies (all hereafter collectively called
"ALTech") and other good and valuable consideration, I understand and agree to
the following provisions for the protection of the property rights of ALTech and
for the protection of the rights of others who have entrusted ALTech with
confidential proprietary information:
1. Disclosure to ALTech. I agree to disclose fully and promptly to ALTech
all Proprietary Information which is developed, conceived, reduced to practice
or learned by me solely or jointly with others, at any time during the term of
my employment I agree to make and maintain written records of the aforesaid
Proprietary Information and to submit promptly the same, and to make
supplemental oral disclosure, to ALTech. The term "Proprietary Information"
means all intellectual and physical work product having actual or potential
value to ALTech including inventions, whether or not patentable and whether or
not tested or reduced to practice, discoveries, ideas, conceptions, processes,
developments, designs, business plans, trade secrets, mask works, and tangible
expressions, whether or not copyrightable, computer software, systems, programs
or procedures, which are developed, conceived, reduced to practice or learned by
employees or consultants of ALTech solely or jointly with others, which
Proprietary Information (a) relates to the current business activities of
ALTech, (b) results from, or is suggested by, work which is performed for ALTech
or which is funded in whole or in part by ALTech, or (c) results from any use of
premises, equipment or property (tangible or intangible) owned, leased, licensed
or contracted for by ALTech.
2. Ownership and Assignment of Rights to ALTech. I agree to assign and
hereby do assign to ALTech as its exclusive property the entire right, title and
interest in and to all Proprietary Information embraced by Paragraph 1 above,
including without limitation, all patents, patent applications and copyrights. I
further agree to execute all papers, and otherwise to provide all requested
assistance, at the expense of ALTech, during and subsequent to my employment, to
enable ALTech or its nominees to obtain such patents, copyrights and other legal
protection as it may desire in any country. All copyrightable work ("Work")
created by me in connection with my employment is intended to be a "work made
for hire" as that term is defined in Section 101 of the Copyright Act of 1976,
as amended (the "Copyright Act"), and shall be the property of ALTech and ALTech
shall be the sole author of such work within the meaning of the Copyright Act.
All such Works, as well as copies of such Works in whatever medium fixed or
embodied, shall be owned exclusively by ALTech and I expressly disclaim any
interest in them. If the copyright to any such Works shall not be the property
of ALTech by operation of law, I hereby assign and will assign to ALTech,
without further consideration, all right, title and interest in such Work and
will assist ALTech, at its expense, to secure, maintain and defend for the
benefit of ALTech all copyrights, registrations, extensions and renewals on any
and all such Work, including translations thereof in any and all countries, such
Work to be and remain the property of ALTech whether copyrighted or not.
<PAGE>
I hereby waive all moral rights and all inalienable rights that I may have
in any Work, including without limitation, any right to identification of
authorship, any right of approval on modifications or limitation on subsequent
modifications. To the extent that this waiver is deemed unenforceable under
applicable law, I acknowledge and agree that I will not exercise any such
inalienable right without the specific prior written consent of ALTech.
In the event that ALTech is unable, after reasonable effort, to secure my
signature on letters, patent, copyright or other documents relating to any
Proprietary Information, whether because of my physical or mental incapacity or
for any other reason whatsoever, I hereby irrevocably designate and appoint
ALTech and its duly authorized officers and agents as my agent and
attorney-in-fact, to act for and in my behalf and stead to execute and file any
such application(s) and to take all other lawfully permitted acts to further the
prosecution and issuance of letters patent, copyright or other documents with
the same legal force and effect as if executed by me.
The assignment provisions of this Agreement shall not apply to Proprietary
Information which is exempt from assignment under the applicable laws of the
state of employment. I agree, however, that ALTech shall have a non-exclusive,
fully paid license to use for all purposes any Proprietary Information within
the scope of the actual or anticipated business of ALTech but not assigned to
ALTech under this Agreement unless such a license is prohibited by statute or by
a court of last resort and final jurisdiction.
I understand and agree that ALTech shall determine, in its sole and
absolute discretion, whether an application for or registration of any patent,
copyright or other intellectual property right shall be filed on any development
assigned to ALTech under this Agreement, and whether such an application shall
be prosecuted or abandoned prior to issuance or registration.
3. Confidentiality. I agree to preserve in confidence, and not to use, to
publish, or to otherwise disclose, either during or subsequent to my employment,
without the written permission of ALTech, any Confidential Information. The term
"Confidential Information" means any Proprietary Information or any knowledge,
information or materials about the products, services, know-how, research and
development, customers, or business plans of ALTech or any confidential
information about financial matters, marketing, pricing, compensation or any
other confidential information of ALTech, its customers, or others from whom
ALTech has received information under obligations of confidence.
The conditions of Paragraph 3 hereof shall not apply to information which:
(a) was in the public domain or generally available to the public prior
to my receipt thereof, or which subsequently becomes part of the
public domain or generally available to the public except by my
wrongful act; or
(b) was in my possession prior to receipt from ALTech; or
(c) is received by me from a third party, unless I know or have reason
to know of an obligation of secrecy of the third party to ALTech
with respect to such information; or
(d) is required by law to be disclosed.
4. Confidential Information of Others. I agree not to disclose to ALTech,
or to use in my work at ALTech (a) any confidential information belonging to
others, or (b) any prior inventions made by me which ALTech is not entitled to
learn of or use.
5. Return of Materials. Upon the request of ALTech at any time and in the
event of the termination of my employment at ALTech, whether or not such
termination is voluntary, I will deliver promptly to my superior at ALTech all
documents which relate to the business activities of
<PAGE>
ALTech, and all materials and things which belong to ALTech or have been given
to me by ALTech or others during the course of my employment.
6. Prior Agreements. I represent that I have attached hereto a copy of any
agreement (such as a prior employment agreement) which affects my ability to
comply with the terms of this agreement. If there is no such agreement, I have
written my initials here: /s/ SRP
7. Enforcement. I agree that ALTech would not be fairly compensated by
money damages for any breach of this Agreement by me and therefore in the event
of a breach or threatened breach of this Agreement ALTech shall be entitled to
specific performance, an injunction and other equitable relief in addition to
money damages and other legal remedies. I hereby waive any requirement that
ALTech post a bond or surety in connection with its attempts to enforce this
Agreement.
8. Miscellaneous. This Agreement shall be binding on my executors,
administrators, heirs, legal representatives or assigns, and may not be modified
except in writing with the approval of an officer of ALTech. If any provision of
this Agreement is determined to be illegal or unenforceable, because of the
duration thereof or the area or scope covered, I hereby request any court making
such determination to reduce the duration, area and/or scope so that in its
reduced form such covenant shall be enforceable and I agree that in such event
all remaining provisions shall remain in full force and effect. This Agreement
shall be governed by and construed in accordance with the internal laws of The
Commonwealth of Massachusetts. This document sets forth the entire agreement
between ALTech and me with respect to the matters set forth herein.
WITNESS EMPLOYEE
/s/ W.J. Farrell /s/ Stuart R. Patterson
- ------------------------ ---------------------------
Date: 12/1/97 Date: 12/1/97
------------------ ---------------------
Social Security No. ###-##-####
-----------
<PAGE>
APPLIED LANGUAGE TECHNOLOGIES, INC.
695 Atlantic Ave.
Boston, Massachusetts 02111
EMPLOYEE NON-COMPETITION AGREEMENT
Name: Stuart R. Patterson Employment Date: 9/2/97
------------------- ------
(Type or Print)
In consideration of my employment, continued employment and the
salary/wages paid to me by Applied Language Technologies, Inc. or any of its
parent, subsidiary or affiliate companies (all hereafter collectively called
"ALTech") and other good and valuable consideration, I understand and agree to
the following provisions:
1. Non-Competition. To the extent I was personally involved in or
substantively knowledgeable of confidential ALTech developments, I will not
during my employment and for a period of twelve (12) months after termination of
my employment accept a consulting engagement or employment with a Competitor (as
hereinafter defined), client or customer of ALTech without written permission
from ALTech, which permission will not be unreasonably withheld in those
instances where such engagement or employment does not involve risk of use or
disclosure of Confidential Information. Competitor shall mean any company
engaged in using speech recognition technology to create systems for
telephone-based sales of goods or services. Notwithstanding the foregoing, I
agree that the companies listed in Appendix 1 are competitors of ALTech for whom
I shall not work as provided above. The listing of these specific companies is
not intended to be a complete listing of all current or future competitors of
ALTech.
2. Definition of Confidential Information. The term "Confidential
Information" means any Proprietary Information or any knowledge, information or
materials about the products, services, know-how, research and development,
customers, or business plans of ALTech or any confidential information about
financial matters, marketing, pricing, compensation or any other confidential
information of ALTech, its customers, or others from whom ALTech has received
information under obligations of confidence.
Confidential Information shall not include information which:
(a) was in the public domain or generally available to the public prior
to my receipt thereof, or which subsequently becomes part of the
public domain or generally available to the public except by my
wrongful act; or
(b) was in my possession prior to receipt from ALTech; or
(c) is received by me from a third party, unless I know or have reason
to know of an obligation of secrecy of the third party to ALTech
with respect to such information; or
(d) is required by law to be disclosed.
3. Definition of Proprietary Information. The term "Proprietary
Information" means all intellectual and physical work product having actual or
potential value to ALTech including inventions, whether or not patentable and
whether or not tested or reduced to practice, discoveries, ideas, conceptions,
processes, developments, designs, business plans, trade secrets, mask works and
tangible expressions, whether or not copyrightable, computer software, systems,
programs or procedures, which are developed, conceived, reduced to practice or
learned by employees or consultants of ALTech solely or jointly with others,
which Proprietary
<PAGE>
Information (a) relates to the actual or anticipated business activities of
ALTech, (b) results from, or is suggested by, work which is performed for ALTech
or which is funded in whole or in part by ALTech, or (c) results from any use of
premises, equipment or property (tangible or intangible) owned, leased, licensed
or contracted for by ALTech.
4. Enforcement I agree that ALTech would not be fairly compensated by
money damages for any breach of this Agreement by me and therefore in the event
of a breach or threatened breach of this Agreement ALTech shall be entitled to
specific performance, an injunction and other equitable relief in addition to
money damages and other legal remedies. I hereby waive any requirement that
ALTech post a bond or surety in connection with its attempts to enforce this
Agreement.
5. Miscellaneous. This Agreement shall be binding on my executors,
administrators, heirs, legal representatives or assigns, and may not be modified
except in writing with the approval of an officer of ALTech. If any provision of
this Agreement is determined to be illegal or unenforceable, because of the
duration thereof or the area or scope covered, I hereby request any court making
such determination to reduce the duration, area and/or scope so that in its
reduced form such covenant shall be enforceable and I agree that in such event
all remaining provisions shall remain in full force and effect. This Agreement
shall be governed by and construed in accordance with the internal laws of The
Commonwealth of Massachusetts. This document sets forth the entire agreement
between ALTech and me with respect to the matters set forth herein.
WITNESS EMPLOYEE
/s/ W.J. Farrell /s/ Stuart R. Patterson
- ------------------------ ---------------------------
Date: 12-1-97 Date: 12/1/97
------------------ ---------------------
Social Security No. ###-##-####
-----------
<PAGE>
Appendix I
Competitors of Applied Language Technologies, Inc.
The following entities are deemed to be competitors of Applied Language
Technologies, Inc. as of the date of this Agreement:
Voice Control Systems
BBN- Bolt Beraneck and Newman
Nuance
Pure Speech
Lucent
Northern Telecom
The listing of these specific companies is not intended to be a complete listing
of all current or future competitors of ALTech.
<PAGE>
EXHIBIT 10.9
SPEECHWORKS INTERNATIONAL, INC.
Incentive Stock Option Agreement
Terms and Conditions
WHEREAS, the Board of Directors (the "Board") has authorized the grant of
-----
stock options upon certain terms and conditions set forth herein; and
WHEREAS, the Board has authorized the grant of this stock option pursuant
and subject to the terms of the Plan, a copy of which is available from the
Company and is hereby incorporated herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the Company and the Optionee agree as set
forth above and as follows:
1. Grant. Pursuant and subject to the Plan, the Company does hereby grant
-----
to the Optionee a stock option (the "Option") to purchase from the Company the
------
number of shares of its Common Stock set forth in Section 3 upon the terms and
conditions set forth in the Plan and upon the additional terms and conditions
contained herein. This Option is intended to qualify for special federal income
tax treatment as an "incentive stock option" pursuant to Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code").
----
2. Option Price. This Option may be exercised at the option price per share
------------
of Stock set forth in Section 4 hereof, subject to adjustment as provided herein
and in the Plan.
3. Term and Exercisability of Option. This Option shall expire on the date
---------------------------------
determined pursuant to Section 5 hereof and shall be exercisable prior to that
date in accordance with and subject to the conditions set forth in the Plan and
those conditions, if any, set forth in Section 6 hereof. In addition, in the
event that before this Option has been exercised in full the Optionee ceases to
be an employee of the Company for any reason other than death or a termination
for dishonesty or other "cause" as provided in Section 16 of the Plan, the
Optionee may exercise this Option to the extent that he might have exercised it
on the date of termination of his employment, during the period ending on the
earlier of (i) the date on which the Option expires in accordance with Section
5 of this Agreement or (ii) 30 days after the date of termination of the
Optionee's employment by the Company. In the event of the death of the Optionee
before this Option has been exercised in full, the personal representative of
the Optionee may exercise this Option to the extent that the Optionee might have
exercised it on the date of his death, during the period ending on the earlier
of (i) the date on which the Option expires in accordance with Section 5 of this
Agreement or (ii) the first anniversary of the date of the Optionee's death.
4. Method of Exercise. To the extent that the right to purchase shares of
------------------
Stock has accrued hereunder, this Option may be exercised from time to time by
written notice to the Company substantially in the form attached hereto as
Exhibit A, stating the number of shares with respect to which this Option is
being exercised, and accompanied by payment in full of the option price for the
number of shares to be delivered, by means of payment acceptable to the Company
in accordance with Section 10 of the Plan. As soon as practicable after its
receipt of such notice, the Company shall, without transfer or issue tax to the
Optionee (or other person entitled to exercise this Option), deliver to the
Optionee (or other person entitled to exercise this Option), at the principal
executive offices of the Company or such other place as shall be mutually
acceptable, a certificate or certificates for such shares out of theretofore
authorized but unissued shares or reacquired shares of its Stock as the Company
may elect; provided, however, that the time of such delivery may be postponed
by the Company for such period as may be required for it with reasonable
diligence to comply with any applicable requirements of law. Payment of the
option price may be made in cash or cash equivalents, or, in accordance with the
terms and conditions Section 10 of the Plan, in whole or in part in shares of
Common Stock of the Company; provided however, that the
<PAGE>
SpeechWorks International, Inc.
Incentive Stock Option Agreement
Page 2
Board reserves the right upon receipt of any written notice of exercise from the
Optionee to require payment in cash with respect to the shares contemplated in
such notice. If the Optionee (or other person entitled to exercise this Option)
fails to pay for and accept delivery of all of the shares specified in such
notice upon tender of delivery thereof, his right to exercise this Option with
respect to such shares not paid for may be terminated by the Company.
5. Non-assignability of Option Rights. This Option shall not be
----------------------------------
assignable or transferable by the Optionee except by will or by the laws of
descent and distribution. During the life of the Optionee, this Option shall be
exercisable only by him.
6. Compliance with Securities Act. The Company shall not be obligated to
------------------------------
sell or issue any shares of Stock or other securities pursuant to the exercise
of this Option unless the shares of Stock or other securities with respect to
which this Option is being exercised are at that time effectively registered or
exempt from registration under the Securities Act of 1933, as amended, and
applicable state securities laws. In the event shares or other securities shall
be issued which shall not be so registered, the Optionee hereby represents,
warrants and agrees that he will receive such shares or other securities for
investment and not with a view to their resale or distribution, and will execute
an appropriate investment letter satisfactory to the Company and its counsel.
7. Legends. The Optionee hereby acknowledges that the stock certificate
-------
or certificates evidencing shares of Stock or other securities issued pursuant
to any exercise of this Option will bear a legend setting forth the restrictions
on their transferability described in Section 12 hereof and, if applicable to
this Option, in Section 19 of the Plan.
8. Rights as Stockholder. The Optionee shall have no rights as a
---------------------
stockholder with respect to any shares of Stock or other securities covered by
this Option until the date of issuance of a certificate to him for such shares
or other securities. No adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
9. Notice to Company of Disqualifying Disposition. The Optionee hereby
----------------------------------------------
agrees that he will promptly give notice to the Company in the event that he
sells, transfers, exchanges or otherwise disposes of any shares of Stock or
other securities obtained pursuant to any exercise of this Option before the day
after the later of (a) the second anniversary of the date of grant set forth at
the conclusion of this Agreement and (b) the first anniversary of the date on
which the shares of Stock or other securities were transferred to him pursuant
to his exercise of this Option.
10. Termination or Amendment of Plan. The Board may in its sole and
--------------------------------
absolute discretion at any time terminate or from time to time modify and amend
the Plan, but no such termination or amendment will affect rights and
obligations under this Option.
11. Effect Upon Employment. Nothing in this Option or the Plan shall be
----------------------
construed to impose any obligation upon the Company to employ the Optionee or to
retain the Optionee in its employ, or continue its involvement with, the
Optionee.
12. Time for Acceptance. Unless the Optionee shall evidence his
-------------------
acceptance of this Option by execution of this Agreement within (7) days after
its delivery to him, the Option and this Agreement shall be null and void.
13. Stockholders Agreement. Optionee hereby agrees, upon the request of
-----------------------
the Company, to become a party to that certain Second Amended and Restated
Stockholders Agreement, dated May 8, 1998, among the Company and certain
stockholders of the Company party thereto, as the same may be amended,
supplemented, or modified, from time to time, or any similar agreement which is
entered into by the Company and its stockholders, by executing
<PAGE>
SpeechWorks International, Inc.
Incentive Stock Option Agreement
Page 3
an instrument of adherence substantially in the form of Exhibit B
---------
hereto or such other documents as the Company may reasonably
request.
14. Accelerated Vesting
-------------------
Notwithstanding the foregoing vesting schedule, immediately prior to the
consummation of an Applicable Event (as defined in Section 17 of the Plan)
the Option shall become exercisable with respect to 50% of the unvested
shares subject to the Option at such time, if any; and if the Board of
Directors in its sole and absolute discretion deems it appropriate for the
provisions of clause (c) of the fourth paragraph of Section 17 to apply in
connection with such Applicable Event, this paragraph shall be deemed to
apply to the Option as of the effective date of such Applicable Event in
accordance with clause (c) of the fourth paragraph of Section 17 and the
Optionee shall be deemed vested as set forth in this paragraph.
15. General Provisions.
------------------
a. Amendment Waivers. This Agreement, including the Plan, contains the
-----------------
full and complete understanding and agreement of the parties hereto as to the
subject matter hereof and may not be modified or amended, nor may any provision
hereof be waived, except by a further written agreement duly signed by each of
the parties. The waiver by either of the parties hereto of any provision hereof
in any instance shall not operate as a waiver of any other provision hereof or
in any other instance.
b. Binding Effect. This Agreement shall inure to the benefit of and be
--------------
binding upon the parties hereto and their respective heirs, executors,
administrators, representatives, successors and assigns.
c. Construction. This Agreement is to be construed in accordance with
------------
the terms of the Plan. In case of any conflict between the Plan and this
Agreement, the Plan shall control. The titles of the sections of this Agreement
and of the Plan are included for the convenience only and shall not be construed
as modifying or affecting their provisions. The masculine gender shall include
both sexes; the singular shall include the plural and the plural the singular
unless the context otherwise requires.
d. Notices. Any notice in connection with this Agreement shall be
-------
deemed to have been properly delivered if it is in writing and is delivered
in hand or sent by registered mail to the party addressed as follows, unless
another address has been substituted by notice so given:
To the Optionee: To his address as listed on the books of the Company.
To the Company: SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, MA 02111
Copy to:
Mintz Levin Cohn Ferris Glovsky and Popeo PC
One Financial Center
Boston, MA 02111
Attention: John R. Pomerance, Esq.
<PAGE>
SpeechWorks International, Inc.
Incentive Stock Option Agreement
Page 4
EXHIBIT A
to
Incentive Stock Option
[FORM FOR EXERCISE OF INCENTIVE STOCK OPTION]
Dated: ,
----------------- -----
SpeechWorks International, Inc.
695 Atlantic Avenue
Boston, MA 02111
Re: Exercise of Incentive Stock Options
Ladies and Gentlemen:
Please take notice that the undersigned hereby elects to exercise the stock
option granted to on by and to the extent
-------------------- -----------------
of purchasing shares of the Common Stock of SpeechWorks
------------
International, Inc. for the option price of $ per share, subject to
-----------
the terms and conditions of the Incentive Stock Option Agreement between
and SpeechWorks International, Inc. dated as of .
- -------------- ----------------
The undersigned encloses herewith payment, in cash or in such other property as
is permitted under the Plan, of the purchase price for said shares. If the
undersigned is making payment of any part of the purchase price by delivery of
shares of Common Stock of Applied Language Technologies, Inc., he hereby
confirms that he has investigated and considered the possible income tax
consequences to him of making such payments in that form.
The undersigned hereby specifically confirms to SpeechWorks International, Inc.
that he is acquiring said shares for investment and not with a view to their
sale or distribution, and that said shares shall be held subject to all of the
terms and conditions of said Incentive Stock Option Agreement.
Very truly yours,
- -----------------------------
<PAGE>
SpeechWorks International, Inc.
Incentive Stock Option Agreement
Page 5
EXHIBIT B
---------
INSTRUMENT OF ADHERENCE
("Stockholder")
The undersigned, a holder of shares of Common Stock, $.001 par value, of
SpeechWorks International, Inc., a Delaware corporation (the "Company"), hereby
joins in and agrees to be bound by all the terms and provisions of that certain
Second Amended and Restated Stockholders Agreement dated as of the 8th day of
May, 1998, as amended, and shall for all purposes be deemed to be a Stockholder
thereunder, subject to the obligations of a Stockholder set forth therein, and
hereby agrees that all shares of Common Stock now or hereafter held by the
undersigned shall be subject to the restrictions on transfer, rights of purchase
and co-sale and other provision of said Agreement.
EXECUTED on this ____ day of _____________, ___.
________________________________________
<PAGE>
EXHIBIT 21.1
Subsidiaries of Registrant
--------------------------
SpeechWorks International Holdings, Inc. Delaware
SpeechWorks Technology, Inc. Quebec
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 4, 2000, except for Note 13 for which the date is
April 14, 2000, relating to the consolidated financial statements of SpeechWorks
International, Inc., which appears in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 19, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,474
<SECURITIES> 0
<RECEIVABLES> 4,157
<ALLOWANCES> 60
<INVENTORY> 0
<CURRENT-ASSETS> 16,607
<PP&E> 4,916
<DEPRECIATION> 1,508
<TOTAL-ASSETS> 20,566
<CURRENT-LIABILITIES> 4,474
<BONDS> 0
43,507
0
<COMMON> 6
<OTHER-SE> (28,254)
<TOTAL-LIABILITY-AND-EQUITY> 20,566
<SALES> 14,011
<TOTAL-REVENUES> 14,011
<CGS> 8,131
<TOTAL-COSTS> 21,619
<OTHER-EXPENSES> 160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> (15,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,463)
<EPS-BASIC> (3.28)
<EPS-DILUTED> (3.28)
</TABLE>
