<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNISPHERE NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3576 522142617
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
ONE EXECUTIVE DRIVE
CHELMSFORD, MASSACHUSETTS 01824
(978) 848-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. DOLCE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONE EXECUTIVE DRIVE
CHELMSFORD, MASSACHUSETTS 01824
(978) 848-0300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
MARK G. BORDEN, ESQ. ADAM L. SALASSI, ESQ.
PHILIP P. ROSSETTI, ESQ. MARK D. SPOTO, ESQ.
HALE AND DORR LLP COOLEY GODWARD LLP
60 STATE STREET ONE FREEDOM SQUARE
BOSTON, MASSACHUSETTS 02109 11951 FREEDOM DRIVE
TELEPHONE: (617) 526-6000 RESTON, VIRGINIA 20190
TELECOPY: (617) 526-5000 TELEPHONE: (703) 456-8000
TELECOPY: (703) 456-8100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Merger Agreement are met or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF
SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED(1) AMOUNT OF REGISTRATION FEE(2)
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<S> <C> <C>
Common stock, $.01 par value per share...................... 7,460,000 shares $3,169
-----------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Based upon the maximum number of shares of common stock of the Registrant
issuable in the merger described herein.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended, the
registration fee is based on the book value of $12,001,869 of BroadSoft,
Inc. as of September 30, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
BROADSOFT, INC.
220 PERRY PARKWAY
GAITHERSBURG, MD 20877
, 2001
Dear Stockholders:
You are cordially invited to attend the special meeting of stockholders of
BroadSoft, Inc., to be held on , , 2001, at a.m. at
.
BroadSoft, Inc., Unisphere Networks, Inc. and a wholly owned subsidiary of
Unisphere entered into a merger agreement dated as of October 20, 2000. Under
that agreement, the wholly owned subsidiary will be merged with and into
BroadSoft, and BroadSoft will survive as a wholly owned subsidiary of Unisphere.
Your board of directors is mailing this proxy statement/prospectus to you to
solicit your proxy to vote for approval and adoption of the merger agreement and
the merger.
If we complete the merger, shares of BroadSoft common stock that are
outstanding at the completion of the merger will be converted into shares of
Unisphere common stock, unless you exercise appraisal rights under Delaware law.
We will determine the portion of a share of Unisphere common stock into which
each share of BroadSoft common stock will be converted immediately prior to
completion of the merger according to formulas specified in the merger agreement
and described in the attached materials. In addition, you may become entitled to
additional shares of Unisphere common stock depending upon the trading price of
Unisphere common stock in the public market during a specified period after the
closing. If the merger agreement is approved and all other conditions described
in the merger agreement have been met or, where permissible, waived, the merger
is expected to occur as soon as possible after the special meeting. There is no
public trading market for BroadSoft common stock. Unisphere common stock is
quoted on the Nasdaq Stock Market under the symbol "UNSP."
After careful consideration, your board of directors has unanimously
determined that the merger is fair to and in the best interests of BroadSoft and
its stockholders and unanimously recommends that BroadSoft stockholders vote to
approve and adopt the merger agreement and the merger.
The accompanying proxy statement/prospectus describes the terms and
conditions of the merger agreement and includes, as Annex A, a complete text of
the merger agreement. I urge you to read the enclosed materials carefully for a
description of the merger. Whether or not you plan to attend the special meeting
in person and regardless of the number of shares you own, please complete, sign,
date and return the enclosed proxy card as promptly as possible. We look forward
to seeing you at the special meeting.
Sincerely,
/s/ Michael Tessler
Michael Tessler
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES OF UNISPHERE COMMON STOCK TO
BE ISSUED UNDER THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated , 2001 and is first
being mailed to BroadSoft stockholders on or about , 2001.
<PAGE> 3
[UNISPHERE LOGO] [BROADSOFT LOGO]
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is the prospectus of Unisphere Networks,
Inc. with respect to the issuance by Unisphere of shares of Unisphere common
stock in connection with the agreement and plan of merger among Unisphere
Networks, Inc., Pitcher Acquisition Corp., a wholly owned subsidiary of
Unisphere, and BroadSoft, Inc. The merger agreement provides for the merger of
Pitcher Acquisition Corp. with and into BroadSoft. Following the merger,
BroadSoft will be a wholly owned subsidiary of Unisphere.
This proxy statement/prospectus is the proxy statement of BroadSoft and is
being furnished to BroadSoft stockholders in connection with the special meeting
of BroadSoft stockholders to be held on , 2001 at .
------------------------
UNTIL , 2001 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
------------------------
<PAGE> 4
SOURCES OF ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Unisphere that is not included or delivered with
this document. This information is available without charge to BroadSoft
stockholders upon written or oral request. Contact Unisphere at One Executive
Drive, Chelmsford, Massachusetts 01824, Attention: Marc Jaffan, Director of
Investor Relations. Unisphere's telephone number is (978) 848-0300. To obtain
timely delivery of requested documents prior to the special meeting of BroadSoft
stockholders, you must request them no later than , 2001, which is
five business days prior to the date of the special meeting.
ALSO SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 122 OF THIS PROXY
STATEMENT/PROSPECTUS.
<PAGE> 5
BROADSOFT, INC.
220 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2001
Dear Stockholders:
A special meeting of stockholders of BroadSoft, Inc. will be held on
, , 2001, at
, commencing at a.m., for the following purposes:
- To consider and vote on a proposal to approve and adopt the Agreement and
Plan of Merger dated as of October 20, 2000 among BroadSoft, Inc.,
Unisphere Networks, Inc. and Pitcher Acquisition Corp., a wholly owned
subsidiary of Unisphere, a copy of which is attached as Annex A to the
proxy statement/prospectus accompanying this notice.
- To consider and transact such other business as may properly be brought
before the special meeting or any adjournment thereof.
After careful consideration, your board of directors has unanimously
determined that the merger is fair to and in the best interests of BroadSoft and
its stockholders. The BroadSoft board has unanimously approved and adopted the
merger agreement and unanimously recommends that you vote to approve and adopt
the merger agreement and the merger. We urge you to read the accompanying proxy
statement/prospectus carefully for a description of the merger agreement.
Stockholders of BroadSoft beneficially holding, as of the record date,
shares of BroadSoft common stock and preferred stock with voting power
sufficient to approve the merger agreement and the merger have agreed to vote
all of their respective shares in favor of the approval and adoption of the
merger agreement and the merger. Consequently, approval and adoption of the
merger agreement and the merger by BroadSoft stockholders is assured.
Pursuant to the merger agreement, holders of BroadSoft common stock and
preferred stock are entitled to appraisal rights in connection with the merger,
in accordance with Delaware law.
The record date for determining the stockholders who will receive notice of
and be entitled to vote at the special meeting is , 2001.
By Order of the Board of Directors,
/s/ JEFFREY JORDAN
Jeffrey Jordan
Secretary
Gaithersburg, Maryland
, 2001
Whether or not you plan to attend the special meeting, please complete,
sign, date and return the enclosed proxy card promptly in the enclosed
postage-paid envelope. Stockholders who attend the special meeting may revoke
their proxies and vote in person if they desire. PLEASE DO NOT SEND YOUR STOCK
CERTIFICATES WITH YOUR PROXY CARD AT THIS TIME. Do not send in your stock
certificates until you receive a letter of transmittal.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Questions and Answers About the Merger...................... i
Summary..................................................... 1
The Merger................................................ 1
Risk Factors................................................ 8
Risks Related to the Merger............................... 8
Risks Related to BroadSoft................................ 10
Risks Relating to Unisphere............................... 10
Special Note Regarding Forward-Looking Statements........... 21
Selected Historical and Unaudited Pro Forma Condensed
Combined Financial Information............................ 22
Market Price Information.................................... 31
Market Price Information.................................. 31
Recent Closing Prices..................................... 31
Dividends................................................. 31
The Special Meeting......................................... 32
Date, Time and Place...................................... 32
Matters to be Considered at the Special Meeting........... 32
Record Date............................................... 32
Voting and Revocation of Proxies.......................... 32
Quorum; Abstentions....................................... 33
Vote Required............................................. 33
Appraisal Rights.......................................... 33
Solicitation of Proxies; Expenses......................... 34
Board Recommendation...................................... 34
The Merger.................................................. 35
Background of the Merger.................................. 35
Joint Reasons for the Merger.............................. 37
Unisphere's Reasons for the Merger........................ 38
BroadSoft's Reasons for the Merger; Recommendation of the
BroadSoft Board of Directors........................... 38
Opinion of Financial Advisor to BroadSoft................. 40
Engagement of W.R. Hambrecht.............................. 43
Treatment of BroadSoft Common Stock and BroadSoft Options
in the Merger.......................................... 44
Accounting Treatment of the Merger........................ 44
Material United States Federal Income Tax Consequences.... 44
Limitations on Tax Opinion................................ 47
Nasdaq National Market Quotation.......................... 47
Resales of Unisphere Common Stock Issued in Connection
with the Merger; Affiliate Agreements.................. 47
Interests of BroadSoft's Executive Officers and Directors
in the Merger.......................................... 48
Rights of BroadSoft Stockholders to Appraisal............. 49
Appraisal Rights Procedures............................... 50
The Merger Agreement........................................ 53
General................................................... 53
The Conversion Ratio; Treatment of BroadSoft Common Stock
and BroadSoft Preferred Stock.......................... 53
Additional Shares of Unisphere Common Stock and Options
May be Issued After the Closing........................ 54
Treatment of BroadSoft Options............................ 55
Escrow Shares............................................. 55
No Fractional Shares...................................... 55
</TABLE>
<PAGE> 7
<TABLE>
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PAGE
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<S> <C>
Appraisal Rights.......................................... 56
Effective Time of the Merger.............................. 56
The Exchange Agent........................................ 56
Exchange of Certificates.................................. 56
Representations and Warranties............................ 57
Covenants................................................. 58
Indemnification of Unisphere and Certain BroadSoft
Stockholders........................................... 60
Conditions to Completion of the Merger.................... 62
Termination............................................... 63
Expenses.................................................. 64
Waiver and Amendment...................................... 64
Other Agreements............................................ 65
Escrow Agreement.......................................... 65
Affiliate Agreement....................................... 65
Loan and Security Agreement............................... 66
Noncompetition and Nonsolicitation Agreement.............. 67
Lock-up Agreements........................................ 67
Voting Agreements......................................... 68
Approval of the Right of Disqualified Individuals to
Receive Any Amounts Payable to the Individual on an
Acceleration of Vesting................................ 68
Description of Unisphere's Business......................... 70
Overview.................................................. 70
Industry Background....................................... 70
Our Solution.............................................. 72
Our Strategy.............................................. 74
Products.................................................. 75
Unisphere Management Center............................... 79
Customers................................................. 79
Sales and Marketing....................................... 80
Customer Service and Support.............................. 80
Research and Development.................................. 81
Manufacturing............................................. 81
Competition............................................... 81
Intellectual Property..................................... 82
Government Regulation..................................... 82
Employees................................................. 83
Facilities................................................ 83
Legal Proceedings......................................... 83
Unisphere's Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 84
Unisphere's Management...................................... 94
Executive Officers, Directors and Key Employees........... 94
Board Committees.......................................... 97
Director Compensation..................................... 97
Compensation Committee Interlocks and Insider
Participation.......................................... 97
Employment Agreements..................................... 97
Executive Compensation.................................... 99
</TABLE>
<PAGE> 8
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PAGE
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Option Grants In Last Fiscal Year......................... 100
Fiscal Year End Option Values............................. 101
Stock Plans............................................... 101
Unisphere's Relationships with Siemens and Related Party
Transactions.............................................. 103
Relationship with Siemens................................. 103
Software Development Services Agreements.................. 103
OEM Software Distribution Agreement for DirX-Metadirectory
Software............................................... 103
Vendor Distribution Agreement............................. 104
Tax Sharing Agreement..................................... 104
OEM Agreement for the Purchase of SMX Products............ 104
Software License Agreement for RTP Software............... 104
Engineering Services Agreement............................ 104
License-Back of Voice Over Internet Protocol.............. 105
Transactions with Directors and Officers.................. 105
Description of BroadSoft's Business......................... 106
BroadSoft's Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 107
BroadSoft's Related Party Transactions...................... 110
Stock Restriction Agreements.............................. 110
Security Ownership of Certain Beneficial Holders and
Management of BroadSoft................................... 111
Description of Unisphere Capital Stock...................... 114
Common Stock.............................................. 114
Preferred Stock........................................... 114
Section 203 of Delaware General Corporation Law........... 114
Limitation of Liability and Indemnification............... 115
Comparison of Rights of Common Stockholders of Unisphere and
Stockholders of BroadSoft................................. 116
Capitalization............................................ 116
Size and Classification of the Board of Directors......... 116
Removal of Directors...................................... 116
Voting.................................................... 117
Liquidation Preference.................................... 117
Redemption................................................ 118
Conversion................................................ 118
Dividends................................................. 118
Amendment of Certificate of Incorporation................. 119
Amendment of By-laws...................................... 119
Stockholder Action by Written Consent..................... 119
Notice of Stockholder Meetings............................ 119
Ability to Call Special Meeting........................... 120
Transactions with Interested Parties...................... 120
State Anti-Takeover Statutes.............................. 120
Limitation of Liability of Directors...................... 120
Indemnification of Directors and Officers................. 121
Legal Matters............................................... 121
Experts..................................................... 121
Where You Can Find More Information......................... 122
Unisphere Networks, Inc. Index to Consolidated Financial
Statements................................................ F-1
BroadSoft, Inc. Index to Financial Statements............... S-1
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ANNEXES
A. Agreement and Plan of Merger............................ A-1
Exhibit A Escrow Agreement
Exhibit B Stockholder Voting Agreement
Exhibit C Affiliate Agreement
Exhibit D Loan and Security Agreement
Exhibit E Opinion of Counsel to BroadSoft
Exhibit F Noncompetition and Nonsolication
Agreement
Exhibit G-1 Form of Lock-up Agreement (employee)
Exhibit G-2 Form of Lock-up Agreement (non-employee)
Exhibit H Opinion of Counsel to Unisphere and the
Transitory Subsidiary
B. Opinion of W.R. Hambrecht + Co. ........................ B-1
C. Section 262 of the Delaware General Corporation Law..... C-1
</TABLE>
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE COMPANIES PROPOSING TO MERGE?
A: Unisphere and BroadSoft are proposing to merge because we believe the
resulting combination will further compliment Unisphere's strategy to offer
service providers an enhanced portfolio of integrated internet protocol
public networking solutions to enable next-generation voice and data
services, and will create a stronger, more competitive company capable of
achieving greater financial strength, operational efficiencies, earning
power and growth potential than either company would have on its own.
Q: HOW WILL THESE TWO COMPANIES MERGE?
A: Unisphere and BroadSoft will combine under a merger agreement providing
that Pitcher Acquisition Corp., a wholly owned subsidiary of Unisphere that
we call the merger subsidiary, will merge with and into BroadSoft. As a
result of the merger, BroadSoft will become a wholly owned subsidiary of
Unisphere.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, BroadSoft common stock will be converted into
Unisphere common stock. We will determine the portion of a share of
Unisphere common stock into which your BroadSoft common stock will initially
be converted immediately prior to the effective time of the merger. Based on
the number of shares of BroadSoft common stock and stock options and
warrants outstanding at , 2001, and assuming no new BroadSoft
option grants (other than the permitted grant of up to 750,000 options to
purchase BroadSoft common stock) or forfeitures and no new issuances of
BroadSoft stock other than upon option and warrant exercises, each share of
BroadSoft common stock will be initially converted at the closing into
shares of Unisphere common stock. At the closing, an aggregate of
496,000 shares will be deposited into a one-year escrow to secure
indemnification obligations of the BroadSoft stockholders under the merger
agreement.
Following the closing of the merger, Unisphere may be obligated to issue
additional shares of its common stock and options to purchase Unisphere
common stock to BroadSoft stockholders and optionholders, up to a maximum of
1,750,000 shares. The number of additional shares, if any, will be based on
the average of the closing price of Unisphere common stock during the 20
consecutive trading days beginning with the first complete trading day
following Unisphere's announcement of its second fiscal quarter financial
results or 30 days following the closing of the merger, whichever is later.
If you hold shares of BroadSoft common stock that are unvested or are
subject to a repurchase option, a risk of forfeiture or another condition
under any restricted stock purchase agreement or other similar agreement
with BroadSoft, referred to as restricted common stock, the shares of
Unisphere common stock you receive in the merger will also be unvested or
subject to the same repurchase option, risk of forfeiture or other
condition. If your restricted stock purchase or other agreement provides for
acceleration of the vesting schedule for your shares of BroadSoft common
stock upon the occurrence of the merger, the accelerated schedule will apply
to the shares of Unisphere restricted common stock that you receive in the
merger.
On October 19, 2000, the last day before the public announcement of the
proposed merger, Unisphere common stock was not publicly traded. On
, 2001, Unisphere completed its initial public offering and
Unisphere common stock began trading on the Nasdaq National Market. On
, 2001, the most recent practicable date prior to the printing
of this proxy statement/prospectus, the last reported sale price of
Unisphere common stock on the Nasdaq National Market was $ per share.
<PAGE> 11
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER OF UNISPHERE AND BROADSOFT?
A: We are working to complete the merger as quickly as possible. We expect to
complete the merger in the second quarter of fiscal 2001. However, we cannot
predict the exact timing because there are several conditions to closing. If
necessary or desirable, Unisphere and BroadSoft may agree to complete the
merger at a later date.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: The merger is intended to qualify as a reorganization under the Internal
Revenue Code. Accordingly, no gain or loss will generally be recognized by
Unisphere, BroadSoft or the merger subsidiary as a result of the merger.
Additionally, no gain or loss will be recognized by BroadSoft stockholders to
the extent they receive shares of Unisphere common stock in the merger.
However, BroadSoft stockholders will recognize taxable gain to the extent
they receive cash in the merger in lieu of fractional shares. BroadSoft
stockholders are urged to consult their tax advisors for a full understanding
of the tax consequences of the merger.
Q: WHO MUST APPROVE THE MERGER?
A: In addition to the approvals by the Unisphere board of directors and the
BroadSoft board of directors, which have already been obtained, the merger
must be approved by BroadSoft stockholders.
Q: WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT AND THE
MERGER?
A: The presence at the special meeting, in person or by proxy, of the
following will constitute a quorum for transaction of business at the special
meeting:
- holders of a majority of the voting power represented by all shares of
BroadSoft common stock and BroadSoft Series B preferred stock (with Series
B preferred stock voting on an as-converted basis) issued and outstanding
on the record date, voting together as a single class; and
- holders of a majority of the voting power represented by all shares of
BroadSoft Series A preferred stock and BroadSoft Series B preferred stock
(with Series B preferred stock voting on an as-converted basis) issued and
outstanding on the record date, voting together as a single class.
Abstentions will be included in determining the number of shares present
and voting at the meeting for the purpose of determining the presence of a
quorum.
The affirmative vote of the holders of at least a majority of the voting
power of BroadSoft's outstanding shares of common stock and BroadSoft Series
B preferred stock, voting on an as-converted basis, and a majority of the
voting power of BroadSoft's outstanding shares of Series A preferred stock
and Series B preferred stock, voting as a single class and on an as-converted
basis, is required to approve the merger agreement and the merger. Each share
of BroadSoft common stock and Series A preferred stock has one vote per
share. Each share of BroadSoft Series B preferred stock has two votes per
share. Stockholders of BroadSoft beneficially holding shares of BroadSoft
common stock and preferred stock with voting power sufficient to approve the
merger agreement and the merger have agreed to vote all of their respective
shares in favor of the approval and adoption of the merger agreement and the
merger. Consequently, approval and adoption of the merger agreement and the
merger by BroadSoft stockholders is assured.
Q: WHAT DO I NEED TO DO NOW?
A: You should read this proxy statement/prospectus, including its annexes,
carefully, and consider how the merger will affect you as a stockholder.
ii
<PAGE> 12
Q: HOW DO I VOTE?
A: You may indicate how you want to vote on your proxy card and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so
that your shares will be represented at the BroadSoft special meeting. You
may also attend the special meeting and vote in person instead of submitting
a proxy. You may also attend the special meeting and vote in person in order
to revoke an earlier submitted proxy.
If you fail either to return your proxy card or to vote in person at the
special meeting, or if you mark your proxy "abstain," the effect will be a
vote against the merger agreement and the merger. If you sign and send in
your proxy without indicating how you want to vote, your proxy will be
counted as a vote for the merger agreement and the merger.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: You may change your vote at any time before the vote takes place at the
BroadSoft special meeting. To do so, you may either complete and submit a
later dated proxy card or send a written notice stating that you would like
to revoke your proxy. In addition, you may attend the special meeting and
vote in person.
Q: WHEN AND WHERE IS THE BROADSOFT SPECIAL MEETING?
A: The special meeting of BroadSoft stockholders will be held at
, on , 2001 at a.m.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After we complete the merger, Unisphere or its transfer agent will send
instructions to you explaining how to exchange your shares of BroadSoft
common stock for the appropriate number of shares of Unisphere common stock.
Q: WHO MAY I CONTACT WITH ANY ADDITIONAL QUESTIONS?
A: You may call Michael Tinsley, BroadSoft's vice president of finance and
administration, at (240) 364-5104.
Q: ARE THERE ANY RISKS ASSOCIATED WITH THE MERGER?
A: The merger does involve risks. For a discussion of risk factors that should
be considered in evaluating the merger, see "Risk Factors" beginning on page
8.
iii
<PAGE> 13
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire proxy statement/prospectus, including its annexes and the documents to
which we have referred you. See "Where You Can Find More Information" on page
121. We have included page references parenthetically to direct you to a more
complete description of the topics in this summary.
THE COMPANIES
UNISPHERE NETWORKS, INC.
One Executive Drive
Chelmsford, Massachusetts 01824
(978) 848-0300
Unisphere provides data and voice networking products to communications
service providers. Unisphere's suite of products enables communications service
providers to offer value-added, integrated voice and high-speed data services to
business and residential users. The markets for Unisphere products include
internet protocol routing, broadband access and next generation voice switching.
Unisphere's target customers include new and established service providers,
cable operators and domestic and international wireless and wireline carriers.
BROADSOFT, INC.
220 Perry Parkway
Gaithersburg, Maryland 20877
(301) 977-9440
BroadSoft is a development stage company that provides software service
delivery and creation systems that support business telephony applications for
use on the internet, such as call waiting, voice mail and conferencing.
THE MERGER
Through the merger, BroadSoft will become a wholly owned subsidiary of
Unisphere. BroadSoft stockholders will receive Unisphere common stock in
exchange for their shares of BroadSoft common stock. We expect that all shares
of BroadSoft Series A preferred stock will be redeemed by BroadSoft for cash and
all shares of BroadSoft Series B preferred stock will be converted into shares
of BroadSoft common stock prior to the effective time of the merger. The merger
agreement is attached to this proxy statement/prospectus as Annex A. We
encourage you to read the merger agreement as it is the legal document that
governs the merger.
VOTE REQUIRED IS ASSURED
(PAGE 33)
Approval of the merger agreement and the merger requires the vote of a
majority of the voting power of BroadSoft's outstanding shares of common stock
and Series B preferred stock (with Series B preferred stock voting on an
as-converted basis), voting together as a single class, and a majority of the
voting power of BroadSoft's outstanding shares of Series A preferred stock and
Series B preferred stock (with Series B preferred stock voting on an
as-converted basis), voting as a single class. As of , 2001,
BroadSoft's directors and executive officers and their affiliates, together with
other principal stockholders, beneficially owned shares of BroadSoft common
stock and Series B preferred stock representing approximately % of the
combined voting power of such stock and shares of BroadSoft Series A preferred
stock and Series B preferred stock representing approximately % of the
combined voting power of such stock. These stockholders have agreed to vote
their shares in favor of, among other things, the merger agreement and the
merger. Accordingly, approval of the merger agreement and the merger at the
BroadSoft special meeting is assured.
<PAGE> 14
BROADSOFT BOARD RECOMMENDATION TO STOCKHOLDERS
(PAGE 34)
After careful consideration, the BroadSoft board of directors has
determined that the terms and conditions of the merger are fair to you and in
your best interests, and unanimously recommends that you approve the merger
agreement and the merger.
TOTAL NUMBER OF UNISPHERE SHARES TO BE ISSUED IN CONNECTION WITH THE MERGER
(PAGE 53)
The total number of shares of Unisphere common stock that Unisphere will
issue in the merger, together with the number of shares of Unisphere common
stock that will be issuable upon the exercise of BroadSoft stock options that
Unisphere will assume in the merger, will be between 5,710,000 and 7,460,000.
The exact number will depend upon a variety of factors, primarily the average
trading price of Unisphere common stock in the public market during a 20 trading
day period that will begin at a specified time after the closing. These shares
consist of the following:
- at the closing, Unisphere will allocate 4,960,000 shares of Unisphere
common stock proportionately among the holders of BroadSoft common stock
and BroadSoft stock options; of the shares allocated to the holders of
BroadSoft common stock, 496,000 will be immediately placed in escrow for
one year to secure the indemnification obligations of the BroadSoft
stockholders under the merger agreement;
- after the closing, Unisphere may be required to allocate up to 1,750,000
additional shares of Unisphere common stock to the holders of BroadSoft
common stock and BroadSoft stock options depending upon the market
performance of Unisphere common stock during the 20 trading day
measurement period discussed above; of the additional shares allocated to
the holders of BroadSoft common stock, a number equal to 10% of the total
additional shares, including those allocated to BroadSoft stock options,
will be placed into the indemnification escrow; and
- we expect that BroadSoft will grant additional stock options prior to the
closing to some BroadSoft employees, which Unisphere will assume in the
merger and will become exercisable to purchase 750,000 shares of
Unisphere common stock; no additional shares will be allocated to these
options after the closing.
WHAT BROADSOFT STOCKHOLDERS WILL RECEIVE AT CLOSING
(PAGE 53)
Your shares of BroadSoft common stock will be converted into shares of
Unisphere common stock in the merger. We will calculate a conversion ratio for
the BroadSoft common stock immediately prior to the closing of the merger. In
calculating this ratio, we will first add the number of shares of BroadSoft
common stock outstanding at that time, which will include the shares issued upon
the expected conversion of BroadSoft Series B preferred stock, and the number of
shares of BroadSoft common stock issuable upon the exercise of then outstanding
BroadSoft stock options, excluding the additional stock options we expect
BroadSoft to grant prior to the closing. We will then divide 4,960,000 by the
resulting sum. This will yield the conversion ratio, or the portion of a share
of Unisphere common stock into which each share of BroadSoft common stock will
be initially converted at the closing. The effect of this calculation is to
allocate the initial 4,960,000 shares of Unisphere common stock proportionately
among the BroadSoft stockholders and optionholders. The shares allocated to the
BroadSoft common stock will be issued at closing. The shares allocated to the
BroadSoft stock options will not be issued at closing; instead, Unisphere will
assume the options and they will thereafter be exercisable to purchase Unisphere
common stock as described below. Of the shares to be issued at closing with
respect to the BroadSoft common stock, 496,000 shares will be placed into the
indemnification escrow.
If you hold shares of BroadSoft common stock that are unvested or are
subject to a repurchase option, a risk of forfeiture or another condition under
any restricted stock purchase agreement or other similar agreement with
BroadSoft, referred to as restricted common stock, the shares of Unisphere
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<PAGE> 15
common stock that you receive at the closing of the merger will also be unvested
or subject to the same repurchase option, risk of forfeiture or other condition.
If your restricted stock purchase or other agreement provides for acceleration
of the vesting schedule for your shares of BroadSoft restricted common stock
upon the occurrence of the merger, the accelerated schedule will apply to the
shares of Unisphere restricted common stock that you receive in the merger. The
repurchase price of your BroadSoft restricted common stock will be adjusted by
dividing it by the conversion ratio described above.
As of , 2001, after giving effect to the conversion into common
stock of all shares of BroadSoft Series B preferred stock and the assumed
exercise of all BroadSoft warrants, BroadSoft had outstanding shares of
BroadSoft common stock and options and warrants to purchase additional
shares of BroadSoft common stock. Based on these numbers, and assuming no new
BroadSoft option grants or forfeitures and no new issuances of BroadSoft stock
other than upon option and warrant exercises, each share of BroadSoft common
stock will be initially converted at the closing into of a share of
Unisphere common stock, of which shares will be deposited into the
one-year indemnification escrow.
ADDITIONAL SHARES THAT MAY BE ISSUED AFTER THE CLOSING
(PAGE 54)
In addition to the 4,960,000 shares initially allocated among the
stockholders and optionholders of BroadSoft at the closing, Unisphere may become
obligated to allocate up to 1,750,000 additional shares of Unisphere common
stock after the closing. The number of additional shares allocated, if any, will
be determined following the 20 trading day measurement period beginning with the
first complete trading day following Unisphere's announcement of its second
fiscal quarter financial results or 30 days following the closing of the merger,
whichever is later. The number of additional shares, if any, will depend upon
the average closing price of Unisphere common stock on the Nasdaq National
Market during the measurement period. As with the initial shares, the additional
shares will be allocated among the former holders of BroadSoft common stock and
stock options and in the same proportion. Shares allocated to the options will
take the form of additional options granted to the former BroadSoft
optionholders on a pro-rata basis with the options assumed by Unisphere at the
closing. The remaining additional shares will be allocated to the former
BroadSoft stockholders within 15 days after the end of the measurement period.
Of the shares allocated to the BroadSoft common stock and stock options, a
number equal to 10% of the total number of additional shares will be placed into
the indemnification escrow.
Any additional shares issued to former holders of BroadSoft restricted
common stock who received shares of Unisphere restricted common stock at the
closing of the merger will be subject to the same conditions and have the same
repurchase price as the initial shares of Unisphere restricted common stock
issued to those holders.
The following table shows the total number of additional shares to be
allocated among the BroadSoft stockholders and optionholders, and the number of
additional shares per share of BroadSoft common stock, at the indicated average
closing price of Unisphere common stock during the 20 trading day measurement
period:
<TABLE>
<CAPTION>
PORTION OF
ADDITIONAL SHARES
TO BE PLACED IN
AVERAGE CLOSING PRICE ADDITIONAL SHARES PER ESCROW PER SHARE
PER SHARE DURING TOTAL ADDITIONAL SHARE OF BROADSOFT OF BROADSOFT
MEASUREMENT PERIOD SHARES COMMON STOCK COMMON STOCK
--------------------- ---------------- --------------------- -----------------
<S> <C> <C> <C>
$ or higher 0 0 0
$ to $ 500,000
$ or lower 1,750,000
</TABLE>
If the average closing price during the measurement period is between
$ and $ or between $ and $ , the number of
additional shares will be determined by a mathematical formula. The portion of
additional shares to be placed in escrow in the table is based on the number of
outstanding shares of BroadSoft common stock and stock options at ,
2001.
3
<PAGE> 16
TREATMENT OF BROADSOFT STOCK OPTIONS
(PAGE 55)
At the completion of the merger, Unisphere will assume each option to
acquire BroadSoft common stock that is outstanding, whether or not vested, and
each BroadSoft option will become an option to acquire Unisphere common stock.
The number of shares of Unisphere common stock subject to each option will be
equal to the number of shares of BroadSoft common stock subject to the
unexercised portion of the option immediately prior to the effective time of the
merger multiplied by the conversion ratio. Conversely, the per share exercise
price under each option will be adjusted by dividing it by the conversion ratio.
After their assumption by Unisphere, each BroadSoft option will otherwise have
the same terms and vesting schedule as under the old option, except that 25% of
the unvested shares subject to the option will accelerate and vest as a result
of the merger. However, with respect to the options to be granted by BroadSoft
and which will become exercisable for 750,000 shares of Unisphere common stock,
as described below, there will be no such acceleration as a result of the
merger.
If Unisphere becomes obligated to issue additional shares after the 20
trading day measurement period, Unisphere will also issue additional stock
options to purchase Unisphere common stock as described above. These options
will have terms similar to the assumed options to which they relate, including
as to the exercise price.
We also expect that BroadSoft will grant additional stock options prior to
the closing to some BroadSoft employees, which Unisphere will assume in the
merger and will become exercisable to purchase 750,000 shares of Unisphere
common stock. No additional shares will be allocated to these options after the
closing.
No shares of Unisphere common stock issuable upon the exercise of the
assumed options will be placed into the indemnification escrow.
CONDITIONS TO THE MERGER
(PAGE 62)
The completion of the merger depends upon first meeting a number of
conditions, including:
- the requisite BroadSoft stockholder approval approving the merger
agreement and the merger has been obtained, which, as discussed above, is
assured;
- the Securities and Exchange Commission has declared the registration
statement of which this proxy statement/prospectus is a part effective
under the Securities Act of 1933;
- that the registration statement relating to Unisphere's initial public
offering has been declared effective by the Securities and Exchange
Commission by January 31, 2000;
- the number of BroadSoft shares dissenting from the merger was not more
than the specified percentage;
- BroadSoft has obtained all required third-party consents;
- the representations and warranties of BroadSoft, Unisphere and the merger
subsidiary are true and correct as of the effective time of the merger,
except as otherwise provided in the merger agreement and for any failure
to be true and correct which has not resulted in and would not be
reasonably likely to result in a material adverse effect;
- legal opinions regarding the treatment of the merger as a reorganization
for United States federal income tax purposes have been delivered;
- specified employees of BroadSoft have entered into non-competition
agreements and other specified agreements with Unisphere;
- all outstanding shares of BroadSoft Series B preferred stock have been
converted into BroadSoft common stock;
4
<PAGE> 17
- all BroadSoft warrants have been exercised or terminated;
- any "parachute payments" have been approved by the requisite stockholder
vote under the Internal Revenue Code;
- all outstanding shares of BroadSoft Series A preferred stock have been
redeemed not later than the specified date; and
- other customary contractual conditions specified in the merger agreement
have been satisfied.
Some of the conditions to the merger may be waived by the party entitled to
assert the condition.
NO SOLICITATION BY BROADSOFT
(PAGE 59)
BroadSoft has agreed that neither it nor any of its officers, directors,
employees, representatives or agents will, directly or indirectly, other than as
provided in the merger agreement, do any of the following:
- initiate, encourage or otherwise facilitate any proposal regarding a
business combination, sale of stock or material assets or similar
business transaction involving BroadSoft;
- disclose any non-public information about BroadSoft; or
- engage in discussions or negotiations with any third party regarding a
business combination, sale of stock or material assets or similar
business transaction.
TERMINATION OF THE MERGER AGREEMENT
(PAGE 63)
The merger agreement may be terminated upon the occurrence of a number of
events, including:
- by mutual written consent of the parties;
- if the requisite vote of BroadSoft stockholders to approve the merger
agreement and the merger is not obtained at the special meeting;
- if the other party breaches any representation, warranty or covenant in
the merger agreement, the breach is reasonably likely to have a material
adverse effect and such party fails to cure the breach within 20 days of
receiving notice of the breach; or
- the merger is not completed by February 28, 2001 because any specified
condition to closing has not been satisfied (unless the failure results
from a breach by the terminating party), provided that this date will be
extended until April 29, 2001 in the event that the registration
statement of which this proxy statement/prospectus is a part has not been
declared effective by the Securities and Exchange Commission.
OPINION OF W.R. HAMBRECHT + CO., BROADSOFT'S FINANCIAL ADVISOR
(PAGE 40)
W.R. Hambrecht + Co., BroadSoft's financial advisor, has given a written
opinion, dated October 20, 2000, to BroadSoft's board of directors, to the
effect that, as of October 20, 2000, the consideration to be received by the
holders of BroadSoft common stock pursuant to the merger agreement was fair,
from a financial point of view, to such stockholders. The full text of the
opinion is attached as Annex B to this proxy statement/prospectus and we
encourage you to read it carefully in its entirety to understand the procedures
followed, assumptions made, matters considered and the limitations in the review
undertaken. The opinion is addressed to the BroadSoft board of directors and
does not constitute a recommendation to any BroadSoft stockholder with respect
to matters relating to the merger.
5
<PAGE> 18
ENGAGEMENT OF W.R. HAMBRECHT + CO. IN THE MERGER
(PAGE 43)
Pursuant to the terms of an engagement letter dated October 5, 2000, W.R.
Hambrecht + Co. was retained by BroadSoft as a financial advisor. Under the W.R.
Hambrecht engagement letter, BroadSoft paid W.R. Hambrecht a fee of $350,000
upon delivery of the W.R. Hambrecht opinion. Upon the written request of
BroadSoft, W.R. Hambrecht will deliver up to two updates, or bring-downs, of the
W.R. Hambrecht opinion, deliverable no later than April 4, 2001. In addition,
BroadSoft agreed to reimburse W.R. Hambrecht for all reasonable out-of-pocket
expenses incurred in connection with its engagement. BroadSoft also agreed to
indemnify and hold harmless W.R. Hambrecht, its affiliates, and other related
persons in connection with W.R. Hambrecht's engagement.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF BROADSOFT IN THE MERGER
(PAGE 48)
In considering the recommendation of the BroadSoft board of directors, you
should be aware of the interests that some members of BroadSoft's management and
directors have in the merger. These interests include the following:
- BroadSoft employees, including members of management, will be granted new
stock options by BroadSoft prior to the closing of the merger that will
be assumed by Unisphere and will become options to purchase an aggregate
of 750,000 shares of Unisphere common stock;
- all BroadSoft stock options issued and outstanding, including those held
by members of management, will be assumed by Unisphere, and 25% of the
vested portion of each option will vest and become exercisable upon the
closing of the merger, other than the 750,000 options described above;
- the holders of the options assumed by Unisphere, including officers and
directors of BroadSoft, will not be required to place any of the
Unisphere shares they might acquire upon exercise of the assumed options
into the escrow to secure indemnification obligations;
- the vesting of 25% of the unvested portion of restricted stock;
- BroadSoft directors and officers will have the right to indemnification
upon the satisfaction of specified conditions;
- depending on the trading price of Unisphere common stock during the
specified 20 trading day period, additional stock options to purchase
Unisphere common stock may be issued to former optionholders of
BroadSoft, including officers and directors; and
- BroadSoft's Series A preferred stock, including shares held by certain
directors, will be redeemed for cash prior to the closing of the merger.
In considering the fairness of the merger to BroadSoft stockholders, the
BroadSoft board of directors took into account these interests. These interests
are different from, or in addition to, your and their interests as stockholders.
ACCOUNTING TREATMENT
(PAGE 44)
Unisphere will account for the merger using the purchase method of
accounting, which means that the assets and liabilities of BroadSoft, including
intangible assets, will be recorded at their fair value and the results of
operations of BroadSoft will be included in Unisphere's results from the date of
acquisition.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
(PAGE 44)
We have structured the merger in order to qualify as a reorganization under
the Internal Revenue Code. Assuming that the merger qualifies as a
reorganization, no gain or loss generally will be recognized
6
<PAGE> 19
by BroadSoft stockholders for federal income tax purposes on the exchange of
shares of BroadSoft common stock solely for shares of Unisphere common stock.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You are urged to consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
HOLDERS OF BROADSOFT COMMON STOCK AND PREFERRED STOCK HAVE APPRAISAL RIGHTS
(PAGE 49)
Under Delaware law, the holders of BroadSoft common stock and preferred
stock are entitled to the right to seek an appraisal of, and to be paid the fair
value of, their shares. Section 262 of the Delaware General Corporation Law,
which governs the rights of stockholders who wish to seek appraisal of their
shares, is summarized under the heading "The Merger -- Rights of BroadSoft
Stockholders to Appraisal" on page 49, and is attached to this proxy
statement/prospectus as Annex C.
HOW THE RIGHTS OF BROADSOFT STOCKHOLDERS WILL DIFFER AS UNISPHERE STOCKHOLDERS
(PAGE 116)
The rights of BroadSoft stockholders after the merger will be governed by
Unisphere's charter and by-laws. Those rights differ from rights of BroadSoft
stockholders under BroadSoft's charter and by-laws. These differences are
summarized under the heading "Comparison of Rights of Common Stockholders of
Unisphere and Stockholders of BroadSoft" on page 116.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
(PAGE 21)
This proxy statement/prospectus contains forward-looking statements. In
some cases, you can identify forward-looking statements by terminology -- for
instance, may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential or continue, the negative of these terms, or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the risk factors
section. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations.
RECENT STOCK PRICE INFORMATION
(PAGE 31)
On October 19, 2000, the last full trading day prior to the public
announcement of the proposed merger, Unisphere common stock was not publicly
traded. Unisphere completed its initial public offering on , 2001
and Unisphere common stock began trading on the Nasdaq National Market at that
time. On , 2001, the most recent practicable date prior to the
printing of this proxy statement/prospectus, the last reported sale price of
Unisphere common stock on the Nasdaq National Market was $ per share.
We are unable to provide information with respect to the market prices of
BroadSoft, and the equivalent per share market prices of Unisphere common stock
have been omitted, because there is no established trading market for shares of
BroadSoft common stock.
7
<PAGE> 20
RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to vote to approve and adopt the merger agreement and the merger. You
should also consider the other information in this proxy statement/prospectus
and the additional information in Unisphere's other reports on file with the
Securities and Exchange Commission and in the other documents incorporated by
reference in this proxy statement/prospectus. See "Where You Can Find More
Information" on page 122.
RISKS RELATING TO THE MERGER
UNISPHERE'S COMMON STOCK PRICE IS VOLATILE AND, THE VALUE OF UNISPHERE COMMON
STOCK ISSUED IN THE MERGER WILL DEPEND ON ITS MARKET PRICE AT THE TIME OF THE
MERGER AND FOLLOWING THE MERGER.
At the closing of the merger, each share of BroadSoft common stock will be
exchanged for shares of Unisphere common stock. The initial exchange ratio will
be determined immediately prior to the closing of the merger. Neither Unisphere
nor BroadSoft may terminate or renegotiate the merger agreement, and BroadSoft
may not resolicit the vote of its stockholders, solely because of changes in the
market price of Unisphere common stock. Consequently, the specific dollar value
of Unisphere common stock that BroadSoft stockholders will receive upon the
completion of the merger will depend on the market value of Unisphere common
stock at the time of closing, and may decline from the date you submit your
proxy. Although the merger agreement contains provisions requiring Unisphere to
issue additional shares if the average closing price of the Unisphere common
stock is below a specified threshold during a specified period following the
merger, the total number of additional shares is capped. For this reason, these
provisions provide only limited protection in the event the Unisphere common
stock trades at prices below the threshold. Neither Unisphere nor BroadSoft can
predict or give any assurances as to the value or market price of Unisphere
common stock at any time before or after the merger.
In addition, neither Unisphere nor BroadSoft can predict the extent to
which investor interest in Unisphere common stock will lead to the development
of a trading market or how liquid that market might become. The trading price of
Unisphere common stock, and the value to BroadSoft stockholders, could be
subject to wide fluctuations in response to factors such as:
- the integration of Unisphere and BroadSoft;
- actual or anticipated variations in quarterly operating results;
- failure to meet analyst predictions and projections;
- changes in market valuations of communications service providers and
equipment companies;
- continued growth of the internet and e-commerce;
- new products or services offered by Unisphere or its competitors; and
- sales of Unisphere common stock or other securities in the future.
In addition, stock markets in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry factors may harm
the market price of Unisphere common stock, regardless of Unisphere's actual
operating performance.
UNISPHERE MAY FACE CHALLENGES IN INTEGRATING UNISPHERE AND BROADSOFT AND, AS A
RESULT, MAY NOT REALIZE THE EXPECTED BENEFITS OF THE ANTICIPATED MERGER.
Unisphere may not be successful in integrating Unisphere and BroadSoft.
Integrating the operations and personnel of Unisphere and BroadSoft will be a
complex process. Unisphere is uncertain that the integration will be completed
rapidly or that it will achieve the anticipated benefits of the merger.
The successful integration of Unisphere and BroadSoft will require, among
other things, integration of Unisphere's and BroadSoft's products and services,
assimilation of sales and marketing groups, integration
8
<PAGE> 21
of the companies' information and software systems, coordination of employee
retention, hiring and training, and coordination of ongoing and future research
and development efforts. The diversion of the attention of management and any
difficulties encountered in the process of combining the companies could cause
the disruption of, or a loss of momentum in, the activities of the combined
company's business. Further, the process of combining Unisphere and BroadSoft
could negatively affect employee morale and the ability of Unisphere to retain
some of its or BroadSoft's key employees after the merger.
IF UNISPHERE DOES NOT SUCCESSFULLY INTEGRATE BROADSOFT OR THE MERGER'S BENEFITS
DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET PRICE
OF UNISPHERE COMMON STOCK MAY DECLINE.
The market price of Unisphere common stock may decline as a result of the
merger if:
- the integration of Unisphere and BroadSoft is unsuccessful;
- Unisphere does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial or industry analysts;
or
- the effect of the merger on Unisphere's financial results is not
consistent with the expectations of financial or industry analysts.
SALES OF SUBSTANTIAL AMOUNTS OF UNISPHERE COMMON STOCK IN THE PUBLIC MARKET
AFTER THE PROPOSED MERGER COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF
UNISPHERE COMMON STOCK.
Assuming the completion of the merger, Unisphere would issue shares
of Unisphere common stock at the effective time of the merger and assume options
to purchase additional shares. In addition, Unisphere may issue up to an
additional 1,750,000 shares of common stock, including upon the exercise of
assumed options, depending on the trading price of Unisphere common stock during
a specified period of time following the effective time of the merger.
Approximately shares of Unisphere common stock to be issued in
the merger will be freely tradable immediately following the merger. In
addition, approximately shares of Unisphere common stock are
currently freely tradeable and additional shares will become freely
tradable at various times through , 2001 as a result of the expiration of
lock-up agreements entered into by Unisphere stockholders in connection with
Unisphere's initial public offering. Siemens, which owned % of Unisphere
common stock as of , 2001, is not required under Unisphere's
certificate of incorporation or otherwise to own a minimum percentage of
Unisphere common stock. The sale of substantial amounts of these shares
(including shares issued upon exercise of outstanding options) may cause
substantial fluctuations in the price of Unisphere common stock.
IF THE COSTS ASSOCIATED WITH THE MERGER EXCEED THE BENEFITS REALIZED, UNISPHERE
MAY EXPERIENCE INCREASED LOSSES.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to Unisphere's stockholders resulting from the
issuance of shares in connection with the merger, Unisphere's financial results
could be adversely affected, including increased losses.
BROADSOFT MAY NOT BE ABLE TO ENTER INTO A MERGER OR BUSINESS COMBINATION WITH
ANOTHER PARTY AT A FAVORABLE PRICE BECAUSE OF RESTRICTIONS IN THE MERGER
AGREEMENT.
While the merger agreement is in effect, BroadSoft is prohibited from
entering into or soliciting, initiating or encouraging any inquiries or
proposals that may lead to a proposal or offer for a business combination, sale
of stock or material assets, or other similar transactions with any person other
than Unisphere. As a result of this prohibition, BroadSoft may not be able to
enter into an alternative transaction at a favorable price.
UNCERTAINTIES ASSOCIATED WITH THE MERGER MAY CAUSE BROADSOFT TO LOSE KEY
PERSONNEL.
Current and prospective BroadSoft employees may experience uncertainty
about their future roles with Unisphere. This uncertainty may adversely affect
BroadSoft's ability to retain key management, sales, marketing and technical
personnel, or to attract qualified personnel in the future.
9
<PAGE> 22
CUSTOMERS OF UNISPHERE AND BROADSOFT MAY DELAY OR CANCEL ORDERS AS A RESULT OF
CONCERNS OVER THE MERGER.
The announcement and completion of the merger could cause customers and
potential customers of Unisphere and BroadSoft to delay, cancel or not renew
contracts for services as a result of customer concerns and uncertainty over
integration and support of Unisphere's or BroadSoft's services. Any delay,
cancellation or nonrenewal of contracts could have a material adverse effect on
the business, operating results and financial condition of the combined company.
RISKS RELATED TO BROADSOFT
OFFICERS OF BROADSOFT AND SOME MEMBERS OF BROADSOFT'S BOARD OF DIRECTORS HAVE
INTERESTS IN THE MERGER THAT MAY INFLUENCE THEM TO SUPPORT OR APPROVE THE MERGER
AGREEMENT AND THE MERGER.
Officers of BroadSoft and some members of BroadSoft's board of directors
have interests in the merger that are in addition to their interests generally
as stockholders of BroadSoft. For instance:
- BroadSoft employees, including members of management, will be granted new
stock options by BroadSoft prior to the closing of the merger that will
be assumed by Unisphere and will become options to purchase an aggregate
of 750,000 shares of Unisphere common stock;
- all BroadSoft stock options issued and outstanding, including those held
by members of management, will be assumed by Unisphere, and 25% of the
unvested portion of each option will vest and become exercisable upon the
closing of the merger, other than the 750,000 described above;
- the holders of the options assumed by Unisphere, including officers and
directors of BroadSoft, will not be required to place any of the
Unisphere shares they might acquire upon exercise of the assumed options
into the escrow to secure indemnification obligations;
- the vesting of 25% of the unvested portion of restricted stock;
- BroadSoft directors and officers will have rights to indemnification upon
the satisfaction of certain conditions;
- depending on the trading price of Unisphere common stock during the
specified 20 trading day period, additional stock options to purchase
Unisphere common stock and additional shares of restricted stock may be
issued to former optionholders and holders of restricted stock of
BroadSoft, including officers and directors; and
- BroadSoft's Series A preferred stock, including shares held by certain
directors, will be redeemed for cash prior to the closing of the merger.
These factors provide BroadSoft's officers and directors with interests in
the merger that are different from, or in addition to, yours. In addition, some
directors and officers and their affiliates have already agreed to vote in favor
of the merger. The directors and officers of BroadSoft may have been more likely
to vote to approve the merger agreement and the merger than if they did not have
these interests. You should consider whether these interests influenced these
directors and officers to support or recommend the merger. You should read more
about these interests under "The Merger -- Interests of BroadSoft's Executive
Officers and Directors in the Merger" on page 48.
RISKS RELATING TO UNISPHERE
RISKS RELATED TO FINANCIAL RESULTS OF UNISPHERE
WE HAVE A LIMITED OPERATING HISTORY AND HAVE OPERATED AS A CONSOLIDATED COMPANY
FOR A SHORT PERIOD OF TIME, WHICH WILL MAKE IT DIFFICULT FOR YOU TO PREDICT OUR
FUTURE RESULTS OF OPERATIONS.
We have a limited operating history and have operated as a consolidated
company for a short period of time. We were incorporated in January 1999 as a
subsidiary of Siemens. Siemens acquired Argon Networks in March 1999 and Castle
Networks and Redstone Communications in April 1999, and contributed them to us
in June 1999. In addition, our management team has a limited operating history
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together. James A. Dolce, Jr., our President and Chief Executive Officer, and
Thomas M. Burkardt, our Chief Operating Officer and Vice President, assumed
their current positions beginning in January 2000. Our current Chief Financial
Officer, John J. Connolly, joined our company in July 2000. We did not begin to
ship any products for commercial deployment until September 1999. Due to our
limited operating history, it is difficult to predict our future results of
operations.
WE HAVE INCURRED NET LOSSES AND NEGATIVE CASH FLOW SINCE OUR INCEPTION AND WE
EXPECT TO CONTINUE TO INCUR NET LOSSES AND NEGATIVE CASH FLOW FOR THE
FORESEEABLE FUTURE, AND WE MAY NEVER ACHIEVE PROFITABILITY.
We have incurred net losses and negative cash flow for our entire history,
and we expect to continue to incur net losses and negative cash flow for the
foreseeable future. We have incurred and will continue to incur significant
expenses for research and development, sales and marketing, customer support,
developing distribution channels and general and administrative expenses as we
expand our business. We will need to generate significantly higher revenues to
achieve profitability, and we may never be able to achieve or sustain
profitability.
OUR REVENUE AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND AS A
RESULT OUR STOCK PRICE COULD SIGNIFICANTLY DECLINE.
Our quarterly revenue and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
many of which are beyond our control. If our quarterly or annual operating
results do not meet the expectations of investors or securities analysts, our
common stock price could significantly decline. Some of the factors that could
affect our quarterly or annual revenue and operating results include:
- the timing and size of sales of our products, particularly those products
recently introduced;
- our ability to obtain sufficient supplies of sole or limited source
components for our products;
- our ability to develop, manufacture, introduce, ship and support our
current product lines as well as new products and product enhancements;
- the mix of distribution channels through which our products are sold;
- non-cash, variable compensation expense charges applicable to some of our
employee stock options;
- our ability to control or quickly adjust our fixed expenses, such as
research and development and personnel expenses;
- announcements, new product introductions and reductions in the price of
products offered by our competitors;
- variation in capital spending budgets of communications service
providers; and
- our ability to realize forecasted sales for a particular period.
As a result, a delay in generating or recognizing revenue and controlling
our costs for the reasons set forth above, or for any other reason, could cause
significant variations in our operating results. In addition, as a result of any
of these factors, it is possible that, in the future, our revenue and operating
results will fall below the expectations of public market analysts and
investors. In this event, the price of our common stock could significantly
decline.
WE MAY NEED ADDITIONAL FINANCING IN THE FUTURE, WHICH MAY NOT BE AVAILABLE, AND
WE MAY BE REQUIRED TO ISSUE ADDITIONAL SECURITIES. ANY ADDITIONAL FINANCING MAY
RESULT IN RESTRICTIONS ON OUR OPERATIONS OR SUBSTANTIAL DILUTION TO OUR
STOCKHOLDERS.
Historically, Siemens has funded our operations as needed. Since our
initial public offering, however, Siemens no longer has an obligation to provide
us with additional funds. We are required to fund our operations independently
and we may need to raise substantial additional funds to:
- support our expansion;
- develop new technologies;
- respond to competitive pressures;
- acquire complementary businesses; or
- respond to unanticipated requirements.
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We may try to raise additional funds through public or private financings,
strategic relationships or other arrangements. Additional funding may not be
available on acceptable terms or at all. If adequate funds are not available, we
may be required to curtail significantly or defer one or more of our operating
goals or programs. If we succeed in raising additional funds through the
issuance of equity or convertible securities, the issuance could result in
substantial dilution to existing stockholders. If we raise additional funds
through the issuance of debt securities or preferred stock, these new securities
would have rights, preferences and privileges senior to those of the holders of
our common stock. The terms of these securities could also impose restrictions
on our operations.
RISKS RELATED TO CUSTOMERS OF UNISPHERE
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS
AND OUR REVENUE COULD DECLINE SIGNIFICANTLY IF WE LOSE A CUSTOMER OR IF A
CUSTOMER CANCELS OR DELAYS AN ORDER.
Because we depend on a small number of customers, our revenue could decline
significantly if we lose a customer, or if a customer cancels or delays an
order. Sales to Siemens as a value-added reseller of our products accounted for
63.5% of our net revenues for the fiscal year ended September 30, 1999 and 41.0%
of our net revenues for the fiscal year ended September 30, 2000. In addition,
for the fiscal year ended September 30, 2000, sales to ITC Deltacom accounted
for 28.3% of our net revenues. We do not have any long-term contracts with any
of our customers and we do not expect the distribution and other agreements to
which we are a party with Siemens will have a material effect on the revenues
generated by sales to Siemens in the future. We expect to continue to derive a
majority of our revenues from a limited number of customers in the near future.
THE LONG AND VARIABLE SALES AND DEPLOYMENT CYCLES FOR OUR PRODUCTS MAY CAUSE OUR
REVENUE AND OPERATING RESULTS TO VARY SIGNIFICANTLY, WHICH INCREASES THE RISK OF
AN OPERATING LOSS FOR ANY GIVEN FISCAL QUARTER.
Our products have lengthy sales cycles and we may incur substantial sales
and marketing expenses and expend significant management effort without making a
sale. A customer's decision to purchase our products often involves a
significant commitment of its resources and a lengthy product evaluation and
qualification process. In addition, the length of our sales cycles will vary
depending on the type of customer to whom we are selling and the product being
sold. Even after making the decision to purchase our products, our customers
often deploy our products slowly. Timing of deployment can vary widely and
depends on:
- the size of the network deployment;
- the complexity of our customers' network environments;
- our customers' skill sets;
- the hardware and software configuration and customization necessary to
deploy our products; and
- our customers' ability to finance their purchase of our products.
As a result, it is difficult for us to predict the quarter in which our
customers may purchase our products and our revenue and operating results may
vary significantly from quarter to quarter, which increases the risk of an
operating loss for us for any given quarter.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, ORDERS FOR OUR
PRODUCTS WILL BE DELAYED OR CANCELED AND SUBSTANTIAL PRODUCT RETURNS COULD
OCCUR, WHICH COULD HARM OUR BUSINESS.
Many of our customers require that our products be designed to interoperate
with their existing networks, each of which may have different specifications
and use multiple standards. Our customers' networks may contain multiple
generations of products from different vendors that have been added over time as
their networks have grown and evolved. Our products must interoperate with these
products as well as with future products in order to meet our customers'
requirements. In some cases, we may be required to modify our product designs to
achieve a sale, which may result in a longer sales cycle, increased research and
development expense, and reduced operating margins. If our products do not
interoperate with existing equipment in our customers' networks, installations
could be delayed, orders for
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our products could be canceled or our products could be returned. This could
harm our business, financial condition and results of operations.
IF WE FAIL TO DEVELOP AND SELL NEW PRODUCTS THAT MEET THE EVOLVING NEEDS OF OUR
CUSTOMERS, OR IF OUR NEW PRODUCTS OR ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE, OUR BUSINESS AND RESULTS OF OPERATIONS WOULD BE HARMED.
Our success depends on our ability to anticipate our customers' evolving
needs and to develop and market products that address those needs. We are
currently in the process of developing higher-capacity IP routing and
next-generation voice switching products to meet the growing bandwidth demands
of communications service providers. In addition, we are in the initial stages
of testing our SRX-3000 softswitch. The timely development of these products, as
well as any additional new or enhanced products, is a complex and uncertain
process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of these and other new products and enhancements. We may not have
sufficient resources to anticipate successfully and accurately technological and
market trends, or to manage successfully long development cycles. The
introduction of new or enhanced products also requires that we manage the
transition from older products to these new or enhanced products in order to
minimize disruption in customer ordering patterns. We may also be required to
collaborate with third parties to develop our products and may not be able to do
so on a timely and cost-effective basis, if at all. If we are not able to
develop new products or enhancements to existing products on a timely and
cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our ability to continue to sell our products and grow our
business would be harmed.
IF WE FAIL TO CAPITALIZE ON OPPORTUNITIES TO WIN CONTRACTS FROM OUR TARGET
CUSTOMERS, WE MAY NOT BE ABLE TO SELL PRODUCTS TO THOSE CUSTOMERS FOR AN
EXTENDED PERIOD OF TIME AND OUR REVENUE COULD DECLINE.
We believe that our customers deploy and upgrade their networks
infrequently and in large increments. As a result, if we fail to win a purchase
contract from a target customer, we may not have an opportunity to sell products
to that customer for an extended period of time. In addition, if we fail to win
contracts from target customers that are at an early stage in their network
design cycle, we may never be able to sell products to these customers because
they may prefer to continue purchasing products from their existing vendor.
Because we rely on a small number of customers for the majority of our sales,
our failure to capitalize on limited opportunities to win contracts with these
customers would harm our business, financial condition and results of
operations.
CONSOLIDATION AMONG COMMUNICATIONS SERVICE PROVIDERS MAY CAUSE A REEXAMINATION
OF STRATEGIC AND PURCHASING DECISIONS BY OUR CURRENT AND POTENTIAL CUSTOMERS,
WHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.
Consolidation among communications service providers may cause delays in
the purchase of our products and cause a reexamination of strategic and
purchasing decisions by our current and potential customers. In addition, we may
lose valuable relationships with key personnel of a customer of ours due to
budget cuts, layoffs or other disruptions following, or during, a consolidation.
RISKS RELATED TO UNISPHERE'S INDUSTRY
INTENSE COMPETITION AND CONSOLIDATION IN THE MARKETS IN WHICH WE COMPETE COULD
PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUE AND PREVENT US FROM
ACHIEVING OR SUSTAINING PROFITABILITY.
The market for data and voice networking products is highly competitive. We
compete directly with numerous companies, including Cisco Systems, Juniper
Networks, Lucent Technologies, Nortel Networks, Redback Networks and Sonus
Networks. Our voice switching products also compete to a limited extent with
some traditional voice switching products of Siemens. Many of our current and
potential competitors have longer operating histories, significantly greater
selling and marketing, technical, financial and customer support resources and
broader customer relationships and product offerings than we do. As a result,
these competitors may be able to devote greater resources to the development,
promotion, sale and support of their products. In addition, these companies may
adopt aggressive pricing policies and leverage
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their customer bases and broader product offerings to gain market share. We
believe that competitive pressures are likely to result in price reductions and
reduced margins, which would harm our results of operations. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could develop new technologies that compete with our products or even
render our products obsolete. We may not have sufficient resources to continue
to make the investments or achieve the technological advances necessary to
compete successfully with existing or new competitors.
The markets in which we compete are characterized by increasing
consolidation. We cannot predict how industry consolidation will affect our
competitors and we may not be able to compete successfully in an increasingly
consolidated industry. Additionally, because we may be dependent on strategic
relationships with third parties in our industry, any consolidation involving
these parties could reduce the demand for our products and otherwise harm our
business prospects. Our competitors that have large market capitalizations or
cash reserves are also better positioned than we are to acquire other companies,
including other competitors of ours, thereby obtaining new technologies or
products that may displace our product lines. Any of these acquisitions could
give our competitors a strategic advantage that would harm our business,
financial condition and results of operations.
IF USAGE OF THE INTERNET DOES NOT CONTINUE TO GROW AS EXPECTED OR THE MIGRATION
OF COMMUNICATIONS SERVICES TO THE INTERNET IS NOT WIDELY ACCEPTED, OUR BUSINESS
COULD BE HARMED.
The internet is a packet-based network and packet-based technology may not
be widely accepted as the platform for the new public network. If use of the
internet does not grow significantly or the migration to, and the market
acceptance of, the internet as the new public network does not occur, or occurs
more slowly than expected, we may not be able to sell our products in
significant volumes. Many factors beyond our control may limit the increased use
of the internet or delay the migration of communications services to the
internet, including:
- the inability of the internet to support the growing performance and
reliability demands placed on it;
- inadequate demand for internet protocol routing, broadband access and
next-generation voice switching from business and residential users;
- the inability of businesses to address adequately security and privacy
concerns of users;
- the development of legislation and regulations related to the internet
and the new public network;
- installation, space and power constraints at carrier central offices; and
- evolving industry standards for internet protocol routing, broadband
access, next-generation voice switching and other technologies.
IF WE FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS, SALES OF OUR EXISTING AND
FUTURE PRODUCTS COULD BE HARMED.
Failure of our products to comply, or delays in compliance, with the
various existing, anticipated, and evolving industry regulations and standards
could harm sales of our existing and future products. The markets for our
products are characterized by a significant number of communications regulations
and standards, some of which are evolving as new technologies are deployed. Our
customers often require our products to comply with various standards, including
those promulgated by the:
- Federal Communications Commission;
- American National Standards Institute;
- Institute of Electrical and Electronic Engineers;
- International Telecommunication Union;
- Internet Engineering Task Force;
- Telcordia Technologies; or
- Underwriters Laboratories.
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In addition, our key competitors may establish proprietary standards that
they may not make available to us. As a result, our products may not
interoperate with their products. We may also be required to comply with
recommendations of telecommunications authorities in various countries. Our
customers may also require, or we may otherwise deem it necessary or advisable,
that we modify our products to address actual or anticipated changes in the
regulatory environment.
COMMUNICATIONS SERVICE PROVIDERS ARE SUBJECT TO GOVERNMENT REGULATION, AND
CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS THAT NEGATIVELY IMPACT
COMMUNICATIONS SERVICE PROVIDERS COULD HARM OUR BUSINESS.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the entire communications industry, including communications service
providers. Future FCC regulations affecting the internet, communications service
providers or their service offerings, may harm our business. For example, FCC
regulatory policies that affect the availability of data and internet services
may impede communication service providers' penetration into some markets or
affect the prices that they are able to charge. In addition, domestic and
international regulatory bodies, such as the Federal Trade Commission and the
European Commission, are beginning to adopt standards and regulations for the
internet. These domestic and foreign standards and regulations address various
aspects of internet use, including issues over invasion of privacy, the security
of data transmitted over the internet and taxation of e-commerce. Resulting
standards and regulations could adversely affect the development of e-commerce
and other uses of the internet. This could directly or indirectly harm the
telecommunications industry in which communications service providers operate.
To the extent communications service providers are adversely affected by laws or
regulations regarding their business, products or service offerings, this could
harm our business, financial condition and results of operations.
RISKS ASSOCIATED WITH UNISPHERE'S PRODUCTS
WE DEPEND ON ACT MANUFACTURING AND CELESTICA TO MANUFACTURE SUBSTANTIALLY ALL OF
OUR PRODUCTS, AND ANY DELAY OR INTERRUPTION IN MANUFACTURING BY THESE CONTRACT
MANUFACTURERS WOULD RESULT IN DELAYED OR REDUCED SHIPMENTS TO OUR CUSTOMERS AND
MAY HARM OUR BUSINESS.
We currently outsource substantially all of our manufacturing to ACT
Manufacturing, or ACT, and Celestica Inc., or Celestica. We do not have internal
manufacturing capabilities. Our reliance on ACT and Celestica involves a number
of risks, including the absence of adequate capacity, the unavailability of, or
interruptions in access to, process technologies and reduced control over
component availability, delivery schedules, manufacturing yields and costs. ACT
and Celestica also build products for other companies, and they may not have
sufficient quantities of inventory available to fill our orders, or may be
unwilling to allocate their internal resources to fill our orders on a timely
basis. If either ACT or Celestica is unable or unwilling to continue
manufacturing our products in required volumes and at high quality levels, we
will have to identify, qualify and select acceptable alternative manufacturers,
which could be a timely process. It is possible that an alternate source may not
be available to us when needed or be in a position to satisfy our production
requirements at acceptable prices and quality. If we are required or choose to
change one or both of our contract manufacturers, our revenue may decline and
our customer relationships may be damaged. Any significant interruption in
manufacturing would reduce our supply of products to our customers, which may
harm our business.
IF WE FAIL TO ACCURATELY PREDICT OUR COMPONENT OR MANUFACTURING REQUIREMENTS, WE
COULD INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We currently provide forecasts of our demand to ACT, Celestica and our
component suppliers months prior to scheduled delivery of products to our
customers. Lead times for the materials and components that we order vary
significantly and depend on numerous factors, including the specific supplier,
contract terms and demand for a component at a given time. If we overestimate
our component requirements, our contract manufacturer may purchase excess
inventory. For those parts that are unique to our products, we could be required
to pay for these excess parts and recognize related inventory write-down costs.
In the past, we have overestimated our demand for some of our components. If we
underestimate our requirements, our contract manufacturer may have an inadequate
inventory, which could interrupt the
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manufacturing of our products and result in delays in shipments and revenue, or
could cause us to purchase materials and components from third parties at higher
costs. In the past, we have underestimated our demand for some of our
components.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS, AND IF
WE ARE UNABLE TO OBTAIN THESE COMPONENTS ON A TIMELY BASIS, WE WILL NOT BE ABLE
TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS.
We currently purchase several key components from single or limited
sources, including IBM, Motorola and PMC-Sierra. For example, we have worked
with IBM for over a year to develop several of our key application specific
integrated circuits, or ASICs, which are custom designed to perform a specific
function more rapidly than a general purpose microprocessor. These ASICs are
very complex and IBM is our sole supplier. In the event our sole source or
limited source suppliers cannot supply us in the future with the quantity of key
components that we require, we may not be able to deliver our products to our
customers. We may not be able to develop an alternate source to these suppliers
in a timely manner.
We do not have guaranteed supply arrangements with most of our key
suppliers and we may not be able to obtain necessary supplies in a timely
manner. Financial or other difficulties faced by these suppliers or significant
changes in demand for these components could limit the availability of these
components. In addition, any of our sole-source suppliers could be acquired by,
or enter into exclusive arrangements with, our competitors or stop selling their
products or components to us at acceptable prices, or at all. Any interruption
or delay in the supply of any of these components, or the inability to obtain
these components from alternate sources at acceptable prices and within a
reasonable amount of time, would harm our ability to meet scheduled product
deliveries to our customers and would harm our business, financial condition and
results of operations.
IF OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, OUR BUSINESS
COULD BE HARMED.
Our products are highly technical and are designed to be deployed in very
large and complex networks. Because of their nature, our products can only be
fully tested when deployed in networks that generate high amounts of data and/or
voice traffic. Because of our short operating history, our products have not yet
been broadly deployed. For example, we are currently in the initial stages of
testing our SRX-3000 softswitch. We have experienced errors in the past in
connection with new products and enhancements. We expect that errors may be
found from time to time in new or enhanced products after we begin commercial
shipments. In addition, our customers may use our products in conjunction with
products from other vendors. As a result, if problems occur, it may be difficult
to identify the source of these problems. Any defects or errors in our products
discovered in the future, or failures of our customers' networks, whether caused
by our products or another vendor's products, could result in:
- loss of, or delay in, revenue and loss of market share;
- loss of customers;
- negative publicity regarding us and our products;
- increased service and warranty costs; and
- legal actions by our customers.
CLAIMS BASED ON ERRORS IN OUR PRODUCTS OR IN PERFORMING PRODUCT RELATED SERVICES
COULD RESULT IN COSTLY LITIGATION AGAINST US.
Because our products are designed to provide critical communications
services, we may be subject to significant liability claims or liquidated
damages pursuant to contracts with our customers. Our insurance may not, or may
not be sufficient to, cover us against these liabilities or may not continue to
be available to us. Liability claims could also require us to spend significant
time and money in litigation. As a result, any of these claims, whether or not
successful, could seriously damage our reputation and harm our business,
financial condition and results of operations.
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RISKS ASSOCIATED WITH OTHER ASPECTS OF UNISPHERE'S BUSINESS
IF WE FAIL TO MANAGE THE GROWTH OF OUR OPERATIONS AND INTEGRATION OF OUR
ACQUISITIONS, OUR FUTURE GROWTH WILL BE LIMITED.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This expansion, together with the integration of Argon
Networks, Castle Networks and Redstone Communications, and our proposed
acquisition of BroadSoft, places or may place a significant strain on our
managerial, operational and financial resources. From June 30, 1999 to September
30, 2000, we increased the number of our employees from 260 to 611. We are still
in the process of integrating managerial and other personnel. In particular,
James A. Dolce, Jr., our President and Chief Executive Officer, and Thomas M.
Burkardt, our Chief Operating Officer and Vice President, assumed their current
positions beginning in January 2000. Our current Chief Financial Officer, John
J. Connolly, joined the company in July 2000. Our rapid growth has placed a
significant demand on management and operational resources. Our management,
personnel, systems, procedures, controls and customer service may be inadequate
to support our future operations. To manage the expected growth of our
operations and personnel, we will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- hire, train, motivate and manage our personnel; and
- effectively manage multiple relationships with our customers, suppliers
and other parties.
If we are not able to accomplish the foregoing in an efficient and timely
manner, our business, financial condition and results of operations will be
harmed.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND THE
LOSS OF THEIR SERVICES COULD DISRUPT OUR OPERATIONS AND OUR CUSTOMER
RELATIONSHIPS.
Our success depends to a significant degree upon the continued
contributions of the principal members of our management, many of whom would be
difficult to replace. In particular, we rely on the services of each of James A.
Dolce, Jr., our President and Chief Executive Officer, and Thomas M. Burkardt,
our Chief Operating Officer and Vice President. Mr. Dolce formerly served as the
Chief Executive Officer of Redstone Communications and Mr. Burkardt formerly
served as President and Chief Executive Officer of Castle Networks. Siemens
acquired Redstone and Castle in April 1999 and contributed them to us in June
1999. Messrs. Dolce and Burkardt have played integral roles in the development
and commercialization of the technology and products of those two businesses. In
addition, Messrs. Dolce and Burkardt have existing relationships with several
communications service providers that are critical to our sales efforts. The
loss of the services of either of Messrs. Dolce or Burkardt, or any other key
personnel, particularly senior management, sales personnel and engineers, could
harm our operations and our customer relationships. We do not have key man life
insurance for any of our executive officers or key personnel, including Messrs.
Dolce and Burkardt.
COMPETITION FOR QUALIFIED PERSONNEL IN OUR INDUSTRY IS INTENSE AND IF WE ARE NOT
SUCCESSFUL IN HIRING AND RETAINING THESE PERSONNEL, OUR ABILITY TO OPERATE AND
GROW OUR BUSINESS MAY BE HARMED.
Competition for qualified personnel in the networking equipment industry is
intense and we may not be successful in hiring and retaining qualified
personnel. Failure to hire qualified personnel could harm the growth of our
business. Our growth and expansion of operations has placed significant demands
on our management, engineering, sales and marketing staff and facilities. We
will need to hire additional personnel in each of these areas to continue to
grow our business. We have experienced, and expect to continue to experience,
difficulty in recruiting and retaining qualified personnel.
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WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The market for our products is global and we market, sell and service our
products in the United States and internationally. For the fiscal year ended
September 30, 2000, we derived 41.2% of our net revenues from international
sales. The majority of our revenue from these international sales has been
derived through sales of our products through Siemens, primarily to companies in
Portugal, Germany and Hong Kong. We intend to expand substantially our
international operations and enter new international markets. We have a limited
management team and this expansion will require significant management attention
and financial resources to develop successfully direct and indirect
international sales and support channels.
We have limited experience in marketing and distributing our products
internationally. In addition, our international operations are subject to other
inherent risks, including:
- difficulties and costs of staffing and managing foreign operations;
- certification requirements and differing regulatory and industry
standards;
- reduced protection for intellectual property rights in some countries;
- fluctuations in currency exchange rates; and
- import or export licensing requirements.
In addition, sales efforts on our behalf by Siemens in European countries
are subject to seasonal purchasing patterns typical of European customers,
particularly in the summer, which could harm our operating results. Moreover,
our sales efforts in Asia-Pacific countries are susceptible to recessions that
could lead to increased governmental ownership or regulation of the economy,
higher interest rates, increased barriers to entry, such as higher tariffs and
taxes, and reduced demand for United States manufactured goods.
IF WE MAKE ANY ACQUISITIONS OR STRATEGIC INVESTMENTS, OUR BUSINESS COULD BE
DISRUPTED AND OUR FINANCIAL CONDITION COULD BE HARMED.
Our business has been built upon the acquisition of three companies.
Although we have no current agreements or negotiations underway with respect to
any acquisitions or strategic investments other than BroadSoft, we may acquire
or make investments in other businesses, products or technologies in the future.
Our acquisition of BroadSoft, as well as any other acquisitions or strategic
investments, if any, may entail numerous risks, including:
- difficulties in assimilating acquired operations, technologies or
products;
- diversion of management's attention from our core business concerns;
- risks of entering markets in which we have no or limited prior
experience;
- substantial dilution of our current stockholders' ownership;
- incurrence of substantial debt;
- incurrence of significant amortization expenses related to goodwill and
other intangible assets; and
- incurrence of significant immediate write-offs.
OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL
PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our technology is difficult and the steps taken by us may
not
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prevent unauthorized use of our technology, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. Claims for alleged
infringement and any resulting lawsuit, if successful, could subject us to
significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation could also force us to do one or more
of the following:
- stop selling, incorporating or using our products that use the challenged
intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, the license for which may
not be available on reasonable terms, or at all; or
- redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Our general liability insurance does not cover potential
claims of this type.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE.
We integrate third-party technology with our products, including signaling
system gateway technology of Trillium Digital Systems and software from Fujitsu
Siemens Computers. From time to time we may be required to license technology
from third parties to develop new products or product enhancements. Third-party
licenses may not be available to us on commercially reasonable terms, if at all.
Our inability to obtain third-party licenses required to develop new products
and product enhancements could require us to obtain substitute technology of
lower quality or performance standards or at a greater cost, any of which could
seriously harm our business, financial condition and results of operations.
RISKS RELATED TO UNISPHERE'S RELATIONSHIP WITH SIEMENS
YOU WILL NOT BE ABLE TO CONTROL OUR CORPORATE EVENTS BECAUSE SIEMENS CURRENTLY
OWNS OVER 80% OF OUR OUTSTANDING COMMON STOCK. SIEMENS' MAJORITY OWNERSHIP COULD
DISCOURAGE OR PREVENT A POTENTIAL ACQUIRER FROM OBTAINING CONTROL OF US, WHICH
MAY HARM THE MARKET PRICE OF OUR COMMON STOCK.
Siemens currently beneficially owns approximately % of our outstanding
common stock and will own approximately % of our outstanding common stock
if we complete the merger with BroadSoft and assuming we do not issue any
additional shares to BroadSoft stockholders after the effective time of the
merger as a result of the trading price of our common stock during a specified
period of time. Accordingly, Siemens, by virtue of its majority ownership of our
common stock, will have the power, acting alone, to elect a majority of our
board of directors and will have the ability to determine the outcome of any
corporate actions requiring stockholder approval, regardless of how our other
stockholders may vote. Siemens, other than by virtue of its majority ownership
of our common stock, does not have the right to elect a minimum number of our
directors. Under Delaware law and our certificate of incorporation, Siemens may
exercise its voting power by written consent, without convening a meeting of
stockholders. Siemens' interests could conflict with the interests of our other
stockholders. Siemens' ownership may have the effect of delaying, deferring or
preventing a change in control of our company or of discouraging a potential
acquirer from attempting to obtain control of us, which could harm the market
price of our common stock.
19
<PAGE> 32
BECAUSE WE HAVE THREE DIRECTORS WHO ARE ALSO SENIOR EXECUTIVES OF SIEMENS OR ARE
AFFILIATED WITH SIEMENS, SOME OF OUR DIRECTORS MAY FACE CONFLICTS OF INTEREST.
Three of our directors are also senior executives of Siemens or are
affiliated with Siemens. These directors may have conflicts of interest with
respect to matters potentially or actually involving us, such as acquisitions,
financings and other corporate opportunities that may be suitable for us. These
relationships could create, or appear to create, potential conflicts of interest
when directors or officers are faced with decisions that could have different
implications for our company and Siemens.
WE COMPETE WITH SIEMENS AND WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST
WITH SIEMENS. BECAUSE OF SIEMENS' MAJORITY OWNERSHIP OF OUR COMPANY, WE MAY NOT
RESOLVE THESE CONFLICTS ON THE MOST FAVORABLE TERMS TO US AND OUR BUSINESS MAY
BE HARMED.
Conflicts of interests may arise between Siemens and ourselves in a number
of areas, including:
- business opportunities that may be attractive to both Siemens and us; and
- contractual relationships with Siemens concerning distribution
relationships, technical services, and other matters.
Our voice switching products compete to a limited extent with some
traditional voice switching products of Siemens. In addition, Siemens is a
value-added reseller of products of our competitors. We may not be able to
resolve any potential conflicts with Siemens and, even if we do, the resolution
may be less favorable than if we were dealing with an unaffiliated party.
We have agreements with Siemens relating to distribution of our products,
engineering services and other matters and they may be amended or terminated
upon agreement between the parties. While we are controlled by Siemens, Siemens
may be able to require us to terminate these agreements or to agree to amend
these agreements. The amendments may be less favorable to us than the current
terms of these agreements.
20
<PAGE> 33
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. In
some cases, you can identify forward-looking statements by terminology -- for
instance, as may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential or continue, the negative of these terms, or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the risk factors
section. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results
or to changes in our expectations.
21
<PAGE> 34
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
UNISPHERE SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
This information should be read in conjunction with the Unisphere
consolidated financial statements and related notes included elsewhere in this
prospectus and "Unisphere's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The table below sets forth our selected financial data. The consolidated
financial data as of September 30, 1999 and 2000, and for the period from
January 12, 1999 (date of inception) through September 30, 1999 and for the year
ended September 30, 2000 are derived from our audited consolidated financial
statements included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
UNISPHERE NETWORKS, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JANUARY 12, 1999
(INCEPTION) THROUGH YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------- ------------------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 2,813 $ 49,628
Cost of revenues(1)..................................... 6,485 43,476
--------- ---------
Gross profit (loss)(1)......................... (3,672) 6,152
Operating expenses:
Research and development(1)......................... 68,369 112,451
Sales and marketing(1).............................. 20,291 42,874
General and administrative(1)....................... 13,919 14,736
Amortization of intangible assets................... 61,629 127,033
Impairment of intangible assets..................... -- 118,810
Purchased in-process research and development....... 217,400 --
Stock-based compensation............................ -- 22,464
--------- ---------
Total operating expenses....................... 381,608 438,368
--------- ---------
Loss from operations........................... (385,280) (432,216)
Other income (expense).................................. 227 (1,466)
--------- ---------
Net loss....................................... $(385,053) $(433,682)
========= =========
Basic and diluted net loss per share.................... $ (4.47) $ (5.02)
========= =========
Weighted average shares used in computing basic and
diluted net loss per share............................ 86,133 86,399
========= =========
(1) Excludes non-cash, stock-based compensation expense
as follows:
Cost of revenues...................................... $ -- $ 644
Research and development.............................. -- 9,212
Sales and marketing................................... -- 4,753
General and administrative............................ -- 7,855
--------- ---------
$ -- $ 22,464
========= =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 9,082 $ 634
Working capital (deficit)............................... (45,277) (14,013)
Total assets............................................ 674,257 471,954
Total stockholders' equity.............................. 614,898 429,663
</TABLE>
22
<PAGE> 35
The separate financial data of Redstone Communications and Castle Networks
have been presented below because we consider these companies to be our
predecessor business.
The table below sets forth selected financial data of Redstone
Communications. The financial data as of December 31, 1997 and 1998 and April
27, 1999, for the period from September 16, 1997 (date of inception) to December
31, 1997, for the year ended December 31, 1998 and for the period from January
1, 1999 to April 27, 1999 are derived from the audited financial statements of
Redstone Communications included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
REDSTONE COMMUNICATIONS, INC.
(IN THOUSANDS)
PERIOD FROM
SEPTEMBER 16, 1997 JANUARY 1, 1999
(INCEPTION) THROUGH YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1998 APRIL 27, 1999
------------------- ----------------- ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ -- $ -- $ --
Operating expenses:
Research and development.................... 503 8,767 21,003
Sales and marketing......................... 40 731 6,446
General and administrative.................. 133 765 1,169
------ -------- --------
Total operating expenses................ 676 10,263 28,618
------ -------- --------
Loss from operations.................... (676) (10,263) (28,618)
Other income, net............................... 84 361 107
------ -------- --------
Net loss................................ $ (592) $ (9,902) $(28,511)
====== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents................... $6,318 $ 10,972 $ 3,969
Working capital............................. 6,185 9,707 2,745
Total assets................................ 6,558 12,506 6,449
Total stockholders' deficit................. (576) (8,836) (15,136)
</TABLE>
The table below sets forth selected financial data of Castle Networks. The
financial data as of December 31, 1997 and 1998 and April 20, 1999, for the
period from October 16, 1997 (date of inception) to December 31, 1997, for the
year ended December 31, 1998 and for the period from January 1, 1999 to April
20, 1999 are derived from the audited financial statements of Castle Networks
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
CASTLE NETWORKS, INC.
(IN THOUSANDS)
PERIOD FROM
OCTOBER 16, 1997 JANUARY 1, 1999
(INCEPTION) THROUGH YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1998 APRIL 20, 1999
------------------- ----------------- ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $ -- $ -- $ --
Operating expenses:
Research and development.................... 23 6,051 10,154
Sales and marketing......................... 2 1,785 10,072
General and administrative.................. 38 827 2,164
------ -------- --------
Total operating expenses................ 63 8,663 22,390
------ -------- --------
Loss from operations.................... (63) (8,663) (22,390)
Other income, net............................... -- 277 101
------ -------- --------
Net loss................................ $ (63) $ (8,386) $(22,289)
====== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 47 $ 12,218 $ 6,219
Working capital (deficit)................... (70) 11,115 3,660
Total assets................................ 61 13,700 8,249
Total stockholders' deficit................. (63) (6,506) (12,708)
</TABLE>
23
<PAGE> 36
BROADSOFT SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected statement of operations data for the period from inception
(November 17, 1998) to December 31, 1998, the year ended December 31, 1999 and
the nine months ended September 30, 2000, and the selected balance sheet data at
December 31, 1998 and 1999 and September 30, 2000, set forth below, have been
derived from BroadSoft's audited financial statements included elsewhere in this
proxy statement/prospectus. The selected statement of operations data for the
nine months ended September 30, 1999 are derived from unaudited financial
statements included elsewhere in this proxy statement/prospectus that have been
prepared on the same basis as the audited financial statements and, in the
opinion of BroadSoft's management, contain all adjustments, consisting only of
normal recurring adjustments necessary for the fair presentation of BroadSoft's
operating results for such period. The historical results are not necessarily
indicative of results to be expected for any future period. The data has been
derived from financial statements that have been prepared in accordance with
generally accepted accounting principles and should be read in conjunction with
the BroadSoft Financial Statements and the Notes thereto and "BroadSoft's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
FROM NINE MONTHS NINE MONTHS
INCEPTION TO YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 2000
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating expenses:
Research and development.............. $ -- $ 1,707 $ 1,066 $ 4,376
Sales and marketing................... -- 561 333 1,895
General and administrative............ -- 771 551 3,173
------- ------- ------- -------
Total operating expenses........... -- 3,039 1,950 9,444
------- ------- ------- -------
Loss from operations.................... -- (3,039) (1,950) (9,444)
------- ------- ------- -------
Other expenses.......................... -- -- -- (5)
Interest income, net.................... -- 64 36 224
------- ------- ------- -------
Net loss................................ $ -- $(2,975) $(1,914) $(9,225)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ----------------- ------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $500 $ 2,134 $13,388
Working capital........................... -- 1,597 12,249
Total assets.............................. 500 2,480 17,384
Non-current obligations................... -- 184 3,107
Redeemable preferred stock................ -- 4,320 21,820
Total stockholders' deficit............... -- (2,645) (9,818)
</TABLE>
24
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma condensed combined financial statements
give effect to Unisphere's acquisition of BroadSoft using the purchase method of
accounting. The unaudited pro forma condensed combined statement of operations
for the year ended September 30, 2000 gives effect to the acquisition of
BroadSoft as if it had occurred on October 1, 1999. The unaudited pro forma
condensed combined statement of operations data for the year ended September 30,
2000 are derived from the historical results of operations of Unisphere for the
year ended September 30, 2000, the historical results of BroadSoft for the
nine-month period ended September 30, 2000 and the historical results of
BroadSoft for the three-month period ended December 31, 1999. The unaudited pro
forma condensed combined balance sheet as of September 30, 2000 gives effect to
the acquisition of BroadSoft as if it had occurred on that date. The unaudited
pro forma condensed combined balance sheet as of September 30, 2000 was derived
from the historical balance sheets of Unisphere and BroadSoft as of that date.
The unaudited pro forma condensed combined financial statements are
presented for informational purposes only and do not purport to be indicative of
the results of operations that actually would have been achieved had such
transactions been consummated on the date or for the periods indicated and do
not purport to be indicative of the balance sheet data or results of operations
as of any future date or for any future period. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
accompanying notes, the historical financial statements and notes thereto of
Unisphere and BroadSoft, which are included elsewhere in this proxy
statement/prospectus, "Unisphere's Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "BroadSoft's Management's
Discussion and Analysis of Financial Condition and Results of Operations."
25
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ------------------------
UNISPHERE BROADSOFT ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................................. $ 49,628 $ -- $ -- $ 49,628
Cost of revenues(1).......................... 43,476 -- -- 43,476
--------- -------- -------- ---------
Gross profit................................. 6,152 -- -- 6,152
--------- -------- -------- ---------
Operating expenses:
Research and development(1)................ 112,451 4,772 -- 117,223
Sales and marketing(1)..................... 42,874 2,013 -- 44,887
General and administrative(1).............. 14,736 2,013 -- 16,749
Amortization of intangible assets.......... 127,033 -- 44,642(d) 171,675
Impairment of intangible assets............ 118,810 -- -- 118,810
Stock-based compensation................... 22,464 1,735 7,119(e) 31,318
--------- -------- -------- ---------
Total operating expenses................ 438,368 10,533 51,761 500,662
--------- -------- -------- ---------
Loss from operations......................... (432,216) (10,533) (51,761) (494,510)
--------- -------- -------- ---------
Other expenses............................... (2,164) (5) -- (2,169)
Interest income, net......................... 698 252 -- 950
--------- -------- -------- ---------
Net loss..................................... $(433,682) $(10,286) $(51,761) $(495,729)
========= ======== ======== =========
Basic and diluted net loss per share......... $ (5.02) $ (5.49)
========= =========
Weighted average shares used in computing
basic and diluted net loss per share....... 86,399 90,372
========= =========
</TABLE>
---------------
(1) Excludes non-cash, stock-based compensation
expense as follows:
<TABLE>
<S> <C> <C> <C> <C>
Cost of revenues........................ $ 644 $ -- $ -- $ 644
Research and development................ 9,212 245 1,068 10,525
Sales and marketing..................... 4,753 110 356 5,219
General and administrative.............. 7,855 1,380 5,695 14,930
--------- -------- -------- ---------
$ 22,464 $ 1,735 $ 7,119(e) $ 31,318
========= ======== ======== =========
</TABLE>
26
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- -------------------------
UNISPHERE BROADSOFT ADJUSTMENTS COMBINED
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 634 $13,388 $(11,320)(c) $ 2,702
Other current assets................... 27,644 1,136 -- 28,780
-------- ------- -------- --------
Total current assets.............. 28,278 14,524 (11,320) 31,482
Non-current assets..................... 43,549 2,860 -- 46,409
Intangible assets, net................. 400,127 -- 133,927(a) 534,054
-------- ------- -------- --------
Total assets...................... $471,954 $17,384 $122,607 $611,945
======== ======= ======== ========
Current liabilities.................... $ 42,291 $ 2,275 $ -- $ 44,566
Non-current liabilities................ -- 3,107 -- 3,107
-------- ------- -------- --------
Total liabilities................. 42,291 5,382 -- 47,673
Redeemable preferred stock............. -- 21,820 (21,820)(b) --
Total stockholders' equity............. 429,663 (9,818) 144,427(b) 564,272
-------- ------- -------- --------
Total liabilities, preferred
stock and stockholders'
equity..................... $471,954 $17,384 $122,607 $611,945
======== ======= ======== ========
</TABLE>
27
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
a. For the purpose of calculating the acquisition purchase price in the pro
forma financial statements, the number of unrestricted common shares, restricted
common shares and options to purchase common shares of Unisphere assumed issued
in the acquisition is 4,724, 1,523 and 1,213, respectively. These amounts are
based on the maximum number of unrestricted shares, restricted common shares and
options to purchase common shares of Unisphere issuable in the transaction. The
actual number of Unisphere unrestricted common shares, restricted common shares
and options to purchase common shares that will be issued in the acquisition is
subject to adjustment as set forth in the merger agreement between Unisphere and
BroadSoft. The aggregate estimated fair value of the maximum number of Unisphere
unrestricted common shares, restricted common shares and options to purchase
common shares, based on a fair value of $21.00 per share, is $149,454. Including
estimated acquisition-related expenses of $4,000, the total estimated purchase
price is $153,454.
The acquisition of BroadSoft will be accounted for using the purchase
method of accounting. The purchase method of accounting allocates the aggregate
purchase price to the assets acquired, including identifiable intangible assets,
and liabilities assumed based upon their respective fair values. For purposes of
the unaudited pro forma condensed combined financial statements, the excess of
the aggregate purchase price over the historical net book value of BroadSoft's
assets acquired and liabilities assumed as of September 30, 2000 has been
allocated to goodwill and other intangible assets, and is for illustrative
purposes in the unaudited pro forma condensed combined financial statements
only. Actual allocations will be based on a valuation that will not be completed
until after the acquisition is consummated.
In addition, the estimated future compensation expense related to the
unvested restricted common shares and unvested options to purchase common shares
issuable by Unisphere in the acquisition has been deducted from goodwill and
recorded as deferred compensation. The deferred compensation adjustment is equal
to the estimated average percentage of the vesting period that has not yet
expired for each of the groups of restricted common shares and options to
purchase common shares to be issued in the acquisition multiplied by the
aggregate fair value of each of those groups of restricted common shares and
options to purchase common shares. The deferred compensation will be amortized
into expense over the remaining vesting periods of the restricted common shares
and options to purchase common shares.
In connection with the merger, BroadSoft will incur an estimated $3,000 in
some acquisition-related expenses. The expenses reduced working capital and
increased goodwill and intangible assets in the allocation table below.
The following represents the preliminary allocation of the estimated
purchase price for Unisphere's acquisition of BroadSoft for purposes of the
unaudited pro forma condensed combined financial statements:
<TABLE>
<S> <C>
Working capital, including cash acquired.................... $ 4,929
Non-current assets.......................................... 2,860
Non-current liabilities..................................... (3,107)
Goodwill and intangible assets.............................. 133,927
Deferred compensation....................................... 14,845
--------
Aggregate purchase price.................................... $153,454
========
</TABLE>
b. The unaudited pro forma condensed combined balance sheet reflects the
initial issuance of unrestricted and restricted shares of Unisphere common stock
and options to purchase Unisphere common stock in exchange for all of the
outstanding unrestricted and restricted shares of BroadSoft common stock and
options to purchase BroadSoft common stock, including the assumed conversion of
the BroadSoft Series B redeemable preferred stock to common stock. BroadSoft's
Series A redeemable preferred stock
28
<PAGE> 41
will be redeemed for cash prior to the consummation of the acquisition. The pro
forma adjustments to redeemable preferred stock and stockholders' equity are as
follows:
<TABLE>
<CAPTION>
TOTAL REDEEMABLE
STOCKHOLDERS' PREFERRED
EQUITY STOCK
------------- ----------
<S> <C> <C>
Elimination of BroadSoft Stockholders' Deficit.............. $ 9,818 --
Elimination of converted BroadSoft Series B Preferred
Stock..................................................... -- $(17,500)
Redemption by BroadSoft of Series A Preferred Stock......... -- (4,320)
Issuance of Unisphere Common Stock and options.............. 149,454 --
Deferred Compensation....................................... (14,845) --
-------- --------
Total Adjustments................................. $144,427 $(21,820)
======== ========
</TABLE>
c. The pro forma adjustment to cash is as follows:
<TABLE>
<S> <C>
Unisphere acquisition-related expenses...................... $ (4,000)
BroadSoft acquisition-related expenses...................... (3,000)
Redemption by BroadSoft of Series A Preferred Stock......... (4,320)
--------
$(11,320)
========
</TABLE>
d. The pro forma adjustment to amortization of intangible assets is based
on the assumption that the entire amounts identified as goodwill and other
intangible assets in Unisphere's acquisition of BroadSoft will be amortized on a
straight-line basis over a three-year period. The valuation of the intangible
assets will not be completed until after the acquisition is consummated. When
completed, certain amounts identified as intangible assets may be amortized over
periods other than the three-year period presented in the unaudited pro forma
condensed combined statement of operations. Additionally, a portion of the
purchase price may be identified as in-process research and development. This
amount, if any, will be charged to operating results in Unisphere's consolidated
financial statements in the period following consummation of the acquisition.
The pro forma statement of operations does not give effect to any potential
in-process research and development charge related to the acquisition.
e. The deferred compensation balance of $14,845 is being amortized on a
straight-line basis over the remaining vesting periods, resulting in a pro forma
adjustment of $7,119 for the year ended September 30, 2000. The estimated
allocation of stock-based compensation expense is as follows:
<TABLE>
<S> <C>
Research and development.................................... $1,068
Sales and marketing......................................... 356
General and administrative.................................. 5,695
------
$7,119
======
</TABLE>
29
<PAGE> 42
COMPARATIVE PER SHARE INFORMATION
We have summarized below the per common share information for Unisphere and
BroadSoft on a historical basis, for Unisphere on a pro forma basis and for
BroadSoft on a pro forma equivalent basis.
The unaudited "Pro Forma Unisphere" and the unaudited "Pro Forma
Equivalent -- BroadSoft" information assumes that the merger of Unisphere and
BroadSoft will be accounted for as a purchase. The unaudited "Pro Forma
Unisphere" information is derived from the historical financial information of
Unisphere at or for the fiscal year ended September 2000, and the financial
information of BroadSoft at or for the twelve months ended December 31, 1999 and
at or for the nine months ended September 30, 2000, and assumes that the merger
of Unisphere and BroadSoft occurred at the beginning of the earliest period
presented.
"Pro Forma Unisphere" net loss per common share -- basic and diluted was
calculated by dividing pro forma Unisphere net loss, which is Unisphere
historical net loss combined with BroadSoft historical net loss and includes pro
forma adjustments, by the pro forma weighted average number of Unisphere common
shares outstanding.
"Pro Forma Unisphere" book value per common share was calculated by
dividing total pro forma stockholders' equity by the pro forma number of
Unisphere common shares outstanding at the end of the period.
The unaudited "Pro Forma Equivalent -- BroadSoft" information was
calculated by multiplying the corresponding "Pro Forma Unisphere" data by the
initial minimum common stock exchange ratio of 0.1207. This information shows
how each share of BroadSoft common stock would have participated in the net loss
and book value of Unisphere if the merger had been completed at the beginning of
the earliest period presented. However, these amounts do not necessarily reflect
future per share results of operations or book value of Unisphere.
Stockholders should read the information in this section along with
Unisphere's and Broadsoft's historical financial statements and accompanying
notes included elsewhere in this proxy statement/ prospectus and the unaudited
pro forma condensed combined financial statements and accompanying notes
included elsewhere in this proxy statement/prospectus.
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
SEPTEMBER 30, 2000
------------------
<S> <C> <C>
UNISPHERE -- HISTORICAL
Net loss per common share -- basic and diluted........... $(5.02)
Book value per common share.............................. 4.76
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
<S> <C> <C>
BROADSOFT -- HISTORICAL
Net loss per common share -- basic and diluted.......... $(0.15) $(0.31)
Book value per common share............................. (0.09) (0.32)
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
SEPTEMBER 30, 2000
------------------
<S> <C> <C>
PRO FORMA UNISPHERE
Net loss per common share -- basic and diluted........... $(5.49)
Book value per common share.............................. 5.98
PRO FORMA EQUIVALENT -- BROADSOFT
Net loss per common share -- basic and diluted........... $(0.66)
Book value per common share.............................. 0.72
</TABLE>
30
<PAGE> 43
MARKET PRICE INFORMATION
MARKET PRICE INFORMATION
Unisphere common stock has traded on the Nasdaq National Market under the
symbol "UNSP" since , 2001.
The high and low sale prices of Unisphere common stock as reported on the
Nasdaq National Market between , 2001 through , 2001
were $ and $ , respectively. Because there is no established
trading market for shares of BroadSoft, information with respect to the market
prices of BroadSoft has been omitted.
RECENT CLOSING PRICES
The last reported sale price per share of Unisphere common stock as
reported on the Nasdaq National Market on , 2001, the most recent
practicable date prior to the printing of this proxy statement/prospectus was
$ . Because there was no established trading market for shares of
Unisphere common stock as of October 19, 2000, the day prior to the public
announcement that Unisphere, BroadSoft and the merger subsidiary had entered
into the merger agreement, information with respect to the market price of
Unisphere common stock as of that date has been omitted.
BroadSoft stockholders are advised to obtain current market quotations for
Unisphere common stock. No assurance can be given as to the market prices of
Unisphere common stock at any time before the completion of the merger or as to
the market price of Unisphere common stock at any time after the merger.
DIVIDENDS
Unisphere has never paid or declared any cash dividends on Unisphere common
stock or other securities and does not anticipate paying cash dividends in the
foreseeable future. Unisphere currently intends to retain all future earnings,
if any, for use in the operation of its business.
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THE SPECIAL MEETING
We are furnishing this proxy statement/prospectus to holders of BroadSoft
common stock and BroadSoft preferred stock in connection with the solicitation
of proxies by the BroadSoft board of directors for use at the special meeting of
BroadSoft stockholders to be held on , 2001, and any adjournment or
postponement of the meeting.
This proxy statement/prospectus is first being mailed to BroadSoft
stockholders on or about , 2001. This proxy statement/prospectus is
also furnished to BroadSoft stockholders as a prospectus in connection with the
issuance by Unisphere of shares of its common stock as contemplated by the
merger agreement.
DATE, TIME AND PLACE
The special meeting will be held on , 2001 at , at
.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting of BroadSoft stockholders, and any adjournment or
postponement of the special meeting, BroadSoft stockholders will be asked:
- to consider and vote upon a proposal to approve the merger agreement
among BroadSoft, Inc., Unisphere Networks, Inc. and Pitcher Acquisition
Corp., under which Pitcher Acquisition Corp. will be merged into
BroadSoft and each outstanding share of BroadSoft common stock will be
exchanged for the right to receive shares of Unisphere common stock, and
to approve the merger; and
- to transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
RECORD DATE
Only stockholders of record of BroadSoft common stock, BroadSoft Series A
preferred stock and BroadSoft Series B preferred stock at the close of business
on , 2001 are entitled to notice of and to vote at the special
meeting.
VOTING AND REVOCATION OF PROXIES
We request that BroadSoft stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying postage-paid
envelope. All properly executed proxies that BroadSoft receives prior to the
vote at the special meeting, and that are not revoked, will be voted in
accordance with the instructions indicated on the proxies. If no direction is
indicated, the proxies will be voted to approve the merger agreement and the
merger. The BroadSoft board of directors does not currently intend to bring any
other business before the special meeting and, to their knowledge, no other
matters are to be brought before the special meeting. If other business properly
comes before the special meeting or any adjournment or postponement of the
special meeting, the proxies will vote in accordance with BroadSoft's
management's own judgment.
BroadSoft stockholders may revoke their proxies at any time prior to its
use by:
- delivering to the corporate secretary of BroadSoft a signed notice of
revocation or a later-dated, signed proxy; or
- attending the special meeting and voting in person. Attendance at the
special meeting is not sufficient to revoke a proxy.
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QUORUM; ABSTENTIONS
The presence at the special meeting, in person or by proxy, of the
following will constitute a quorum for transaction of business at the special
meeting:
- holders of a majority of the voting power represented by all shares of
BroadSoft common stock and BroadSoft Series B preferred stock (with the
Series B preferred stock voting on an as-converted basis) issued and
outstanding on the record date, voting together as a single class and;
- holders of a majority of the voting power represented by all shares of
BroadSoft Series A preferred stock and BroadSoft Series B preferred stock
(with the Series B preferred stock voting on an as-converted basis)
issued and outstanding on the record date, voting together as a single
class.
Holders of record of BroadSoft common stock and Series A preferred stock
each have one vote per share. Holders of record of BroadSoft Series B preferred
stock have two votes per share. Abstentions will be included in determining the
number of shares present and voting at the meeting for the purpose of
determining the presence of a quorum. Abstentions will have the same effect as
votes against the merger agreement and the merger. In addition, the failure of a
BroadSoft stockholder to return a proxy or vote in person will have the effect
of a vote against the merger agreement and the merger. Accordingly, BroadSoft
stockholders are urged to return the enclosed proxy card marked to indicate
their vote.
VOTE REQUIRED
As of the close of business on , 2001, the record date, there
were outstanding and entitled to vote shares of BroadSoft common stock,
shares of BroadSoft Series A preferred stock and shares of BroadSoft
Series B preferred stock. Holders of record of BroadSoft common stock and Series
A preferred stock each have one vote per share. Holders of record of BroadSoft
Series B preferred stock have two votes per share.
As of the close of business on the record date, there were holders of
record of BroadSoft common stock, holders of record of BroadSoft Series A
preferred stock and holders of record of BroadSoft Series B preferred
stock. Approval of the merger agreement and the merger requires the affirmative
vote of the holders of a majority of the voting power of the outstanding shares
of BroadSoft common stock (including the Series B preferred stock on an
as-converted basis) and a majority of BroadSoft Series A preferred stock and
BroadSoft Series B preferred stock (with the Series B preferred stock voting on
an as-converted basis), voting as a single class.
As of , 2001, BroadSoft's directors and some executive officers
and their affiliates, together with other principal stockholders, beneficially
owned outstanding shares of BroadSoft common stock and Series B preferred stock
(with the Series B preferred stock, voting on an as-converted basis), voting as
a single class, representing approximately % of the total voting power of
such stock and outstanding shares of BroadSoft Series A preferred stock and
BroadSoft Series B preferred stock (with the Series B preferred stock, voting on
an as-converted basis), voting as a single class, representing approximately
% of the total voting power of such stock. These stockholders have agreed
to vote their shares in favor of, among other things, the merger agreement and
the merger. Accordingly, approval of the merger agreement and the merger at the
special meeting is assured. See "Other Agreements -- Voting Agreements" on page
68.
APPRAISAL RIGHTS
Holders of BroadSoft common stock and preferred stock who submit a written
demand for appraisal of their shares and who comply with the applicable
statutory procedures under Delaware law will be entitled to appraisal rights and
to receive payment in cash for the fair market value of their shares as
determined by the Delaware Chancery Court. For a more complete description of
these rights, see "The Merger -- Rights of BroadSoft Stockholders to Appraisal"
on page 49.
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SOLICITATION OF PROXIES; EXPENSES
In addition to solicitation by mail, the directors, officers and employees
of BroadSoft may solicit proxies from BroadSoft stockholders by telephone,
facsimile, email or in person. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward proxy materials to beneficial owners and
will be reimbursed for their reasonable expenses incurred in sending the proxy
materials to beneficial owners. BroadSoft will bear its own expenses in
connection with the solicitation of proxies for its special meeting of
stockholders, except that Unisphere and BroadSoft each will pay one-half of all
printing and filing costs, fees and expenses, other than attorneys' fees,
incurred in connection with the registration statement of which this proxy
statement/prospectus is a part.
BOARD RECOMMENDATION
After careful consideration, the BroadSoft board of directors has
determined that the terms and conditions of the merger are fair to, and in the
best interests of, BroadSoft and its stockholders. Accordingly, the BroadSoft
board of directors unanimously approved the merger agreement and unanimously
recommends that you vote for approval of the merger agreement and the merger. In
considering the recommendation of the BroadSoft board of directors, you should
be aware that BroadSoft's directors and officers have interests in the merger
that are different from, or in addition to, yours. See "The Merger -- Interests
of BroadSoft's Executive Officers and Directors in the Merger" on page 48.
The matters to be considered at the special meeting are of great importance
to BroadSoft stockholders. Accordingly, you are urged to read and carefully
consider the information presented in this proxy statement/prospectus, and to
complete, date, sign and promptly return the enclosed proxy in the enclosed
postage-paid envelope.
You should not send any stock certificates with your proxy card. A
transmittal form with instructions for the surrender of BroadSoft common stock
certificates will be mailed to you promptly after completion of the merger. For
more information regarding the procedures for exchanging BroadSoft stock
certificates for Unisphere stock certificates, see "The Merger Agreement --
Exchange of Certificates" on page 56.
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THE MERGER
BACKGROUND OF THE MERGER
On June 14, 2000, Thomas M. Burkardt, Unisphere's Chief Operating Officer
and Vice President, and Michael Tessler, BroadSoft's President and Chief
Executive Officer, met in Chelmsford, Massachusetts to discuss potential joint
business initiatives, including outsourcing and reseller arrangements.
On July 11, 2000, Messrs. Burkardt and Tessler met at Unisphere's
headquarters in Chelmsford, Massachusetts to continue to discuss potential joint
business initiatives, including outsourcing and reseller arrangements. At that
time, the parties entered into a mutual confidentiality and non-disclosure
agreement.
On August 9, 2000, James A. Dolce, Unisphere's Chief Executive Officer and
President, Messrs. Burkardt and Tessler and Robert Goodman, Chairman of the
Board of Directors of BroadSoft, met at Unisphere's headquarters to continue
discussions regarding potential joint business initiatives or a possible merger.
On August 16, 2000, Messrs. Dolce and Tessler again discussed by telephone
potential joint business initiatives, including a possible merger.
On August 24 and August 25, 2000, Messrs. Burkardt and Tessler, Dr. Stephan
D. Howaldt, a Unisphere director, representatives of Credit Suisse First Boston,
financial advisors to Unisphere, and certain other members of Unisphere and
BroadSoft management met at a hotel in Gaithersburg, Maryland to discuss and
review certain due diligence items with respect to BroadSoft. At that meeting,
certain members of BroadSoft management gave presentations regarding BroadSoft's
business.
From August 29 to August 31, 2000, Unisphere and representatives of Credit
Suisse First Boston and Hale and Dorr LLP, outside counsel to Unisphere, worked
on the preparation of a preliminary term sheet, as well as a proposed a
structure for a possible transaction.
On August 30, 2000, Messers. Burkardt and Tessler, Suzanne M. Zabitchuck,
in-house General Counsel of Unisphere, and a representative of Cooley Godward
LLP, outside counsel to BroadSoft, discussed by telephone conference a proposed
new mutual confidentiality and non-disclosure agreement.
On September 1, 2000, Credit Suisse First Boston sent the proposed term
sheet and certain Unisphere marketing materials to BroadSoft. On that date,
Messrs. Dolce and Burkardt, Mr. John J. Connolly, Unisphere's Chief Financial
Officer, Vice President and Treasurer, Mr. Goodman and representatives of Credit
Suisse First Boston also discussed by telephone conference the term sheet that
had been circulated.
On September 3, 2000, Messrs. Goodman and Tessler discussed the proposed
term sheet with Cooley Godward and representatives of Robertson Stephens, Inc.,
which had been retained by BroadSoft to provide financial advisory services to
BroadSoft in connection with a transaction with Unisphere. This engagement was
later memorialized in an engagement letter executed by BroadSoft and Robertson
Stephens dated October 12, 2000.
On September 6, 2000, a representative of Robertson Stephens conducted a
due diligence review with respect to Unisphere by telephone with Mr. Dolce.
Between September 8 and September 10, 2000, representatives of Credit
Suisse First Boston and Robertson Stephens had numerous telephone discussions
regarding the terms of consideration in the proposed transaction.
On September 11, 2000, Unisphere held a meeting of the Unisphere board of
directors, during which Messrs. Dolce and Burkardt described the proposed merger
transaction with BroadSoft and updated the board on the term sheet negotiations
and discussions with BroadSoft to date. The Unisphere board authorized Mr. Dolce
and Unisphere's management to continue the discussions and negotiations in
consultation with Unisphere's legal and financial advisors, and to engage in a
preliminary due diligence investigation.
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Between September 15 and September 22, 2000, Messrs. Dolce and Goodman
discussed the proposed term sheet, and representatives of Credit Suisse First
Boston and Robertson Stephens discussed terms of the proposed merger, and
exchanged a proposed term sheet and a counter-proposal term sheet. Unisphere and
BroadSoft also executed a mutual confidentiality and non-disclosure agreement
that superseded the agreement between the parties dated July 11, 2000. A
telephone conference call with representatives from Unisphere, BroadSoft, Cooley
Godward, Credit Suisse First Boston, Hale and Dorr and Robertson Stephens to
discuss the terms of the proposed merger also took place.
On September 21, 2000, BroadSoft held a special telephonic meeting of its
board of directors, during which Messrs. Tessler and Goodman described the
proposed transaction with Unisphere and provided an update on the negotiations
and due diligence investigations. At this time, BroadSoft's board authorized
Messrs. Goodman and Tessler to continue negotiations with Unisphere regarding a
possible transaction.
On various occasions between September 26 and September 28, 2000,
representatives of Unisphere, BroadSoft, Cooley Godward, Credit Suisse First
Boston, Hale and Dorr and Robertson Stephens discussed by telephone the proposed
term sheet.
On September 28, 2000, Credit Suisse First Boston sent Robertson Stephens
and Messrs. Tessler and Goodman a revised term sheet. Also on that date, Messrs.
Burkardt and Tessler, Ms. Zabitchuck and representatives of Hale and Dorr and
Credit Suisse First Boston discussed in various telephone calls the terms of the
proposed merger.
On September 29, 2000, Credit Suisse First Boston sent to Robertson
Stephens and Messrs. Tessler and Goodman the final term sheet. On that date,
Messrs. Tessler and Goodman and representatives of Robertson Stephens discussed
the terms of the merger and the revised term sheet. Also on that date, certain
members of BroadSoft management and representatives of Robertson Stephens met at
Unisphere's headquarters in Chelmsford, Massachusetts with members of
Unisphere's management to discuss and review certain due diligence items with
respect to Unisphere.
On September 30, 2000, BroadSoft executed an exclusivity letter agreement
in which BroadSoft agreed, among other things, not to discuss a possible merger
or acquisition transaction with any party other than Unisphere until October 7,
2000. Also on that date, Hale and Dorr circulated an initial draft of the merger
agreement to BroadSoft and Cooley Godward.
On October 2, 2000, representatives of Hale and Dorr met with certain
members of management of BroadSoft and Cooley Godward at BroadSoft's
headquarters in Gaithersburg, Maryland to conduct due diligence on BroadSoft. At
various times between October 2, 2000 and October 20, 2000, the date the merger
agreement was executed, legal due diligence on BroadSoft was conducted by
Unisphere and by representatives of Hale and Dorr and financial due diligence on
BroadSoft was conducted by Unisphere and representatives of KPMG LLP,
Unisphere's independent accountants. In addition, during this period, additional
legal, financial and operational due diligence on Unisphere was conducted by
BroadSoft management and representatives of Cooley Godward and Robertson
Stephens. Also on October 2, 2000, W.R. Hambrecht + Co. was retained by
BroadSoft to provide advice to BroadSoft's board of directors regarding the
fairness, from a financial point of view, of the consideration to be received by
BroadSoft's stockholders in the proposed transaction with Unisphere. This
engagement was later set forth in an engagement letter executed by BroadSoft and
W.R. Hambrecht dated October 5, 2000.
On October 3, 2000, Unisphere and BroadSoft entered into a mutual
non-solicitation agreement.
Between October 3 and October 6, 2000, Messrs. Dolce, Tessler and Goodman,
Ms. Zabitchuck and representatives of Hale and Dorr and Cooley Godward
participated in various telephone calls to discuss the draft merger agreement
and ancillary agreements.
On October 7, 2000, BroadSoft agreed to extend the term of the exclusivity
letter agreement with Unisphere through October 12, 2000.
On October 11, 2000, Unisphere held a telephonic meeting of the Unisphere
board of directors, during which Mr. Dolce updated the board on the terms of the
merger agreement and ancillary
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agreements, discussions with BroadSoft to date and the results of the due
diligence. The Unisphere board unanimously approved the merger and the merger
agreement and related documents and authorized the management of BroadSoft to
proceed with execution of the merger documents, with such changes as Mr. Dolce
deemed necessary or advisable.
On October 12, 2000, the term of the exclusivity letter agreement was
extended until October 18, 2000. Also on that date, Messrs. Dolce and Tessler
met at Unisphere's headquarters in Chelmsford, Massachusetts to discuss the
terms of the proposed merger.
Between October 13 and October 19, 2000, Unisphere and BroadSoft, together
with their respective legal, financial and accounting advisors, continued their
due diligence reviews and negotiated the terms of the definitive merger
agreement and the other agreements related to the merger.
On the evening of October 17, 2000 and the morning of October 18, 2000,
BroadSoft's board of directors met telephonically to discuss the terms of the
merger agreement and the ancillary agreements. At this meeting, W.R. Hambrecht
delivered its oral opinion, subsequently confirmed by delivery of a written
opinion dated October 18, 2000, that as of such date and based on and subject to
the factors and assumptions stated in its written opinion, the consideration to
be received by the BroadSoft stockholders pursuant to the merger agreement is
fair to such stockholders from a financial point of view. The written opinion of
W.R. Hambrecht is set forth in full as Annex B to this proxy
statement/prospectus. A detailed discussion followed. Following these
discussions, the BroadSoft board, by unanimous vote with all directors present,
approved the merger agreement and the proposed merger with Unisphere, and
recommended that it be submitted to BroadSoft's stockholders for approval.
During the morning of October 20, 2000, Unisphere and BroadSoft entered
into the merger agreement and certain stockholders of BroadSoft entered into a
stockholder agreement with Unisphere. That afternoon, the merger was jointly
announced by Unisphere and BroadSoft.
JOINT REASONS FOR THE MERGER
The Unisphere board of directors and the BroadSoft board of directors each
believe that, after the merger, the combined company will have the potential for
greater operational efficiencies, product offerings, earning power, growth
potential and financial strength than either Unisphere or BroadSoft would have
on its own. The Unisphere board of directors and the BroadSoft board of
directors identified a number of potential benefits of the merger that they
believe could contribute to the success of the combined company and thus inure
to the benefit of stockholders of both companies, including the following:
- through the merger the combined company would be able to offer and
support a broad range of value-added, integrated voice and high-speed
data services to business and residential users;
- increased resources and dedicated research and development efforts,
engineering and sales and support;
- the companies' combined portfolios of intellectual property, patents and
patent applications;
- the creation of a combined company with an experienced management team
that can benefit from each other's experience and expertise; and
- the increased capitalization of the combined company, allowing for
increased access to capital markets and potentially reducing the cost of
capital.
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UNISPHERE'S REASONS FOR THE MERGER
The Unisphere board of directors reviewed a number of factors in evaluating
the merger, including, but not limited to, the following:
- information concerning BroadSoft's business focus, financial performance
and condition, operations, technology and management;
- Unisphere management's view of the financial condition, results of
operations and businesses of Unisphere and BroadSoft before and after
giving effect to the merger and the determination by the Unisphere board
of the merger's effect on stockholder value;
- the strategic importance of securing BroadSoft's software architecture
that supports business telephony applications for use on the internet;
- the terms of the merger agreement; and
- the impact of the merger on Unisphere's customers, vendors, alliance
partners, resellers and employees.
The Unisphere board of directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including the following:
- the risk that the potential benefits of the merger may not be realized;
- the transaction costs involved in connection with closing the merger and
the substantial management time and effort required to effectuate the
merger;
- the possibility that the merger may not be completed, even if approved by
the BroadSoft stockholders;
- the risk that the operations of Unisphere and BroadSoft might not be
successfully integrated;
- the risk that, despite the efforts of Unisphere, key personnel from
BroadSoft might leave Unisphere;
- the loss of customers, vendors, alliance partners or resellers of
BroadSoft who may terminate their relationship with BroadSoft as a result
of the merger because they deem themselves competitors of Unisphere; and
- other applicable risks described in this proxy statement/prospectus under
the heading "Risk Factors."
The Unisphere board of directors concluded, however, that, on balance, the
merger's potential benefits to Unisphere and its stockholders outweighed the
associated risks. The discussion of the information and factors considered by
the Unisphere board of directors is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
merger, the Unisphere board of directors did not find it practicable to and did
not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination.
BROADSOFT'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BROADSOFT BOARD OF
DIRECTORS
BroadSoft's board of directors has unanimously approved the merger
agreement and believes that the merger is fair to, and in the best interests of,
BroadSoft and its stockholders. BROADSOFT'S BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT BROADSOFT'S STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AND THE MERGER. In reaching this unanimous decision, BroadSoft's board
of directors carefully considered the terms of the merger agreement and the
transactions contemplated by the merger agreement and reviewed a number of
factors relevant to the merger, including, but not limited to, the following:
- the value of the merger consideration to be provided to BroadSoft
stockholders in the merger, including additional shares of Unisphere
common stock that may be required to be issued after the end of the 20
day measurement period;
- the fact that Unisphere's common stock is publicly traded and, therefore,
more liquid
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than shares of BroadSoft common stock and preferred stock;
- the opportunity for BroadSoft stockholders, through the exchange of their
shares of BroadSoft stock for shares of Unisphere common stock, to obtain
a financial stake in a more diverse, larger and publicly-traded company
and to participate in its growth;
- the belief that a merger with Unisphere could enhance BroadSoft's ability
to compete with larger, better-financed competitors by providing
BroadSoft with access to the financial resources, distribution channels
and resources, client base, industry contracts and management expertise
of Unisphere;
- the belief that, because BroadSoft's technology is complementary with
technology developed by Unisphere, significant research and development,
marketing and other strategic synergies could result from the combination
of the two companies and that each of the businesses could be stronger as
a result of the merger;
- the financial condition and business of Unisphere, including its
management team, historical association with Siemens, Unisphere's
principal stockholder, and other industry matters;
- the belief that, the consideration offered to BroadSoft's stockholders,
which represents a premium over the book value per share of BroadSoft's
outstanding common stock and preferred stock, was a fair price to
BroadSoft's stockholders;
- the opinion of W.R. Hambrecht + Co., more fully described in "The
Merger -- Opinion of Financial Advisor to BroadSoft," that, as of the
date of the opinion and based on and subject to the assumptions made,
matters considered and limits of the review undertaken, the consideration
to be received by BroadSoft's stockholders was fair, from a financial
point of view as of the date of such opinion;
- the belief that the terms of the merger agreement, including the parties
mutual representation, warranties, covenants and indemnities, were
reasonable;
- the interests of certain directors and executive officers of BroadSoft
that are in addition to the interest of BroadSoft stockholders generally,
as described below under "The Merger -- Interests of BroadSoft's
Executive Officers and Directors in the Merger;" and
- the likelihood that the merger will qualify as a reorganization under
section 368(a) of the Internal Revenue Code, enabling the BroadSoft
stockholders to receive Unisphere common stock in the merger without
suffering a current tax-recognition event.
During the course of its deliberations, the BroadSoft board of directors
also considered a number of potentially negative factors with respect to the
merger, including, but not limited to, the following:
- the fact that the value of the Unisphere consideration to be received in
the merger was difficult to determine at the time that the merger
agreement was negotiated, due to the absence at that time of a public
market for Unisphere common stock;
- the loss of control over the future operations of BroadSoft following the
merger;
- the risk that the benefits sought to be achieved in the merger would not
be achieved;
- the fact that the stockholder voting agreement and certain provisions in
the merger agreement, including the non-solicitation provision, could
discourage third parties from seeking to negotiate a superior proposal
for the acquisition of BroadSoft;
- the fact that the merger agreement does not allow the BroadSoft board of
directors to reassess whether or not the merger with Unisphere is fair to
and in the best interest of BroadSoft stockholders;
- the possibility that the merger might not be consummated and the effect
of the public announcement of the merger on the retention of BroadSoft's
employees and current and prospective customers and partners;
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- the view that certain conditions to Unisphere's obligations to consummate
the merger may be difficult to satisfy because they involve unrelated
third parties; and
- the other risks described above under "Risk Factors."
Upon consideration, the BroadSoft board of directors believes that the
potential benefits of the merger outweigh the potential risks.
The BroadSoft board of directors also discussed with BroadSoft's management
and representatives of Robertson Stephens, Inc., the prospect for combination
with companies other than Unisphere, the possibility that the benefits described
above or other benefits could be achieved through other combinations, and the
risks and benefits of continuing to remain independent, including the risks of
obtaining additional financing and the market for raising private capital.
This discussion of information and factors considered by the BroadSoft
board of directors is not intended to be exhaustive but is believed to include
certain material factors considered by the BroadSoft board of directors. The
BroadSoft board of directors did not find it practicable, nor did it attempt, to
quantify or otherwise assign relative weight to the specific facts, matters and
information considered. In addition, individual members of BroadSoft board of
directors may have given different weight to different factors.
OPINION OF FINANCIAL ADVISOR TO BROADSOFT
Pursuant to an engagement letter dated October 5, 2000, BroadSoft engaged
W.R. Hambrecht + Co. to act as financial advisor to BroadSoft and to render an
opinion to BroadSoft's board of directors as to whether the aggregate merger
consideration to be received by the stockholders of BroadSoft pursuant to the
merger is fair to such stockholders from a financial point of view as of the
date of the merger agreement. At the October 18, 2000 meeting of BroadSoft's
board of directors, W.R. Hambrecht delivered its oral opinion, subsequently
confirmed in a written opinion also dated October 18, 2000, to the effect that,
as of October 18, 2000, based on and subject to the assumptions, limitations and
qualifications set forth in its written opinion, the "consideration," as defined
in the W.R. Hambrecht opinion, to be received by the stockholders of BroadSoft
pursuant to the merger was fair to such stockholders from a financial point of
view.
The full text of the W.R. Hambrecht opinion, which sets forth assumptions
made, procedures followed, matters considered, limitations on and scope of the
review by W.R. Hambrecht in rendering its opinion, is attached as Annex B to
this proxy statement/prospectus and is incorporated into this proxy
statement/prospectus by reference. The W.R. Hambrecht opinion is directed only
to the fairness of the consideration to be received by BroadSoft shareholders
from a financial point of view, has been provided to BroadSoft's board of
directors in connection with its evaluation of the merger, does not address any
other aspect of the merger and does not constitute a recommendation to any
BroadSoft stockholders as to how a stockholder should vote, or take any other
action, with respect to the merger. The summary of the W.R. Hambrecht opinion
set forth in this proxy statement/prospectus is qualified in its entirety by
reference to the full text of such opinion. The BroadSoft stockholders are urged
to read the W.R. Hambrecht opinion carefully and in its entirety.
The W.R. Hambrecht opinion does not address:
- the relative merits of the merger and the other business strategies that
BroadSoft's board has considered; or
- the underlying business decision of BroadSoft's board to proceed with the
merger.
In conducting its investigation and analysis and in arriving at the W.R.
Hambrecht opinion, W.R. Hambrecht reviewed information and took into account
financial and economic factors as it deemed relevant under the circumstances,
including those described below. The summary set forth below does not purport to
be a complete description of the analyses underlying the W.R. Hambrecht opinion
or the
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presentation made by W.R. Hambrecht to BroadSoft's board. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, W.R. Hambrecht did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis or
factor. Accordingly, W.R. Hambrecht believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all of the analyses and factors as a whole, would create a
misleading or incomplete view of the process underlying its opinion. No company
or transaction W.R. Hambrecht used in the analyses described below is directly
comparable to BroadSoft or Unisphere or the contemplated transaction.
In addition, the matters considered by W.R. Hambrecht in arriving at its
opinion are based on numerous macroeconomic, operating and financial assumptions
with respect to industry performance, general business and economic conditions,
many of which are beyond the control of BroadSoft and Unisphere, and involve
application of complex methodologies and educated judgment. Any estimates
incorporated in the analyses performed by W.R. Hambrecht are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than these estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future. In addition, the W.R.
Hambrecht opinion was among several factors taken into consideration by
BroadSoft's board in making its determination to approve the merger agreement
and the merger. Consequently, W.R. Hambrecht's analyses should not be viewed as
determinative of the decision of BroadSoft's board or BroadSoft's management
with respect to the fairness of the consideration set forth in the merger
agreement.
In arriving at its opinion, W.R. Hambrecht, among other things:
- reviewed publicly available information and certain internal information,
primarily financial in nature, including but not limited to projections,
concerning the business and operations of BroadSoft and Unisphere,
furnished to it by BroadSoft and Unisphere for purposes of its analysis;
- reviewed the financial terms and conditions of the draft of the merger
agreement among BroadSoft, Unisphere and a wholly-owned subsidiary of
Unisphere dated October 17, 2000, in the form presented to BroadSoft's
board of directors;
- compared Unisphere's filing range as stated in its registration statement
on Form S-1 filed with the Securities and Exchange Commission on
September 25, 2000 (the "Unisphere filing range") with the market price
of certain publicly traded companies W.R. Hambrecht deemed relevant;
- compared the financial position and operating results of BroadSoft and
Unisphere with those of publicly traded companies that W.R. Hambrecht
deemed relevant;
- compared the proposed financial terms of the merger, including prices and
premiums, with the financial terms of certain other recent and comparable
business combinations that W.R. Hambrecht deemed relevant;
- discussed with representatives of management of BroadSoft and Unisphere
certain information of a business and financial nature regarding
BroadSoft and Unisphere, including their respective historical and
current financial condition and operating results, as well as their
respective future prospects; and
- considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria as W.R.
Hambrecht deemed relevant for purposes of rendering its opinion.
In rendering its opinion, W.R. Hambrecht has not assumed any obligation
independently to verify the foregoing information and has relied upon and
assumed the accuracy and completeness in all material respects of all of the
financial and other information that was available to it from public sources and
that
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was provided to it by BroadSoft and Unisphere or their respective
representatives. With respect to the financial projections for BroadSoft and
Unisphere provided to W.R. Hambrecht by their respective managements, W.R.
Hambrecht relied on representations that the projections were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of BroadSoft and Unisphere at the time of
preparation as to the future operating and financial performance of BroadSoft
and Unisphere, respectively, and that they provided a reasonable basis upon
which W.R. Hambrecht could form its opinion. W.R. Hambrecht expressed no opinion
with respect to these projections or the assumptions upon which they were based.
In connection with the preparation of the W.R. Hambrecht opinion, W.R.
Hambrecht was not authorized, or did W.R. Hambrecht solicit, indications of
interest from third parties for the acquisition of all or any part of BroadSoft.
Although W.R. Hambrecht evaluated the fairness, from a financial point of view,
of the consideration, W.R. Hambrecht was not requested to, and did not,
recommend the specific consideration payable in the merger, which consideration
was determined through negotiations between BroadSoft and Unisphere and approved
by BroadSoft's board.
W.R. Hambrecht assumed that there have been no material changes in
BroadSoft's or Unisphere's assets, financial condition, results of operations,
business or prospects since the respective dates of their last financial
statements made available to W.R. Hambrecht. W.R. Hambrecht relied on advice of
counsel to BroadSoft as to all legal matters with respect to BroadSoft, the
merger and the merger agreement.
W.R. Hambrecht assumed that the merger would be consummated in a manner
that complies in all respects with the applicable provisions of the Securities
Act and the Exchange Act and all other applicable federal and state statutes,
rules and regulations. W.R. Hambrecht relied on the representation of BroadSoft
that the merger will be recorded as a purchase under generally accepted
accounting principles.
W.R. Hambrecht did not assume any responsibility for reviewing patent
applications, technology license agreements, individual credit files, etc. or
for making an independent evaluation, appraisal or physical inspection of any
assets or liabilities (contingent or otherwise) of BroadSoft or Unisphere, nor
has W.R. Hambrecht been furnished with any such appraisals. W.R. Hambrecht
assumed, with BroadSoft's consent, that patents and copyrights of each of
BroadSoft and Unisphere were valid and enforceable as of the date of its
opinion.
W.R. Hambrecht necessarily based its opinion on the business and operations
of BroadSoft and Unisphere as represented to W.R. Hambrecht as of October 18,
2000, and on financial, economic, market, monetary and other conditions as they
existed on, and on the information made available to W.R. Hambrecht as of,
October 18, 2000, the date of the W.R. Hambrecht opinion. It should be
understood that subsequent developments may affect the conclusion expressed in
the W.R. Hambrecht opinion and that W.R. Hambrecht disclaims any undertaking or
obligation to advise any person of any change in any matter affecting the W.R.
Hambrecht opinion which may come or be brought to its attention after the date
of the opinion, subject, however, to W.R. Hambrecht's obligation to deliver
bring-downs of the opinion.
W.R. Hambrecht further assumed that the merger will be consummated in
accordance with the terms described in the merger agreement, without any further
amendments thereto, and without any waiver of any of the conditions to its
obligations thereunder. W.R. Hambrecht also assumed that in the course of
obtaining the necessary regulatory approval for the merger, no restrictions will
be imposed that could have a material adverse effect on the contemplated
benefits of the merger.
Summary of Financial Analyses Performed by W.R. Hambrecht. The following
is a summary of the material financial analyses performed by W.R. Hambrecht in
connection with its opinion presented to BroadSoft's board of directors on
October 18, 2000.
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Implied Unisphere Share Price. W.R. Hambrecht examined the value of the
total merger consideration to be received by the shareholders of BroadSoft based
on the implied Unisphere share price under the following three offering
scenarios:
- at the midpoint of the Unisphere filing range;
- at prices of Unisphere stock implied by observed trading multiples for
sector-leading communications equipment companies comparable to
Unisphere; and
- at prices of Unisphere stock implied by the price performance of
companies in the communications sector following their initial public
offerings. The price performance of these companies was based on the
change from the filing price to the closing price of the stock on the
first day of trading and the change from the offer price to the closing
price of the stock on the 90th day following the offering.
Comparable Company Analysis. To provide contextual data and comparative
market information, W.R. Hambrecht compared selected financial ratios of
BroadSoft with similar data of selected companies in the communications software
sector. W.R. Hambrecht examined the ratios of the consideration implied by the
three Unisphere offering scenarios described above to the projected revenues of
BroadSoft for calendar year 2001 and 2002. W.R. Hambrecht then compared these
values to the ratio of enterprise value to projected calendar year 2001 and 2002
revenues of selected companies in the communications software sector. The
enterprise value of a company is equal to the value of its fully diluted equity
value plus debt, plus minority interests, plus preferred stock, less cash and
cash equivalents. Revenue projections for BroadSoft were based upon estimates
provided to W.R. Hambrecht by the management of BroadSoft. Projections for the
comparable companies were based upon publicly available equity analyst research
estimates.
Selected Merger and Acquisition Transactions. The comparable precedent
transactions analysis provides a market benchmark based on the consideration
paid in selected comparable merger and acquisition transactions involving
communications companies. For this analysis, W.R. Hambrecht reviewed publicly
available information to determine the multiples paid in certain transactions
involving public and private acquired businesses in the communications industry.
W.R. Hambrecht calculated the consideration paid in the relevant transactions in
relation to certain financial and operating criteria of the acquired businesses
at the time of their merger announcements such as their projected 12 month
forward revenues and their number of employees at the time of their merger
announcements. W.R. Hambrecht then compared these metrics to the ratios of the
consideration implied by the three Unisphere offering scenarios described above
to the projected 2001 revenues and number of employees of BroadSoft. W.R.
Hambrecht also examined the ownership positions of the target shareholders in
the combined entities implied by the transaction parameters at the time of their
merger announcements and compared them to the ownership positions of BroadSoft
shareholders under the three Unisphere offering scenarios.
IPO Valuation Analysis. W.R. Hambrecht calculated the consideration to
current BroadSoft shareholders if BroadSoft effected an initial public offering
in 12 months, assuming a 20% dilution to current BroadSoft shareholders upon the
initial public offering. W.R. Hambrecht examined the implied initial public
offering value of BroadSoft based on a projected calendar year 2002 revenue
estimate from BroadSoft's management that was reduced by 15%, a range of
calendar year 2002 revenue multiples based on current observable market
conditions and a range of discount rates. W.R. Hambrecht then compared the
implied consideration to BroadSoft shareholders using the initial public
offering valuation to the consideration to BroadSoft shareholders under the
three Unisphere offering scenarios.
ENGAGEMENT OF W.R. HAMBRECHT
Pursuant to the terms of the W.R. Hambrecht engagement letter dated October
5, 2000, W.R. Hambrecht was retained by BroadSoft as financial advisor. Under
the W.R. Hambrecht engagement letter, BroadSoft paid W.R. Hambrecht a fee of
$350,000 due upon delivery of the W.R. Hambrecht opinion; provided however, that
upon the written request of BroadSoft, W.R. Hambrecht is to deliver up to
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two updates, or bring-downs, of the W.R. Hambrecht opinion (deliverable no later
than 180 days from the date of the W.R. Hambrecht engagement letter). The scope,
form and substance of any bring-downs of the W.R. Hambrecht opinion is as W.R.
Hambrecht considers appropriate. In addition, BroadSoft agreed to reimburse W.R.
Hambrecht, upon W.R. Hambrecht's request from time to time, for all reasonable
out-of-pocket expenses (including the reasonable fees and disbursements of W.R.
Hambrecht's counsel) that W.R. Hambrecht incurred in connection with its
engagement. BroadSoft also agreed to indemnify and hold harmless W.R. Hambrecht,
its affiliates, and each of their directors, officers, agents, advisors,
consultants, employees and controlling persons in connection with W.R.
Hambrecht's engagement, including liabilities under United States federal
securities laws.
W.R. Hambrecht was retained by BroadSoft based on W.R. Hambrecht's
experience as a financial advisor in connection with mergers and acquisitions
and in securities and business valuations generally. W.R. Hambrecht is regularly
engaged in the valuation of securities and businesses in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities and other purposes.
TREATMENT OF BROADSOFT COMMON STOCK AND BROADSOFT OPTIONS IN THE MERGER
At the effective time of the merger, each share of BroadSoft common stock
will be converted into shares of Unisphere common stock. We expect that all
shares of BroadSoft Series A preferred stock will be redeemed by BroadSoft and
all shares of BroadSoft Series B preferred stock will be converted into shares
of BroadSoft common stock prior to the effective time of the merger. We also
expect that all BroadSoft warrants will be exercised or terminated prior to the
effective time of the merger.
At the effective time of the merger, Unisphere will assume all BroadSoft
stock options, which will become options to acquire Unisphere common stock after
the merger, with (other than specified options issued after the date of the
merger agreement to some BroadSoft employees) the number of shares subject to
the option and the option exercise price to be adjusted according to the
conversion ratio.
Following the effective time of the merger, Unisphere may be obligated to
issue up to an aggregate of 1,750,000 additional shares of Unisphere common
stock and options to purchase Unisphere common stock to BroadSoft stockholders
and optionholders. The number of additional shares, if any, will be based on the
average last reported sale price of the Unisphere common stock during the 20
consecutive trading days beginning with the first complete trading day following
Unisphere's announcement of its second fiscal quarter financial results or 30
days following the closing of the merger, whichever is later. The additional
shares, if any, will be allocated among former BroadSoft stockholders and
optionholders in the same proportion as the shares they received at the
effective time of the merger. The exercise price of any additional options
issued and the repurchase price of any restricted stock exchanged will be the
same as the exercise price of the options and the repurchase of the restricted
stock to which they relate issued at the effective time of the merger.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for by Unisphere using the purchase method of
accounting for a business combination. Under this method of accounting, the
assets and liabilities of BroadSoft, including intangible assets will be
recorded at their fair market value and included in the financial statements of
BroadSoft. The results of operations and cash flows of BroadSoft will be
included in Unisphere's financials prospectively as of the completion of the
merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The discussion below summarizes certain material United States federal
income tax consequences of the merger to BroadSoft stockholders who exchange
their BroadSoft stock for Unisphere stock and, as applicable, cash in lieu of
fractional shares of Unisphere stock pursuant to the merger agreement. It is a
condition to the consummation of the merger that Unisphere receive an opinion
from Hale and Dorr LLP (or Cooley Godward LLP if Hale and Dorr LLP does not
provide such an opinion) and that BroadSoft receive an opinion from Cooley
Godward LLP (or Hale and Dorr LLP if Cooley Godward LLP does not
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provide such an opinion) to the effect that the merger will qualify for United
States federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. The discussion below assumes that
the merger will be treated in accordance with the opinions of Hale and Dorr LLP
and Cooley Godward LLP, described in the preceding sentence, which are included
as exhibits 8.1 and 8.2 to the registration statement of which this proxy
statement/prospectus forms a part.
The discussion below and the opinions of Hale and Dorr LLP and Cooley
Godward LLP are based upon current provisions of the Internal Revenue Code,
currently applicable U.S. Treasury regulations promulgated thereunder, and
judicial and administrative decisions and rulings. The opinions of Hale and Dorr
LLP and Cooley Godward LLP will be based on the facts, representations, and
assumptions set forth or referred to in such opinions, including representations
contained in certificates executed by officers of Unisphere and BroadSoft. The
opinions are not binding on the Internal Revenue Service or the courts, and
there can be no assurance that the Internal Revenue Service or the courts will
not take a contrary view. No ruling from the Internal Revenue Service has been
or will be sought. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
herein, and any such changes or interpretations could be retroactive and could
affect the tax consequences of the merger to stockholders of Unisphere and
BroadSoft.
The discussion below does not purport to deal with all aspects of federal
income taxation that may be relevant to particular stockholders in light of
their individual circumstances, and it is not intended for stockholders subject
to special tax treatment under federal income tax laws. Stockholders subject to
special treatment include, without limitation, financial institutions,
tax-exempt organizations, insurance companies, dealers in securities or foreign
currencies, foreign holders, persons who hold their BroadSoft stock as a hedge
against currency risk, a constructive sale, or conversion transaction,
stockholders who do not hold their stock as a capital asset, and holders who
acquired their shares pursuant to the exercise of employee stock options or
otherwise as compensation. The discussion below and such opinions do not
consider the effect of any applicable state, local, or foreign tax laws. In
addition, this discussion and such opinions do not address the tax consequences
of transactions effectuated prior or subsequent to, or concurrently with, the
merger (whether or not such transactions are undertaken in connection with the
merger), or the tax consequences of the assumption by Unisphere of outstanding
BroadSoft options.
The following discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other tax consequences of the merger. In addition, the discussion does not
address the tax consequences which may vary with, or are contingent upon, your
individual circumstances. BROADSOFT STOCKHOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS ON THEIR PARTICULAR CIRCUMSTANCES.
In the opinion of Hale and Dorr LLP, counsel to Unisphere, and in the
opinion of Cooley Godward, counsel to BroadSoft, the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. Assuming that the merger qualifies as a reorganization, then, subject to
the assumptions, limitations, and qualifications referred to herein, the merger
should result in the following federal income tax consequences:
- a BroadSoft stockholder who exchanges its BroadSoft stock for Unisphere
common stock will not recognize gain or loss for United States federal
income tax purposes, except with respect to cash, if any, received in
lieu of a fractional share of Unisphere stock;
- the aggregate tax basis of a BroadSoft stockholder in the Unisphere
common stock received in exchange for BroadSoft stock pursuant to the
merger will be the same as such holder's aggregate tax basis in the
BroadSoft stock surrendered in the merger, decreased by the amount of any
tax basis allocable to any fractional share interest for which cash is
received;
- the holding period for the Unisphere common stock received in the merger
by a BroadSoft stockholder will include the holding period of the
BroadSoft stock surrendered in the merger;
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- a BroadSoft stockholder who receives cash in lieu of a fractional share
of Unisphere common stock in the merger generally will recognize gain or
loss equal to the difference between the amount of cash received and its
tax basis in the BroadSoft stock that is allocable to the fractional
share. The gain or loss generally will be capital gain or loss. In the
case of an individual stockholder, capital gain is subject to a maximum
tax rate of 20% if the individual has held his or her BroadSoft shares
for more than 12 months at the effective time of the merger. The
deductibility of capital losses is subject to limitations for both
individuals and corporations; and
- a BroadSoft stockholder whose Series A preferred stock is redeemed in
cash for the liquidation preference of the Series A preferred stock will
be treated as if it received Unisphere common stock in the merger of
equivalent value which is immediately redeemed for cash under Section 356
and Section 302 of the Code. The stockholder will recognize capital gain
or loss equal to the difference between the amount of cash received and
the stockholder's basis in the Series A preferred stock if the redemption
is (i) in complete termination of the stockholder's stock interest in
Unisphere, (ii) substantially disproportionate with respect to the
stockholder's stock interest in Unisphere, requiring, inter alia, that
the stockholder's percentage interest in Unisphere be reduced by more
than 20%, or (iii) not essentially equivalent to a dividend. The
foregoing tests are applied not only with respect to the stockholder's
"actual" stock interest in Unisphere, but also with respect to any stock
in Unisphere that the stockholder is considered to own by attribution
under the constructive stock ownership rules of Section 318 of the Code.
If the redemption does not satisfy one of the three foregoing tests, the
amount of cash distributed will be treated as a dividend to the
stockholder, taxable as ordinary income, to the extent of the
stockholder's ratable share of BroadSoft's accumulated earnings and
profits, if any. Any amount distributed in excess of the amount taxable
as a dividend will be applied against and reduce the stockholder's basis
for the Unisphere stock that the stockholder is deemed to receive in the
merger, and any amount in excess of such basis will be treated as capital
gain.
A BroadSoft stockholder who exchanges BroadSoft stock for Unisphere common
stock should be treated as receiving the escrowed Unisphere stock at the time of
the merger and should be treated as the owner of such stock. Until such stock is
released, the interim basis of the Unisphere stock received by a BroadSoft
stockholder will be determined as if such stockholder received the maximum
number of Unisphere shares. No federal income tax consequences should result
from the receipt of any shares upon the termination of the escrow. It is the
Internal Revenue Service's position that a former BroadSoft stockholder will
recognize capital gain or loss to the extent that the escrowed Unisphere stock
is sold or used to satisfy a claim. The amount of the gain or loss recognized
should equal the difference between the stockholder's basis in the escrowed
Unisphere stock sold or used to satisfy the claim and the fair market value of
those shares, which will equal sales proceeds if the escrowed stock is sold. The
value of such returned shares will be added back to the tax basis of the
Unisphere stock retained by the stockholder.
Each BroadSoft stockholder will be required to attach a statement to its
tax return for the year of the merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the BroadSoft stock and a description of the
Unisphere common stock received therefor. Each BroadSoft stockholder is urged to
consult its tax advisor regarding this statement and any other tax reporting
obligations.
The opinions described above do not apply to stockholders who exercise
appraisal rights. A BroadSoft stockholder who exercises appraisal rights with
respect to the merger and receives cash for shares of BroadSoft stock will
generally recognize capital gain (or loss) measured by the difference between
the amount of cash received and the stockholder's basis in those shares. The
capital gain or loss will be long-term capital gain or loss if the holder's
holding period for the shares is more than 12 months.
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If the merger is not a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, each BroadSoft stockholder would recognize taxable
gain (or loss) with respect to the BroadSoft stock surrendered, measured by the
difference between:
- the fair market value as of the time of the merger, of the Unisphere
stock received in the merger; and
- the stockholder's tax basis in the BroadSoft stock surrendered in
exchange therefor in the merger.
In such event, a stockholder's aggregate tax basis in the Unisphere common
stock so received would equal its fair market value as of the time of the merger
and the holding period for such stock would begin the day after the merger.
A noncorporate BroadSoft stockholder may be subject to backup withholding
at a rate of 31% on cash payments received in lieu of a fractional share of
Unisphere common stock or upon the exercise of appraisal rights. Backup
withholding will not apply, however, to a stockholder who:
- furnishes a correct taxpayer identification number and certifies that it
is not subject to backup withholding on the substitute W-9 or successor
form included in the letter of transmittal to be delivered to BroadSoft
stockholders following the completion of the merger;
- provides a certification of foreign status on Form W-8BEN or successor
form; or
- is otherwise exempt from backup withholding.
LIMITATIONS ON TAX OPINION
Unlike a ruling from the Internal Revenue Service, an opinion of counsel is
not binding on the Internal Revenue Service and there can be no assurance that
the Internal Revenue Service will not take a position contrary to one or more of
the positions reflected in the opinion or that these positions will be upheld by
the courts if challenged by the Internal Revenue Service. These opinions are
subject to qualifications, are conditioned upon assumptions and are based upon
factual representations made to Hale and Dorr LLP and Cooley Godward LLP by
Unisphere and BroadSoft. The opinions may not be relied upon if these factual
representations are incorrect or incomplete.
This discussion is only a general summary of the material federal income
tax consequences of the merger. The tax consequences of the merger to you may be
different from those summarized above, based on your individual situation. You
are strongly urged to consult your own tax advisor as to the specific tax
consequences of the merger, including tax return reporting requirements, the
applicability and effect of federal, state, local and other applicable tax laws,
and the effect of any proposed changes in the tax laws.
NASDAQ NATIONAL MARKET QUOTATION
It is a condition to the closing of the merger that the shares of Unisphere
common stock to be issued in the merger be approved for trading on the Nasdaq
National Market. Unisphere common stock has been approved for trading.
RESALES OF UNISPHERE COMMON STOCK ISSUED IN CONNECTION WITH THE MERGER;
AFFILIATE AGREEMENTS
Unisphere common stock issued in connection with the merger will be freely
transferable, except as provided by lock-up agreements which BroadSoft
stockholders are a party to and with respect to shares of Unisphere common stock
received by persons who are deemed to be "affiliates," as defined by Rule 144
under the Securities Act of 1933, as amended, of BroadSoft at the effective time
of the merger. Such affiliates may resell these shares only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act, or as
otherwise permitted under the Securities Act. BroadSoft has agreed to use
reasonable efforts to cause each executive officer and director and those who
may be an affiliate of BroadSoft to execute a written affiliate agreement
providing that such person will not offer, sell, transfer or
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otherwise dispose of any of the shares of Unisphere common stock obtained as a
result of the merger except in compliance with the Securities Act and the
related rules and regulations.
INTERESTS OF BROADSOFT'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the BroadSoft board of directors with
respect to the approval of the merger agreement, the merger and the other
transactions related to the merger, BroadSoft stockholders should be aware that
certain members of management and the BroadSoft board of directors have certain
interests in the merger that are in addition to their interests as BroadSoft
stockholders generally. BroadSoft believes that, except as described below, such
persons do not have any material interest in the merger that is different from,
or in addition to, those of BroadSoft stockholders generally. The BroadSoft
board of directors was aware of, and considered the interests of, the directors
and officers when it approved the merger agreement and the merger.
Indemnification; Directors' and Officers' Liability Insurance. The merger
agreement provides that, assuming BroadSoft obtains one or more directors' and
officers' runoff liability insurance policies with insurance carriers reasonably
acceptable to Unisphere and with coverage limits of at least $25 million in the
aggregate which provide coverage for claims for six years after the effective
time of the merger, Unisphere will fulfill and honor all obligations of
BroadSoft pursuant to the indemnification provisions under BroadSoft's charter
and bylaws. Moreover, for six years after the effective time of the merger,
Unisphere will use its reasonable best efforts to keep the directors' and
officers' runoff liability insurance policies in full force and effect.
Stock Option Grants. Pursuant to the merger agreement, BroadSoft will
grant new stock options to some employees of BroadSoft which will be assumed by
Unisphere in the merger. After assumption by Unisphere, these stock options will
represent the right to purchase an aggregate of 750,000 shares of Unisphere
common stock, will have an exercise price equal to the price at which Unisphere
initially sells shares of common stock to the public in its initial public
offering, and will have vesting terms and conditions that are similar to
Unisphere's standard option terms and conditions. Executive officers of
BroadSoft will be granted a portion of these stock options covering an aggregate
of shares of Unisphere common stock.
Acceleration of Stock Options and Restricted Stock Grants. Under the terms
of BroadSoft's stock option agreements and restricted stock purchase agreements
with its employees, upon the occurrence of a "change of control" of BroadSoft,
25% of the unvested portion of such stock option or restricted stock at the time
of change of control will immediately vest and, in the case of stock options
(other than options described in the paragraph above), become exercisable.
Moreover, under the terms of BroadSoft's stock option agreements and restricted
stock purchase agreements with its employees, if a BroadSoft employee is
terminated "without cause" or voluntarily terminates his or her employment for
"good reason" (as those terms are defined in the applicable stock option and
restricted stock purchase agreements), 100% of the unvested portion of any stock
option or restricted stock will immediately vest and, in the case of stock
options, become exercisable. In addition, under the terms of BroadSoft's
restricted stock purchase agreements with Michael Tessler, Scott Hoffpauir,
Jeffrey Jordan, Scott Wharton and Paul Davis, BroadSoft's founders, upon a
change of control of BroadSoft and termination of a founder's employment
"without cause" or for "good reason," 100% of any unvested restricted stock held
by such founder will immediately vest. The merger will constitute a change of
control of BroadSoft for purposes of these agreements, provided, however, that
some key employees of BroadSoft have agreed that the merger, in and of itself,
will not be deemed a termination of their employment for purposes of the
definition of "good reason."
Assumption of Stock Options and Restricted Stock Grants. Under the merger
agreement, each BroadSoft stock option outstanding, including those held by
BroadSoft directors and officers, on the closing date will be assumed by
Unisphere and become an option to acquire Unisphere common stock on the same
terms and conditions as prior to the merger, subject to adjustment to the number
of shares purchasable and the exercise price per share, which will be adjusted
based on the initial conversion ratio
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for BroadSoft common stock. If any additional shares of Unisphere common stock
become payable at the end of the measurement period, additional options will
likewise be granted to former BroadSoft option holders. Moreover, each BroadSoft
restricted stock grant outstanding on the closing date will be converted into
Unisphere common stock based on the initial conversion ratio, and any terms and
conditions regarding repurchase of the shares upon termination of employment
will continue, subject to adjustment to the repurchase price per share based on
the initial conversion ratio, and any acceleration in accordance with its terms.
If any additional shares of Unisphere stock become issuable at the end of the
measurement period, each holder of restricted stock would receive a
proportionate number of the additional shares. The per share price of stock
options and the per share repurchase price for restricted stock, however, will
not be adjusted by virtue of additional options or additional restricted shares
having been issued. In such an event, a restricted stock holder would receive
more per share upon repurchase than the holder otherwise would have received
immediately prior to the merger, and an option holder would be required to pay
more per share upon exercise of an option than the holder would otherwise have
been required to pay immediately prior to the merger.
No shares of Unisphere common stock issuable upon the exercise of the
assumed options will be subject to the indemnification escrow.
Redemption of Series A Preferred Stock. It is a condition to closing the
merger that all shares of BroadSoft's Series A preferred stock have been
redeemed in cash for the liquidation preference of the Series A preferred stock
set forth in BroadSoft's charter. Robert Goodman, a member of BroadSoft's board
of directors, beneficially holds 1,050,000 shares of Series A preferred stock,
which will be redeemed for an aggregate of $504,000 in cash. Robert Soni, a
member of BroadSoft's board of directors, and Mr. Goodman are also principals of
Bessemer Venture Partners, which, together with its affiliates, holds 4,000,000
shares of Series A preferred stock, which will be redeemed for an aggregate of
$1,920,000 in cash.
RIGHTS OF BROADSOFT STOCKHOLDERS TO APPRAISAL
If the merger is consummated, a holder of record of BroadSoft common stock
or preferred stock on the date of making a demand for appraisal, as described
below, will be entitled to have those shares appraised by the Delaware Court of
Chancery under Section 262 of the Delaware General Corporation Law and to
receive payment for the "fair value" of those shares instead of the
consideration provided for in the merger agreement. In order to be eligible to
receive this payment, however, a stockholder must do the following:
- deliver to BroadSoft a demand in writing for the appraisal of his or her
shares at or prior to the special meeting;
- continue to hold his or her shares through the time of the merger; and
- not vote for or consent in writing to the merger agreement or the merger.
Holders of Unisphere common stock and holders of BroadSoft options and
warrants outstanding at the effective time of the merger are not entitled to
appraisal rights in connection with the merger.
BroadSoft stockholders considering seeking appraisal should recognize that
the fair value of BroadSoft shares could be determined to be more than, the same
or less than the value of the Unisphere common stock to which stockholders are
entitled if they do not exercise their appraisal rights. BroadSoft stockholders
who elect to exercise appraisal rights must comply strictly with all of the
procedures set forth in Section 262 of the Delaware General Corporation Law to
preserve those rights. Section 262 of the Delaware General Corporation Law sets
forth the required procedure a stockholder seeking appraisal must follow. We
have attached a copy of Section 262 of the Delaware General Corporation Law as
Annex C to this proxy statement/prospectus.
Making sure that you actually perfect your appraisal rights can be
complicated. The procedural rules under Section 262 are specific and must be
followed completely. Failure to comply with the procedure
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may cause you to lose your appraisal rights. The following is only a summary of
your rights and the procedure relating to appraisal rights and is qualified in
its entirety by the provisions of Section 262 of the Delaware General
Corporation Law. Please review Section 262 for the complete procedure. BroadSoft
will not give you any notice other than as described in this proxy
statement/prospectus and as required by Delaware law.
APPRAISAL RIGHTS PROCEDURES
If you are a BroadSoft stockholder and you wish to exercise your appraisal
rights, you must satisfy the following provisions of Section 262 of the Delaware
General Corporation Law:
- You must make a written demand for appraisal: You must deliver a written
demand for appraisal to BroadSoft within 20 days of the mailing date of
this proxy statement/prospectus.
- You must not vote for or consent in writing to the merger: You must not
consent to or vote for the merger or the adoption of the merger
agreement. If you vote for or consent by written consent to the merger or
the merger agreement, you will not be entitled to any right to seek
appraisal.
- You must continuously hold your BroadSoft shares: You must continuously
hold your BroadSoft common stock and preferred stock from the date you
make the demand for appraisal through the completion of the merger. If
you are the record holder of BroadSoft common stock or preferred stock on
the date you make a written demand for appraisal but then transfer your
shares before the merger, you will lose any right to appraisal with
respect to those shares.
- You should read the paragraphs below for more details on making a demand
for appraisal.
Written Demand. A written demand for appraisal of BroadSoft common stock
or preferred stock must be executed by or on behalf of a stockholder of record
and must reasonably identify the stockholder and that he or she intends to
demand appraisal of his or her shares. If you own BroadSoft common stock or
preferred stock in a fiduciary capacity, such as a trustee, guardian or
custodian, the demand for appraisal must be executed by or for the record owner.
If you own BroadSoft common stock or preferred stock with one or more
persons, such as in a joint tenancy or tenancy in common, the demand for
appraisal must be executed by or for all joint owners. An authorized agent,
which could include one or more of the joint owners, may sign the demand for
appraisal for a stockholder of record. However, the agent must expressly
disclose who the stockholder of record is and that the agent is signing the
demand as that stockholder's agent.
If you are a record owner, such as a broker, who holds BroadSoft common
stock or preferred stock as a nominee for others, you may exercise a right of
appraisal with respect to the shares held for one or more beneficial owners,
while not exercising such right for other beneficial owners. In such a case, you
should specify in the written demand the number of shares as to which you wish
to demand appraisal. If you do not expressly specify the number of shares, we
will assume that your written demand covers all the shares of BroadSoft common
stock or preferred stock that are in your name.
If you are a BroadSoft stockholder who elects to exercise appraisal rights,
you should mail or deliver by hand a written demand to:
BroadSoft, Inc.
220 Perry Parkway
Gaithersburg, Maryland 20877
Attention: President and Chief Executive Officer
If you fail to comply with any of these conditions and the merger becomes
effective, you will only be entitled to receive the merger consideration
provided in the merger agreement.
Written Notice. Within 10 days after the completion of the merger,
BroadSoft must give written notice setting forth the date the merger has become
effective to each stockholder who has fully exercised
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his, her or its appraisal rights in full compliance with the conditions of
Section 262 of the Delaware General Corporation Law.
Petition with the Chancery Court. Within 120 days after the completion of
the merger, either BroadSoft or any stockholder who has complied with the
conditions of Section 262 may file a petition in the Delaware Court of Chancery.
Any stockholder who files such a petition must provide BroadSoft a copy of the
petition demanding that the chancery court determine the value of the shares of
BroadSoft stock held by all of the stockholders who are entitled to appraisal
rights. BroadSoft has no present intention of filing an appraisal petition.
Accordingly, if you intend to exercise your rights of appraisal, you should file
a petition in the Delaware Court of Chancery. Because BroadSoft has no
obligation to file a petition, if you do not file a petition within 120 days
after the completion of the merger, you will lose your rights of appraisal.
Withdrawal of Demand. If you change your mind and decide you no longer
want to assert appraisal rights, you may withdraw your demand for appraisal
rights any time within 60 days after the closing of the merger. You may also
withdraw your demand for appraisal rights after 60 days after the closing of the
merger, but only with the written consent of BroadSoft. If you effectively
withdraw your demand for appraisal rights, you will receive the merger
consideration provided in the merger agreement.
Request for Appraisal Rights Statement. If you have complied with the
conditions of Section 262, you are entitled to receive a statement from
BroadSoft which sets forth the number of shares held by stockholders who have
demanded appraisal rights, and the number of stockholders who own those shares.
To receive this statement, you must send a written request to BroadSoft within
120 days after the completion of the merger. BroadSoft has 10 days after
receiving a request to mail you the statement.
Chancery Court Procedures. If you properly file a petition for appraisal
in the Delaware Court of Chancery and deliver a copy to BroadSoft, BroadSoft
will then have 20 days to provide the chancery court with a list of the names
and addresses of all stockholders who have demanded appraisal rights and have
not reached an agreement with BroadSoft as to the value of their shares. At a
hearing on the petition, the Delaware Court of Chancery will determine which
stockholders, if any, have fully complied with Section 262 of the Delaware
General Corporation Law and whether they are entitled to appraisal rights under
Section 262. The chancery court may also require you to submit your stock
certificates to the Register in Chancery so that it can note on the certificates
that an appraisal proceeding is pending. If you do not follow the chancery
court's directions, you may be dismissed from the proceeding.
Appraisal of Shares. After the Delaware Court of Chancery determines which
stockholders are entitled to appraisal rights, it will consider factors relevant
to a determination of the fair value of your shares except for any appreciation
or depreciation due to any expectation or accomplishment of the merger. After
the chancery court determines the fair value of shares of BroadSoft, it will
direct BroadSoft to pay that value to the stockholders who sought to have their
shares appraised. The chancery court can also direct BroadSoft to pay interest,
simple or compound, on that value if the chancery court determines that interest
is appropriate. In order to receive your payment for your shares, you must then
surrender your stock certificates to BroadSoft.
The Delaware Court of Chancery could determine that the fair value of
shares of BroadSoft stock is more than, the same as or less than the merger
consideration. In other words, if you demand appraisal rights, you could receive
less consideration than you would under the merger agreement. You should also be
aware that an opinion of an investment banking firm that the merger is fair is
not an opinion that the merger consideration constitutes fair value under
Section 262.
Costs and Expenses of Appraisal Proceeding. The costs and expenses of the
appraisal proceeding may be assessed against BroadSoft and/or the stockholders
participating in the appraisal proceeding, as the Delaware Court of Chancery
deems equitable under the circumstances. You may also request that the chancery
court allocate the expenses of the appraisal action incurred by any stockholder
pro rata against the value of all of the shares entitled to appraisal.
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Loss of Stockholders' Rights. If you demand appraisal rights, after the
completion of the merger you will not be entitled to:
- vote shares of stock, for any purpose, for which you have demanded
appraisal rights;
- receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the effective
time of the merger; or
- receive payment of the consideration provided for in the merger
agreement, unless you properly withdraw your demand for appraisal.
If no petition for an appraisal is filed within 120 days after the
completion of the merger, your right to seek an appraisal will cease and you
will be entitled to receive the consideration that all other holders of
BroadSoft capital stock received in the merger. You may withdraw your demand for
appraisal and accept the merger consideration by delivering to BroadSoft a
written withdrawal of your demand, except that:
- any attempt to withdraw made more than 60 days after the completion of
the merger will require the written approval of BroadSoft; and
- an appraisal proceeding in the Delaware Court of Chancery cannot be
dismissed unless the Delaware Court of Chancery approves.
If you fail to comply strictly with the procedures described above you will
lose our appraisal rights. Consequently, if you wish to exercise your appraisal
rights, we strongly urge you to consult a legal advisor.
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THE MERGER AGREEMENT
The following information describes material aspects of the merger
agreement and related agreements. This description does not provide a complete
description of all the terms and conditions of the merger agreement and related
agreements. It is qualified in its entirety by the copies of the merger
agreement and related agreements attached as annexes to this proxy
statement/prospectus. The merger agreement and related agreements are
incorporated herein by reference. You are urged to read the annexes in their
entirety.
GENERAL
The merger agreement provides for the acquisition of BroadSoft by Unisphere
pursuant to the merger of a wholly owned subsidiary of Unisphere into BroadSoft.
BroadSoft will be the surviving corporation resulting from the merger and will
become a wholly-owned subsidiary of Unisphere.
THE CONVERSION RATIO; TREATMENT OF BROADSOFT COMMON STOCK AND BROADSOFT
PREFERRED STOCK
The merger agreement provides that, upon consummation of the merger, each
share of BroadSoft common stock that is outstanding (other than shares owned by
Unisphere or the merger subsidiary, which will be canceled, any shares for which
appraisal rights have been validly asserted and any shares held in BroadSoft's
treasury) will initially be converted into shares of Unisphere common stock
according to the formulas set forth in the merger agreement. Unisphere and
BroadSoft expect that all shares of BroadSoft Series A preferred stock will be
redeemed by BroadSoft and all shares of BroadSoft Series B preferred stock will
be converted into shares of BroadSoft common stock prior to the merger.
Moreover, Unisphere and BroadSoft expect that all BroadSoft warrants will be
exercised or terminated prior to the merger.
We will calculate a conversion ratio for the BroadSoft common stock
immediately prior to the closing of the merger. In calculating this ratio, we
will first add the number of shares of BroadSoft common stock actually
outstanding at that time, which will include the shares issued upon the expected
conversion of BroadSoft Series B preferred stock, and the number of shares of
BroadSoft common stock issuable upon the exercise of then outstanding BroadSoft
stock options. We will then divide 4,960,000 by the resulting sum. This will
yield the conversion ratio, or the number of shares of Unisphere common stock
into which each share of BroadSoft common stock will be initially converted at
the closing. The effect of this calculation is to allocate 4,960,000 shares of
Unisphere common stock proportionately among the BroadSoft stockholders and
optionholders. The shares allocated to the BroadSoft common stock will be issued
at closing. The shares allocated to the BroadSoft stock options will not be
issued at closing; instead, Unisphere will assume the options and they will
thereafter be exercisable to acquire Unisphere common stock as described below.
Of the shares to be issued at closing with respect to the BroadSoft common
stock, 496,000 will be placed into the indemnification escrow.
If you hold shares of BroadSoft restricted common stock that are unvested
or are subject to a repurchase option, a risk of forfeiture or another condition
under any restricted stock purchase agreement or other similar agreement with
BroadSoft, the shares of Unisphere common stock you receive at the closing of
the merger will also be unvested or subject to the same repurchase option, risk
of forfeiture or other condition. If your restricted stock purchase or other
agreement provides for acceleration of the vesting schedule for your shares of
BroadSoft restricted common stock upon the occurrence of the merger, the
accelerated schedule will apply to the shares of Unisphere restricted common
stock that you receive in the merger. The repurchase price of your BroadSoft
restricted common stock will be adjusted by dividing it by the conversion ratio
described above.
As of , 2001, after giving effect to the conversion into common
stock of all shares of BroadSoft Series B preferred stock and the exercise of
all warrants, BroadSoft had outstanding shares of BroadSoft common
stock and options to purchase additional shares of BroadSoft common
stock. Based on these numbers, and assuming no new BroadSoft option grants
(other than specified grants) or forfeitures and no new issuances of BroadSoft
stock other than upon option and warrant exercises, each share of BroadSoft
common stock will be initially converted at the closing into
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shares of Unisphere common stock, of which shares will be deposited
into the indemnification escrow. If BroadSoft grants additional options (other
than specified options) after , 2001 or issues additional shares of
capital stock other than upon the exercise of existing stock options, the
conversion ratio would be lower. Conversely, if any BroadSoft stock options are
forfeited after that date, the conversion ratio would be higher.
ADDITIONAL SHARES OF UNISPHERE COMMON STOCK AND OPTIONS MAY BE ISSUED AFTER THE
CLOSING
Following the effective time of the merger, Unisphere may be obligated to
issue up to an aggregate of 1,750,000 additional shares of Unisphere common
stock and options to purchase Unisphere common stock to BroadSoft stockholders
and optionholders. The number of additional shares and options issued, if any,
will be based on the average of the last reported sale price per share for
Unisphere common stock on the Nasdaq National Market for the 20 consecutive
trading days beginning with the first complete trading day following Unisphere's
announcement of its second fiscal quarter financial results or 30 days following
the closing of the merger, whichever is later.
As with the initial 4,960,000 shares, any additional shares will be
allocated among the former holders of BroadSoft common stock and stock options
and in the same proportion. Shares allocated to the options will take the form
of additional options granted to the former BroadSoft optionholders. The
remaining additional shares will be issued to the former BroadSoft stockholders
within 15 days after the end of the 20 trading day measurement period. Of the
shares allocated to the BroadSoft common stock, a number equal to 10% of the
total number of additional shares, including those allocated to the BroadSoft
stock options, will be placed into the indemnification escrow.
The actual number of additional shares of Unisphere common stock to be
allocated among BroadSoft stockholders and optionholders, if any, will be
calculated as follows:.
- If the average stock price determined as described above is less than or
equal to $ then the total number of additional shares will be
1,750,000,
- If the average stock price determined as described above is greater than
$ and less than $ , then the total number of additional
shares will be equal to:
$ x 500,000
-------------------------
average stock price
- If the average stock price determined as described above is equal to or
greater than $ and less than or equal to $ , then the
total number of additional shares will be 500,000.
- If the average stock price determined as described above is greater than
$ and less than $ , then the total number of additional
shares will be equal to:
$ x 500,000
-------------------------
average stock price
- If the average stock price determined as described above is equal to or
greater than $ , then the total number of additional shares will
be zero.
These per share thresholds do not take into account shares of Unisphere common
stock issued in connection with the underwriters' option to purchase a maximum
of 1,275,000 shares to cover over-allotments in connection with Unisphere's
initial public offering. If the underwriters' exercise their option to purchase
all 1,275,000 shares at the initial public offering price, the first threshold
($ ) would become $ , the second threshold ($ ) would
become $ , the third threshold ($ ) would become $
and the fourth threshold ($ ) would become $ .
After the total number of additional shares is determined, that number will
be allocated among the former BroadSoft stockholders and optionholders in the
same proportion as they were allocated shares at the effective time of the
merger. Based on the number of shares of BroadSoft common stock and options
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to acquire BroadSoft common stock outstanding on , 2001, the holders
of each share of BroadSoft common stock would become entitled to receive
additional shares of Unisphere common stock equal to the total number of
additional shares multiplied by , of which approximately % will be placed
into the indemnification escrow.
TREATMENT OF BROADSOFT OPTIONS
At the effective time of the merger, each option (other than those
described below) to acquire BroadSoft common stock that is outstanding, whether
or not vested, will become an option to purchase Unisphere common stock.
Unisphere will assume each option in accordance with the terms of the existing
BroadSoft plans and agreements governing the options except that:
- Unisphere will deliver Unisphere common stock upon the exercise of each
option;
- the number of shares of Unisphere common stock subject to the option will
be equal to the number of shares of BroadSoft common stock subject to the
unexercised portion of the option immediately before the merger becomes
effective multiplied by the conversion ratio and rounded down to the
nearest whole number;
- the per share exercise price under each option will be adjusted by
dividing it by the conversion ratio and rounding up to the nearest cent;
and
- under the terms of the BroadSoft stock option plans, vesting as to 25% of
the unvested portion of the shares covered by the option will accelerate.
The exercise price per share and the number of shares purchasable under
options issued after the date of the merger agreement, including options that
may be granted pursuant to outstanding offer letters, will not be adjusted at
the effective time of the merger. Additionally, the status of any BroadSoft
option as an "incentive stock option," as defined by the Internal Revenue Code,
will remain unchanged.
For information with respect to options held by BroadSoft's management, see
"The Merger -- Interests of BroadSoft's Executive Officers and Directors in the
Merger" on page 48.
ESCROW SHARES
At the effective time of the merger, 496,000 shares of Unisphere common
stock, or 10% of the total number of shares of Unisphere common stock to be
allocated to the outstanding common stock and stock options of BroadSoft at the
effective time, will be placed into escrow to satisfy the indemnification
obligations of the BroadSoft stockholders under the merger agreement. If
Unisphere issues any additional shares of common stock to the BroadSoft
stockholders following the effective time of the merger, Unisphere will place
into escrow the number of shares of its common stock equal to 10% of the excess
of the total additional shares. The shares of common stock not placed into
escrow will be distributed to the BroadSoft stockholders pro rata in accordance
with the number of shares issued to them at the effective time. Any shares of
Unisphere common stock that are not used to satisfy indemnification obligations
will be distributed to the BroadSoft stockholders depositing shares into escrow
following the first anniversary of the closing of the merger.
NO FRACTIONAL SHARES
Unisphere will not issue fractional shares of its common stock. Instead,
each BroadSoft stockholder will receive cash, without interest, based on the
average of the last reported sale price per share of Unisphere common stock as
reported on the Nasdaq National Market for the 20 consecutive trading days
beginning with the first complete trading day following Unisphere's announcement
of its second fiscal quarter financial results or 30 days after the effective
time of the merger, whichever is later.
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APPRAISAL RIGHTS
Holders of BroadSoft common stock and preferred stock have dissenters'
rights. Under Delaware law, if you do not wish to accept the consideration
provided for in the merger agreement you have the right to dissent from the
merger and to receive payment in cash for the fair value of your BroadSoft
common stock and preferred stock. BroadSoft stockholders electing to exercise
dissenters' rights must comply with the provisions of Section 262 of the
Delaware General Corporation Law in order to perfect their rights. BroadSoft
will require strict compliance with the statutory procedures. See "The
Merger -- Rights of BroadSoft Stockholders to Appraisal" on page 49. A copy of
Section 262 is attached to this proxy statement/prospectus as Annex C.
In view of the complexity of Section 262, BroadSoft stockholders who may
wish to dissent from the merger and pursue appraisal rights should consult their
legal advisors.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
merger, the merger will become effective on the date and at the time specified
in the certificate of merger to be filed with the secretary of state for the
state of Delaware. Unisphere, BroadSoft and the merger subsidiary will use their
best efforts, to the extent commercially reasonable, to cause the merger to
become effective.
Unisphere and BroadSoft anticipate that the merger will become effective on
or about , 2001. However, delays could occur.
Unisphere and BroadSoft cannot assure you that the necessary conditions to
completion of the merger can or will be satisfied. Either BroadSoft's or
Unisphere's board of directors may terminate the merger agreement if the merger
is not completed by February 28, 2001, unless it is not completed because of the
breach of the merger agreement by the party seeking termination. However, that
date will be automatically extended to April 29, 2001 in the event that the
registration statement of which this proxy statement/ prospectus is a part has
not been declared effective by the Securities and Exchange Commission by such
date. See "The Merger Agreement -- Conditions to Completion of the Merger" on
page 62 and "The Merger Agreement -- Termination" on page 63.
THE EXCHANGE AGENT
On the closing date of the merger, Unisphere will deposit with the exchange
agent the certificates representing the initial shares of Unisphere common stock
to be issued to the holders of BroadSoft common stock, less the shares to be
held and disposed of by the escrow agent, to be exchanged for shares of
BroadSoft common stock. Following the determination of the number of additional
shares of Unisphere common stock to be issued, if any, which determination will
occur following the 20 day measurement period, Unisphere will deposit
certificates representing such additional shares with the exchange agent, less
the additional shares to be placed in the indemnification escrow. At such time,
Unisphere will also deposit cash to pay for fractional shares that holders of
BroadSoft common stock are entitled to receive under the merger agreement.
EXCHANGE OF CERTIFICATES
Promptly after the effective time of the merger, each former BroadSoft
stockholder will be mailed a letter of transmittal and any other documents
required by the exchange agent, and instructions for the exchange of the
certificates representing shares of BroadSoft common stock for certificates
representing the initial shares of Unisphere common stock to be issued, less the
pro rata portion of the initial shares of each BroadSoft stockholder to be held
and disposed of by the escrow agent in accordance with the escrow agreement to
which Unisphere and two BroadSoft stockholders are party. Following the date for
the determination of the issuance of any additional shares of Unisphere common
stock, the exchange agent will deliver to each former BroadSoft stockholder
certificates representing their additional shares, based on a pro rata
distribution in accordance with the number of initial shares each BroadSoft
stockholder
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received, less the pro rata portion of the additional shares of each BroadSoft
stockholder to be held and disposed of by the escrow agent.
YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE A LETTER
OF TRANSMITTAL AND INSTRUCTIONS.
After you surrender to the exchange agent certificates for BroadSoft common
stock with a properly completed letter of transmittal, the exchange agent will
mail you a certificate or certificates representing the initial number of shares
of Unisphere common stock, less the shares to be held and disposed of by the
escrow agent, to which you are entitled, together with all undelivered dividends
or distributions in respect of the shares of Unisphere common stock (without
interest), if any, which are payable to holders of Unisphere common stock as of
a date on or after the closing date of the merger and which were paid or
delivered between the effective time of the merger and the time of surrender to
the exchange agent of the BroadSoft common stock certificate. Unisphere will not
be obligated to deliver the consideration to you, as a former BroadSoft
stockholder, until you have surrendered your BroadSoft common stock
certificates. Unisphere will pay any cash due in lieu of any fractional share
following the date for the determination of the issuance of any additional
shares of Unisphere common stock.
If any BroadSoft stockholder's stock certificate has been lost, stolen, or
destroyed, the exchange agent will issue the shares of Unisphere common stock
and any cash in lieu of fractional shares (provided that the date for the
determination of the issuance of any additional shares of Unisphere common stock
has passed) upon the stockholder's submission of an affidavit claiming the
certificate to be lost, stolen, or destroyed by the stockholder of record and
the posting of a bond in such amount as Unisphere may reasonably direct as
indemnity against any claim that may be made against Unisphere with respect to
the certificate.
At the effective time of the merger, the stock transfer books of BroadSoft
will be closed to BroadSoft's stockholders and no transfer of shares of
BroadSoft common stock or BroadSoft preferred stock by any stockholder will
thereafter be made or recognized. If certificates for shares of BroadSoft common
stock or BroadSoft preferred stock are presented for transfer after the
effective time of the merger, they will be canceled and exchanged for initial
shares of Unisphere common stock and additional shares of Unisphere common
stock, if any, less, in each case, any shares to be held in escrow, a check for
the amount due in lieu of fractional shares, if any, and any undelivered
dividends on the Unisphere common stock.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of BroadSoft,
Unisphere and the merger subsidiary. In addition to other matters, the
representations and warranties relate to each company's:
- organization, existence, good standing, corporate power and similar
corporate matters;
- capitalization;
- authorization, execution and delivery of the merger agreement and the
documents contemplated thereby;
- performance under and the enforceability of the merger agreement and
related matters;
- absence of conflicts, violations and defaults under their corporate
charters and by-laws and other agreements and documents;
- financial statements;
- absence of certain changes in their businesses;
- litigation;
- brokers' fees; and
- accuracy of information provided in connection with this proxy statement/
prospectus.
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BroadSoft also represented and warranted in the merger agreement as to:
- subsidiaries;
- absence of undisclosed liabilities;
- tax matters;
- assets;
- owned real property;
- real property leases;
- intellectual property;
- contracts;
- powers of attorney;
- insurance;
- warranties;
- employees and employee benefits;
- environmental matters;
- legal compliance;
- customers and suppliers;
- permits;
- certain business relationships with affiliates; and
- books and records.
Unisphere and the merger subsidiary also represented and warranted in the
merger agreement as to:
- filings with the Securities and Exchange Commission;
- interim operations of the merger subsidiary; and
- certain other transactions with third parties.
COVENANTS
The merger agreement obligates BroadSoft to conduct its business in the
ordinary course of business, consistent with past practice and custom and in
compliance with all applicable laws and regulations. In addition, BroadSoft has
agreed to use its reasonable best efforts to do the following:
- preserve intact its current business organization;
- keep its physical assets in good working condition;
- keep available the services of its current officers and employees; and
- preserve its relationships with customers, suppliers and others having
business dealings with it so that its goodwill and ongoing business is
not impaired in any material respect.
BroadSoft also specifically agreed that it will not, without the prior
written consent of Unisphere:
- issue, sell, redeem or repurchase any stock or other securities of
BroadSoft or any rights, warrants or options to acquire such securities
(except pursuant to the conversion or exercise of convertible securities,
outstanding options or warrants or the repurchases of certain restricted
shares, and as otherwise provided in the merger agreement), or amend any
of the terms of any of the foregoing;
- split, combine or reclassify any shares of its capital stock;
- declare, set aside or pay any dividend or other distribution in respect
of its capital stock other than the redemption of shares of its Series A
preferred stock;
- create, incur or assume any indebtedness other than as provided in the
merger agreement;
- assume, guarantee, endorse or otherwise become liable or responsible for
the obligations of any other person or entity other than as provided in
the merger agreement;
- make any loans, advances or capital contributions to, or investments in,
any other person or entity other than as provided in the merger
agreement;
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- enter into, adopt or amend any employee benefit plan or any employment or
severance arrangement other than as provided in the merger agreement;
- materially modify the employment terms of its directors, officers or
employees, generally or individually, or pay any bonus or other benefit
to its directors, officers or employees, other than as provided in the
merger agreement;
- acquire, sell, lease, license or dispose of any assets or property, other
than purchases and sales of assets in the ordinary course of business or
pursuant to certain permitted contracts;
- mortgage, pledge or subject any of its property or assets to any security
interest;
- discharge or satisfy any security interest or pay any obligation or
liability other than in the ordinary course of business;
- amend its charter, by-laws or other organizational documents other than
to permit the grant of certain options and the redemption of its Series A
preferred stock;
- change in any material respect its accounting methods, principles or
practices, except as may be required by a generally applicable change in
generally accepted accounting principles;
- amend, terminate, take or omit to take any action that would constitute a
violation of or default under, or waive any rights under, certain
specified contracts and agreements, or enter into any contract or
agreement, other than certain permitted contracts, that would be required
to be disclosed pursuant to the merger agreement if it had existed as of
October 20, 2000;
- make or commit to make any capital expenditure in excess of the amounts
set forth in BroadSoft's budget for fiscal year 2000 or fiscal year 2001
other than as provided in the merger agreement;
- institute or settle any legal proceeding;
- take or fail to take any action permitted by the merger agreement with
the knowledge that the action or failure to do so would result in any of
the conditions to the merger not being satisfied; or
- agree in writing or otherwise to take any of the foregoing actions
BroadSoft has also agreed to the following:
- to use its reasonable best efforts to obtain the requisite stockholder
approval to approve the merger agreement and the merger;
- to permit Unisphere access to all BroadSoft properties, records,
contracts, documents and personnel;
- to provide Unisphere with an unaudited income statement and a balance
sheet each month until closing;
- not to initiate, solicit, encourage or otherwise facilitate any proposal
regarding a business combination, sale of stock or material assets or
similar business transaction involving BroadSoft and any other party;
- not to disclose any non-public information about BroadSoft;
- not to engage in discussions or negotiations with any third party
regarding a business combination, sale of stock or material assets or
similar business transaction;
- to submit to a stockholder vote the right of any "disqualified
individual" to receive all payments that could be deemed "parachute
payments" under Section 280G(b) of the Internal Revenue Code, in a manner
that satisfies the requirements of the Internal Revenue Code; and
- to use its reasonable best efforts to obtain all waivers, consents or
approvals from third parties, and to give all such notices to third
parties, as are required.
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Unisphere and BroadSoft have also each agreed, among other things, to the
following:
- to use their respective reasonable best efforts to take all actions and
to do all things necessary, proper or advisable to consummate the
transactions contemplated by the merger agreement;
- to use their respective reasonable best efforts to obtain all waivers,
permits, consents, approvals or other authorizations from governmental
entities and third parties, and to make all necessary filings and
submissions with governmental entities and third parties as may be
required to consummate the transactions contemplated by the merger
agreement and to otherwise comply with all applicable laws and
regulations in connection with the consummation of the transactions
contemplated by the merger agreement;
- to ensure that this proxy statement/prospectus does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading;
- to deliver to the other party supplemental information concerning events
or circumstances occurring subsequent to October 20, 2000 which would
make any representation, warranty or statement in the merger agreement or
the disclosure schedule inaccurate at any time after October 20, 2000 and
until the closing of the merger; and
- to use their respective reasonable best efforts to cause the merger to
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, and to timely satisfy, all applicable tax
reporting and filing requirements contained in the Internal Revenue Code
and the treasury regulations with respect to the merger;
Unisphere has also agreed, among other things, to the following:
- to use its reasonable best efforts to cause its common stock to be issued
in the merger to be listed on the Nasdaq National Market;
- provided BroadSoft has obtained the specified directors' and officers'
runoff liability insurance policy, to continue to honor in all respects
the obligations of BroadSoft pursuant to any indemnification provision
under BroadSoft's by-laws or charter and to maintain such insurance
policy for six years after the effective time of the merger;
- to use its reasonable best efforts to have the registration statement of
which this proxy statement/prospectus is a part declared effective under
the Securities Act of 1933 as promptly as practicable; and
- to keep BroadSoft informed of developments regarding its initial public
offering; and
- to continue to sponsor without material change any BroadSoft sponsored
employee benefit plans in effect at the effective time of the merger
until such time as those plans are merged into Unisphere's parent
corporation's benefit plans or the participants in those plans otherwise
become covered under such parent corporation's benefit plans, provided
that certain amendments to the BroadSoft 401(k) plan occur prior to the
effective time of the merger.
INDEMNIFICATION OF UNISPHERE AND CERTAIN BROADSOFT STOCKHOLDERS
Generally. The merger agreement provides that 10% of the shares of
Unisphere common stock to be allocated to BroadSoft stockholders and
optionholders in the merger will be placed in escrow with an escrow agent as
soon as practicable after the merger is completed.
Indemnification by BroadSoft Stockholders. BroadSoft stockholders
receiving shares of Unisphere common stock in the merger, severally but not
jointly, will indemnify Unisphere and hold it harmless against any and all
damages suffered by Unisphere or any of its affiliates resulting from any
inaccuracy in
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or breach of any representation or warranty or failure to perform any covenant
or agreement of BroadSoft contained in the merger agreement or any claim by a
stockholder or former stockholder of BroadSoft, or any other person, seeking to
assert any of the following:
- ownership or rights to ownership of any shares of BroadSoft stock;
- any rights of a stockholder, including any option, preemptive rights or
rights to notice or to vote;
- any rights under the charter or by-laws of BroadSoft; or
- any claim that his, her or its shares were wrongfully repurchased by
BroadSoft.
No BroadSoft indemnifying stockholder will have any right of contribution
against BroadSoft or the surviving corporation in the merger with respect to any
breach by BroadSoft of any of its representations, warranties, covenants or
agreements in the merger agreement.
Indemnification by Unisphere. Unisphere will indemnify the BroadSoft
indemnifying stockholders in respect of, and hold them harmless against, any and
all damages suffered by the BroadSoft indemnifying stockholders resulting from
any inaccuracy in or breach of any representation or warranty or failure to
perform any covenant or agreement of Unisphere or the merger subsidiary
contained in the merger agreement.
Indemnification Claims. A party entitled, or seeking to assert rights, to
indemnification under the merger agreement must give written notification to the
party from whom indemnification is sought in accordance with the merger
agreement.
Survival of Representations and Warranties. All representations and
warranties contained in the merger agreement will survive the closing of the
merger and any investigation at any time made by or on behalf of an indemnified
party and will expire on the date one year following the closing date except for
representations and warranties related to BroadSoft's capitalization, which
shall survive without limitation.
Limitations. Except as otherwise provided in the merger agreement and with
respect to damages relating to willful misrepresentation, fraud or breach of the
representations and warranties relating to capitalization, the aggregate
liability of the BroadSoft indemnifying stockholders, on the one hand, and
Unisphere, on the other hand, for damages, will not exceed 10% of the total
merger consideration. The BroadSoft indemnifying stockholders and Unisphere will
be liable for indemnification claims only if the aggregate damages for which
they or it would otherwise be liable exceeds $1,000,000. If the damages exceed
$1,000,000, however, then such party or parties will be liable for all damages.
Each BroadSoft indemnifying stockholder will only be liable for his, her or its
pro rata share (based on the number of shares of Unisphere common stock received
by such BroadSoft indemnifying stockholder as a percentage of the total number
of shares of Unisphere common stock issued in the merger) of any damages.
Except for damages relating to willful misrepresentation, fraud and breach
of representations and warranties related to BroadSoft's capitalization and the
covenants regarding the payment of expenses, the escrow agreement will be the
exclusive means for Unisphere to collect any damages for which it is entitled to
indemnification under the merger agreement. In addition, except with respect to
claims based on willful misrepresentation and fraud, after the closing, the
rights of the indemnified parties under the merger agreement and the escrow
agreement will be the exclusive remedy of the indemnified parties with respect
to claims resulting from or relating to any misrepresentation, breach of
warranty or failure to perform any covenant or agreement contained in the merger
agreement. The escrow agreement is Exhibit A to the merger agreement, which is
Annex A to this proxy statement/prospectus.
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CONDITIONS TO COMPLETION OF THE MERGER
Unisphere, BroadSoft and the merger subsidiary are required to complete the
merger only after meeting a number of conditions, including:
- the requisite BroadSoft stockholder approval approving the merger
agreement and the merger has been obtained;
- the Securities and Exchange Commission has declared the registration
statement of which this proxy statement/prospectus is a part effective
under the Securities Act of 1933;
- the shares of Unisphere common stock to be issued in the merger have been
approved for listing on the Nasdaq National Market, subject to notice of
issuance;
- the representations and warranties in the merger agreement are true and
correct as of the date of the merger agreement and as of the date the
merger becomes effective, except as otherwise provided in the merger
agreement and except for any failure to be true and correct which has not
resulted in and would not be reasonably likely to result in a material
adverse effect;
- the performance in all material respects of all obligations required to
be performed by the applicable party under the merger agreement;
- the absence of any legal proceeding which would be reasonably likely to
prevent the merger, make it illegal or have a material adverse effect;
- that the registration statement relating to Unisphere's initial public
offering of its common stock has been declared effective by the
Securities and Exchange Commission by January 31, 2001;
- the receipt of legal opinions regarding the treatment of the merger as a
reorganization; and
- some other conditions must be satisfied, including the receipt of various
certificates from the officers of BroadSoft and Unisphere.
In addition, the obligations of Unisphere and the merger subsidiary to
effect the merger are subject to the satisfaction or waiver of the following
conditions:
- the number of BroadSoft shares dissenting from the merger and the merger
agreement is not more than 2.5% of the total common stock (including the
Series B preferred stock on an as converted basis);
- BroadSoft obtains all required third-party consents;
- Unisphere receives copies of the resignations of each director and
officer of BroadSoft other than those resignations which Unisphere
designates as unnecessary;
- certain BroadSoft employees have, among other things, accepted an offer
of employment from Unisphere, agreed that the merger does not constitute
"good reason" with respect to acceleration of such employee's options
upon termination of employment and executed a noncompetition and
nonsolicitation agreement;
- certain persons affiliated with BroadSoft execute lock-up agreements with
respect to the disposition or transfer of Unisphere capital stock;
- no event has occurred since October 20, 2000 that is reasonably likely to
be or have a material adverse effect on BroadSoft, other than as a result
of certain circumstances identified in the merger agreement;
- all outstanding shares of BroadSoft Series B preferred stock have been
converted into BroadSoft common stock;
- all BroadSoft warrants have been exercised or terminated;
- any "parachute payments" have been approved by the requisite stockholder
vote under the Internal Revenue Code;
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- BroadSoft delivers to Unisphere tax good standings and other documents
which are required by any tax authority in any jurisdiction in which
BroadSoft is required to file tax returns to relieve Unisphere from any
obligation to withhold any portion of any consideration payable in
connection with the merger;
- all outstanding shares of BroadSoft Series A preferred stock have been
redeemed not later than the specified date; and
- Unisphere receives the BroadSoft balance sheet as of the end of the
calendar month preceding the month in which the merger is consummated.
In addition, the obligations of BroadSoft to effect the merger are subject
to the condition that Unisphere has completed its initial public offering,
effected all registrations, filings and notices which are required to be filed
by it, except for any which if not obtained would not have a material adverse
effect on Unisphere or on the ability of the parties to consummate the
transactions contemplated by the merger agreement.
We cannot assure you as to when or if all of the conditions to the merger
can or will be satisfied or waived by the party permitted to do so. If the
merger is not effected on or before February 28, 2001 because any specified
condition to closing has not been satisfied (unless the failure results from a
breach by the terminating party), the board of directors of either BroadSoft or
Unisphere may terminate the merger agreement and abandon the merger, provided
that such date will be extended until April 29, 2001 in the event that the
registration statement of which this proxy statement/prospectus is a part has
not yet been declared effective by the Securities and Exchange Commission. See
"The Merger Agreement -- Termination" on page 63.
NO SOLICITATION
BroadSoft has agreed that neither it nor any of its officers, directors,
employees, representatives or agents will, directly or indirectly, other than as
provided in the merger agreement, do any of the following:
- initiate, encourage or otherwise facilitate any proposal regarding a
business combination, sale of stock or material assets or similar
business transaction involving BroadSoft;
- disclose any non-public information about BroadSoft; or
- engage in discussions or negotiations with any third party regarding a
business combination, sale of stock or material assets or similar
business transaction.
TERMINATION
The merger agreement may be terminated by written notice by the terminating
party under the following circumstances at any time prior to the effective time
of the merger:
- by mutual written consent of the parties;
- by either Unisphere or BroadSoft if the requisite vote of BroadSoft
stockholders in favor of the merger agreement and the merger is not
obtained at the special meeting of stockholders;
- by either Unisphere or BroadSoft if there has been a breach by the other
party of any representation, warranty or covenant contained in the merger
agreement, individually or in combination with any other such breach, the
breach is reasonably likely to have a material adverse effect and the
breach is not cured within 20 days after the breaching party receives a
written notice of the breach; or
- by either Unisphere or BroadSoft if the closing has not occurred by
February 28, 2001 because any specified condition to closing has not been
satisfied (unless the failure results from a breach by the terminating
party), provided that such date will be extended until April 29, 2001 in
the event that the registration statement of which this proxy
statement/prospectus is a part has not been declared effective by the
Securities and Exchange Commission by February 28, 2001.
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EXPENSES
Unisphere and BroadSoft will each pay their own expenses in connection with
the merger, including filing, registration and application fees, printing fees,
and fees and expenses of its own financial or other consultants, investment
bankers, accountants, and counsel. Additionally, if the merger is consummated,
BroadSoft has agreed that it will not incur more than an aggregate of $3 million
in such fees and expenses, and any fees and expenses above such amount shall be
paid by stockholders of record of BroadSoft immediately prior to the effective
time.
WAIVER AND AMENDMENT
To the extent permitted by law, Unisphere, BroadSoft and the merger
subsidiary may agree in writing to amend the merger agreement, whether before or
after the effective time of the merger. In addition, BroadSoft, Unisphere or the
merger subsidiary, may waive any default in the performance of any term of the
merger agreement by the other party or may waive or extend the time for the
compliance or fulfillment by the other party of any and all of its obligations
under the merger agreement. In addition, either Unisphere or BroadSoft may waive
any of the conditions precedent to its obligations under the merger agreement,
unless a violation of any law or governmental regulation would result. To be
effective, a waiver must be in writing and signed by an authorized officer of
Unisphere, BroadSoft or the merger subsidiary, as the case may be.
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OTHER AGREEMENTS
ESCROW AGREEMENT
At the closing of the merger, Unisphere will deposit in escrow with the
escrow agent a certificate representing 496,000 shares of Unisphere common stock
for the purpose of securing and as the sole remedy for satisfying the
indemnification obligations of the BroadSoft stockholders pursuant to the merger
agreement. In addition, Unisphere may from time to time deposit with the escrow
agent additional shares of Unisphere common stock pursuant to the terms of the
merger agreement. The escrow shares will be issued in the name of the escrow
agent or its nominee and will not be subject to any lien attachment or any other
judicial process of any creditor. The escrow will terminate one year after the
closing of the merger. During the term of the escrow agreement, the respective
interests of the BroadSoft stockholders in the escrow shares are not
transferable. In addition, during the term of the escrow agreement, the escrow
shares will be voted by the escrow agent on behalf of the BroadSoft stockholders
in accordance with instructions received by the escrow agent from the BroadSoft
stockholders. In the absence of these instructions, the escrow agent need not
vote these shares. Within five business days after the termination of the
escrow, the escrow agent will distribute the number of shares remaining in
escrow to the BroadSoft stockholders in proportion to their relative holdings
prior to the merger. Unisphere and the BroadSoft stockholders are jointly and
severally liable for losses, liabilities or expenses incurred by the escrow
agent without gross negligence or willful misconduct and arising out of its
duties as escrow agent. Unisphere and the BroadSoft stockholders are each liable
for one-half of such amounts. Amounts payable by BroadSoft stockholders in
connection with such liability may be paid only through sale of shares held in
escrow.
Pursuant to the merger agreement, Mr. Michael Tessler, President and Chief
Executive Officer of BroadSoft, and Mr. Robert Goodman, Chairman of BroadSoft's
board of directors and a principal of Bessemer Venture Partners, a stockholder
of BroadSoft, have been appointed as the representatives of the BroadSoft
stockholders to deal with all matters relating to the indemnification
obligations and the escrow arrangement. The escrow agreement provides that the
BroadSoft stockholders will not hold these representatives liable for any
inaction or any action taken in reliance upon any instruction, consent or other
statement believed by such representative to be genuine and duly authorized in
the absence of gross negligence or willful misconduct.
AFFILIATE AGREEMENT
As a condition to the closing of the merger, affiliates of BroadSoft, which
includes directors and executive officers of BroadSoft, will enter into an
affiliate agreement. The affiliate agreements prohibit the affiliate from
offering, selling, transferring or otherwise disposing of such affiliate's
shares of Unisphere common stock issued to the affiliate in the merger unless
one of the following conditions is met:
- the transaction is permitted under Rule 145 of the Securities Act;
- the affiliate has furnished to Unisphere an opinion of counsel to the
effect that no registration under the Securities Act would be required in
connection with the proposed transaction; or
- a registration statement under the Securities Act covering the proposed
transaction is effective under the Securities Act.
In addition, the affiliate agreement provides that each stock certificate
representing the affiliate's shares of Unisphere common stock will bear a legend
restricting transfer of such shares which would also be binding on the
affiliate's successors and assigns. The affiliate's stock certificates will bear
these restrictive legends until the earliest to occur of one of the
above-referenced permissible transfers or the date on which the affiliate
requests removal of such legend, provided that such request occurs at least two
years from the closing of the merger and the affiliate is not at the time of
request, and has not been during the three-month period immediately preceding
such request, an affiliate of BroadSoft.
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LOAN AND SECURITY AGREEMENT
The merger agreement provides that beginning March 1, 2001 and ending on
the earlier of August 31, 2001, the closing of the merger or the termination of
the merger agreement, and assuming that the merger has not closed, Unisphere
will make loans and advances to BroadSoft at its request for working capital
purposes not to exceed an aggregate outstanding amount of $9,000,000. Unisphere
will not be required to lend more than $1,500,000 in any calendar month. Each
loan will be evidenced by a promissory note. Pursuant to the terms of the loan
agreement, BroadSoft must repay in full the aggregate outstanding principal
amount of each loan, together with all interest due thereon, on the first
anniversary of the date upon which the merger agreement is terminated or the
merger is closed. BroadSoft must pay interest on each loan at a per annum rate
equal to the prime rate plus 4%. Pursuant to the terms of the loan agreement,
BroadSoft will grant to Unisphere a security interest in BroadSoft's property,
including intellectual property, to secure payment and performance of
BroadSoft's obligations under the loan agreement. Pursuant to the terms of the
merger agreement, this security interest may be subordinated to certain loans of
BroadSoft which are outstanding at the effective time of the loan and security
agreement, and Unisphere may be required to enter into subordination agreements
with BroadSoft's currently existing lenders. The loan agreement will terminate
on the earlier of August 31, 2001, the closing of the merger or the termination
of the merger agreement.
Unisphere's obligation to make any loans and advances to BroadSoft is
subject to the following conditions that on the date the loan is to be made:
- each of the representations and warranties of BroadSoft in the loan
agreement, certain other loan documents and the merger agreement is true
and correct as of the date they were made and as of the date of the loan
is to be made, except for any failure to be true and correct which has
not resulted in, and would not be reasonably likely to result in, a
material adverse change;
- no default (as described below) has occurred or is occurring;
- the merger agreement has not been terminated;
- the closing of the merger has not occurred and the failure to have
occurred is not attributable to BroadSoft not having satisfied certain
conditions to the closing of the merger specified in the merger
agreement;
- Unisphere does not have the right to terminate the merger agreement
because a representation or warranty made by BroadSoft in the loan
agreement or the merger agreement was materially false on the date that
it was made; and
- BroadSoft has complied with all other requirements under the loan
agreement.
All obligations under the loan agreement will immediately become due and
payable without any notice on the part of Unisphere if a default occurs. The
following events, among others, constitute a default:
- BroadSoft makes a materially false representation or warranty in the loan
agreement or the merger agreement on the date as of which it is made;
- BroadSoft does not make payment of principal or interest within seven
days of the date when due;
- BroadSoft breaches any of the covenants contained in the loan agreement
or the merger agreement and the breach is not cured within 20 calendar
days after written notice the breach is given by Unisphere to BroadSoft;
- BroadSoft becomes bankrupt;
- the loan agreement or related intellectual property security agreements
fail to create a valid and perfected security interest in any collateral
covered thereby, except as permitted by the terms of such agreements; or
- the existing BroadSoft stockholders cease to own, either directly or
indirectly, at least 67% of the voting stock of BroadSoft, other than
pursuant to the merger agreement.
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The loan agreement provides that BroadSoft will indemnify Unisphere and its
directors, officers, employees, affiliates and agents against any losses,
liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by Unisphere or the other indemnities arising out of any
claim, litigation or proceeding relating to any matters that are the subject of
the loan agreement and related documents absent gross negligence or willful
misconduct.
NONCOMPETITION AND NONSOLICITATION AGREEMENT
The merger agreement provides that as a condition to the closing of the
merger, certain of BroadSoft's key employees will enter into a noncompetition
and nonsolicitation agreement with Unisphere. The noncompetition and
nonsolication agreements executed by these key employees will terminate at the
later of the second anniversary of the closing of the merger or one year after
such employees cease to be employed by Unisphere or its affiliates, except for
those agreements executed by Mr. Michael Tessler, President and Chief Executive
Officer of BroadSoft, and Mr. Scott Hoffpauir, Vice President and Chief
Technology Officer of BroadSoft, which will terminate on the later of the third
anniversary of the closing of the merger or one year after such employees cease
to be employed by Unisphere or its affiliates. During the term of the agreement,
each key employee is prohibited from the following activities in any state or
country in which Unisphere directly or indirectly conducts or reasonably expects
to conduct its business:
- competing with Unisphere;
- providing any services to any person, corporation or other entity engaged
in Unisphere's business;
- becoming financially interested in any person, corporation or other
entity engaged in Unisphere's business other than for investment purposes
and without participating in the business thereof and as otherwise
provided for in the merger agreement;
- soliciting, without Unisphere's prior written consent, directly or
indirectly any person who is or was an employee or independent contractor
of Unisphere or its subsidiaries at any time during the term of the key
employee's employment with Unisphere or its affiliates;
- intentionally interfering with Unisphere's or any of its subsidiaries'
relationship with any person who was employed by Unisphere at the time
the employee was employed by Unisphere or its affiliates and is or was a
customer of Unisphere; or
- hiring or engaging, on behalf of the key employee or any other person or
entity, any employee or independent contractor who is employed or engaged
by Unisphere at the time of the key employee's termination of employment
or at any time during the 180 days prior to such termination.
LOCK-UP AGREEMENTS
The merger agreement provides that certain specified persons shall sign a
lock-up agreement as a condition to the closing of the merger. These lock-up
agreements provide that such employees will not sell, directly or indirectly,
any shares of Unisphere common stock received by them upon the closing of the
merger, without the prior written consent of Credit Suisse First Boston
Corporation until , 2001, which is 180 days after the consummation
of the initial public offering of shares of Unisphere common stock. Up to
1,500,000 shares of Unisphere common stock to be held by non-employees of
BroadSoft upon the closing of the merger, however, may be released from the
180-day lock-up period beginning on the later of , 2001 or the 20th
trading day after the first complete trading day following the public
announcement of Unisphere's quarterly financial results for the first quarter
ending after the date of the consummation of the initial public offering. This
early release would be conditioned upon, among other conditions, the price of
Unisphere common stock trading at a price that is at least two times the initial
public offering price for 20 of the 30 trading days ending on the last trading
day preceding this early release date.
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VOTING AGREEMENTS
BroadSoft stockholders owning more than a majority of BroadSoft common
stock and each series of BroadSoft preferred stock outstanding entered into a
stockholder voting agreement with Unisphere. The voting agreement provides that
the applicable stockholder will vote in favor of, among other things, each of
the following:
- the merger agreement and the merger;
- each other transaction contemplated by the merger agreement, including an
amendment of BroadSoft's certificate of incorporation permitting
BroadSoft to redeem at its option the Series A preferred stock prior to
the effective time of the merger;
- to not treat the merger as a liquidation, dissolution or winding up of
BroadSoft;
- to waive certain rights of redemption with respect to the BroadSoft
Series B preferred stock; and
- the automatic conversion of all outstanding shares of BroadSoft Series B
preferred stock into BroadSoft common stock immediately prior to the
closing of the merger.
In addition, such stockholders have agreed to vote against any merger or
acquisition transaction with any other company that may be submitted to the
BroadSoft stockholders for their consideration. In addition, the stockholders
who are parties to the voting agreement have granted irrevocable proxies to
Unisphere to vote their shares generally in favor of the merger agreement, the
merger and the other items described above and against any competing
transaction.
Each stockholder party to the voting agreement has also agreed that it will
not directly or indirectly other than as provided in the merger agreement, do
any of the following:
- dispose of their respective shares of BroadSoft common stock, or enter
into any agreement to do the same, prior to completion of the merger;
- initiate, solicit, encourage or otherwise facilitate any proposal
regarding a business combination, sale of stock or material assets or
similar business transaction involving BroadSoft;
- disclose any non-public information about BroadSoft; or
- engage in discussions or negotiations with any third party regarding a
business combination, sale of stock or material assets or similar
business transaction.
As of the record date, the BroadSoft stockholders who entered into the
stockholder voting agreement held outstanding shares of BroadSoft common stock
and preferred stock representing the following:
- % of the BroadSoft common stock and Series B preferred stock on an
as-converted basis, voting together as a single class, where a holder of
a share of common stock is entitled to one vote and a holder of a share
of Series B preferred stock is entitled to two votes; and
- % of the BroadSoft Series A preferred stock and Series B preferred
stock, voting together as a single class, where a holder of a share of
Series A preferred stock is entitled to one vote and a holder of a share
of Series B preferred stock is entitled to two votes.
Accordingly, approval of the merger agreement and the merger at the special
meeting of the BroadSoft stockholders is assured. However, because there are
other conditions to closing the merger agreement that have not yet been
fulfilled, closing of the merger is not yet assured.
APPROVAL OF THE RIGHT OF DISQUALIFIED INDIVIDUALS TO RECEIVE ANY AMOUNTS PAYABLE
TO THE INDIVIDUAL ON AN ACCELERATION OF VESTING
If the merger is completed, certain executives and employees of BroadSoft
will receive accelerated vesting of shares of stock and options that are subject
to restricted stock and stock option agreements with BroadSoft. This accelerated
vesting had the potential to trigger an "excess parachute payment" under
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Internal Revenue Code Section 280G, resulting in adverse tax consequences to
executives, employees and potentially to BroadSoft. These adverse tax
consequences should be avoided if the vesting acceleration is approved by
disinterested BroadSoft stockholders holding more than 75% of the total voting
power of BroadSoft's voting shares, in accordance with the Internal Revenue
Code. BroadSoft expects that the approval will be obtained prior to the closing
of the merger.
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DESCRIPTION OF UNISPHERE'S BUSINESS
OVERVIEW
We provide data and voice networking products to communications service
providers. Our suite of products enables communications service providers to
offer value-added, integrated voice and high-speed data services to business and
residential users. The markets for our products include IP routing, broadband
access and next generation voice switching. Our target customers include new and
established service providers, cable operators and domestic and international
wireless and wireline carriers.
Our ERX edge routing products connect and manage large numbers of business
subscribers at the edge of the internet using dedicated network connections,
such as T1, T3 and optical interfaces. Our ERX broadband access products connect
and manage large numbers of business and residential subscribers to the internet
using any of the emerging broadband, or high-speed, access technologies, such as
digital subscriber line, or DSL, cable and wireless. We believe IP routing and
broadband access are essential for the efficient and reliable delivery of both
data and voice traffic over the internet.
Our SMX voice switching products enable communications service providers to
convert voice traffic into a packet format, direct voice traffic onto either the
internet or the traditional telephone network, and deliver basic and advanced
voice services to business and residential users. The redirection or conversion
of voice traffic from the traditional telephone network to the new public
network is also referred to as voice mediation. Our SMX products perform voice
mediation by supporting redirection, or internet offload, and voice conversion,
or voice over IP. These products, combined with our Unisphere Management Center
network and service management software, provide integrated solutions that
support communications traffic ranging from basic voice services to value-added,
high-speed data services.
We believe the use and functionality of the internet will continue to grow
at significant rates. The internet is expanding upon, and we believe that
ultimately it will replace, the capabilities and functionality of the
traditional telephone network. This evolution of the internet into the new
public network requires new internet communications equipment that can deliver
the high levels of reliability users require of a public network. We offer
integrated data and voice hardware and software products that are specifically
designed to meet these requirements.
INDUSTRY BACKGROUND
Data Traffic is Growing More Rapidly than Voice Traffic
The internet has become an integral communications medium for many
consumers, businesses, students and others. The increasing use of applications
such as email, e-commerce, online research, telecommuting and online
entertainment have led to a dramatic growth in the volume of data traffic
transported over the internet. The large amount of data traffic has burdened the
traditional telephone network and the volume of data traffic now exceeds voice
traffic. Communications service providers have responded by investing
significant resources to build and expand data networks.
The Traditional Circuit-Switched Telephone Network is Inefficient
Although the traditional telephone network is highly reliable in
transporting voice traffic, it is inefficient in carrying combined voice and
data traffic. It is a circuit-switched network that delivers voice traffic by
establishing a dedicated path, or circuit, for the duration of each call. A
dedicated circuit is inefficient because it provides substantially more network
capacity than is required to support a voice conversation, particularly during
pauses in a conversation. The inefficiency of the traditional telephone network
is even greater when it is used to carry data traffic, which is characterized by
larger bursts of traffic followed by longer periods of inactivity. The larger
bursts of data traffic often exceed the capacity of the circuit, which can
result in slow performance or a failed connection. The longer periods of
inactivity between bursts of data traffic result in large amounts of unutilized
network capacity on the dedicated circuit and the network overall.
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Packet Networks are More Efficient
Unlike the traditional telephone network, the internet aggregates and
transports data from multiple users over shared network connections. Data
traffic is divided into small units called packets. The aggregation of packets
from multiple users enables communications service providers to better utilize
available network capacity, thereby reducing their equipment and operating
costs. The efficient use of network capacity has become increasingly important
due to the growing number of internet users and the larger variety of
applications and content being downloaded from the internet, including rich web
content such as complex graphics and streaming video and audio. This substantial
growth in data traffic is driving communications service providers to build
large-scale packet networks in order to provide better service at a lower cost.
The Internet is Evolving Into the New Public Network
The growing importance of the internet and its efficiency and scalability,
coupled with the inefficiency of the traditional telephone network in
transporting data traffic, position the internet to become the new public
network for providing data, voice and other services. The co-existence of the
traditional telephone network and the packet-based internet requires investment
in and maintenance of disparate networks to provide services to a common user.
Substantial savings can be realized by providing these services over a single
network. These savings include the elimination of duplicative or overlapping
equipment purchases, the reduction in network operating costs and the rapid
deployment of new services.
Users Increasingly Demand High-Speed Internet Connections
With the increasing importance of the internet, users are demanding
high-speed internet access. Users have traditionally connected to the internet
using dial-up connections over traditional telephone lines. This access method
often causes dropped connections, delays in access and slow performance. Several
minutes are often required to access a multi-media web site and several hours
may be required to transfer or download large files. As a result, users are
demanding higher-speed connections. Business users are connecting to the
internet using dedicated network connections, such as T1, T3 and optical
interfaces. Smaller businesses and residential users are connecting to the
internet using emerging high-speed internet connections, including DSL, cable
and wireless. These high-speed internet connections provide "always on"
availability and eliminate the tedious dial-up process and uncertainties
associated with dial-up connections.
Service Providers Compete by Offering Value-Added Services
As new entrants in the communications service provider industry emerge, the
delivery of high-speed connectivity is becoming intensely competitive. This
competition is resulting in the rapid decline in the price of bandwidth that
communications service providers may charge their customers. To offset this
price erosion, communications service providers are offering integrated data and
voice services, which require high-speed internet connections. In addition,
communications service providers are seeking to retain and grow their user bases
and increase their profitability by offering value-added services such as
security, remote data storage and virtual private data networks over high-speed
internet connections.
Requirements of the New Public Network
We believe that the internet will evolve into a new public network that is
capable of delivering mission-critical data and voice communications and
services. This new network must expand upon the scalability and efficiencies of
packet networks in moving data and minimizing equipment and operating costs. In
addition, the new public network must enable communications service providers to
deliver revenue-generating data and voice services to business and residential
users. To meet these requirements, communications products for the new public
network must offer the following benefits:
Evolutionary Path to the New Public Network. Communications equipment for
the new public network must integrate seamlessly with the traditional telephone
network. Given the substantial investment
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in the traditional telephone network, the transition to the new public network
will be gradual. The shift to the new public network must be nondisruptive to
users. We believe next-generation products used in this new environment must
first reduce the burden on overloaded and expensive circuit switches by
offloading data traffic onto the new public network. The continued transport of
data and voice traffic between the circuit-switched and packet networks will
allow communications service providers to migrate to the new public network
while maintaining revenue streams from existing equipment. Ultimately,
next-generation products must enable communications service providers to build
incremental data and voice traffic capacity and offer value-added services on
the new public network.
Provide Scalability, Performance and Reliability. Communications service
providers' central offices typically support tens or even hundreds of thousands
of simultaneous calls. The new public network must allow communications service
providers to increase easily their service offerings and network capacity as
demand increases. As voice traffic is moved onto the new public network, users
will demand from their communications service providers the same quality of
service and functionality that they are accustomed to with the traditional
telephone network. Because communications service providers operate complex
networks and must carry mission-critical traffic, they adhere to internal and
industry reliability requirements.
Reduce Costs Per Connection. To be economically attractive, the new public
network must provide clear advantages over the traditional telephone network to
communications service providers in terms of cost per connection, space occupied
and power consumption.
Support Growth in High-Speed Internet Connections. With the growth in
high-speed internet connections, communications service providers must manage
hundreds of thousands of new user connections and provide high-speed routing of
data to and from the internet. These management and routing functions include
connectivity, provisioning, authentication and accounting. In addition, many
communications service providers require the ability to support dedicated
connections, such as T1, T3 and optical interfaces, and multiple types of
high-speed internet connections at a single central office location, including
DSL, cable and wireless.
Provide New Revenue Generating Services. As competition among
communications service providers continues to escalate, they must differentiate
themselves by offering value-added services that can be offered with high-speed
internet connections. These value-added services help to increase revenue and
profits for communications service providers. In addition, these value-added
services reduce customer turnover by encouraging users to consider the total
cost of replacing multiple services and to evaluate the risk of transitioning
business critical services to a new communications service provider. As a
result, the new public network must be based on open standard architecture that
allows the development of innovative data and voice services.
OUR SOLUTION
We develop, market and support data and voice networking products for the
new public network. Our suite of products enable communications service
providers to offer value-added, integrated voice and high-speed data services to
business and residential users. We believe our solutions enable a nondisruptive
migration to the new public network. We design and market next-generation:
- Edge routing products;
- Broadband access products;
- Voice switching products; and
- Network and service management products.
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Our products are designed to provide highly reliable, cost efficient,
scalable and flexible network solutions that interoperate with existing network
equipment and shorten the time required to introduce new network features and
services. We believe our products provide the following competitive benefits:
Provide an Evolutionary Migration Path to the New Public Network. Our
products integrate the hardware and software needed to migrate voice and data
traffic from the traditional telephone network to the new public network.
This migration to a packet-based network is performed as a series of steps
that minimize the risk of disrupting service or compromising the performance and
quality users have come to expect from the traditional telephone network. Our
products permit the network to identify where traffic is coming from, which
services are being used and by which customers. With this information,
communications service providers' networks can intelligently match the specific
requirements of the user or application with the network resources needed to
maintain the performance, reliability and service level guarantees required for
individual or business-critical applications. For example, we are designing our
voice switching products to receive voice traffic from the traditional telephone
network and to convert it into packet format for transmission over the new
public network. Our ERX products are designed to provide quality of service that
ensures the performance and reliability of voice traffic over the new public
network.
Our products interoperate with existing routers and switches as well as
with existing software applications such as billing and customer care. This can
preserve the customer's investment and reduce the cost and complexity of product
deployment. Our products provide an advantage to communications service
providers by permitting them to use both circuit-switched and packet-based
networks for both data and voice services, without first requiring that the data
and voice networks be integrated into a single network infrastructure. This
enables communications service providers to migrate to the new public network
with minimal disruption to users.
Meet the Scalability, Performance and High Reliability Requirements of the
New Public Network. Our modular ERX-700/1400 edge routers and SMX-2100 voice
switching products provide a significant advantage to communications service
providers by allowing their networks to scale. Our products provide
communications service providers the ability to increase the number of users,
bandwidth or services of a single system as demand increases. Our product
architecture combines software and high-speed microprocessor technology with
ASICs, which enable a superior level of performance for users regardless of the
applications and services being used. This architecture is designed to ensure
that when voice is transmitted over the internet, users receive the same quality
of voice service as when it is delivered over the traditional telephone network.
Our products are engineered to comply with rigorous industry standards for
reliability and safety. Our products are designed to be fully redundant and
thereby ensure continuous operations in the event of a network or component
failure. Our ERX and SMX products have obtained Telcordia Technologies Network
Equipment Building System, or NEBS, certification.
Reduce Cost Per User/Connection. We believe that the price and performance
of our products offer communications service providers a competitive advantage
by reducing their cost per user/connection to deploy data and voice services.
Our products are designed to reduce costs by supporting more users and
connections and by decreasing complexity through the integration of the
functions of multiple systems into a single product. For example, our SMX-2100
voice switching product is an alternative to a traditional telephone circuit
switch at a lower cost. In addition, the modular design of our edge routers and
voice switching products allows communications service providers to add
incremental services by installing new modules into existing equipment.
Support Multiple High-Speed Access Technologies. Our ERX products are
designed to allow simultaneous delivery of high-speed services over dedicated
connections, such as T1, T3 and optical interfaces, as well as over DSL, cable
and wireless connections from a single system. By delivering multiple high-speed
access services from a single system, our products reduce the need to purchase,
install and operate multiple pieces of equipment. In addition to supporting
these services, our products combine routing functionality with high-speed
internet access to provide a competitive advantage to communications service
providers.
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Deliver New High-Value Data and Voice Services. The combination of our
software and hardware allows communications service providers to deploy new
high-value data and voice services. Our ERX products support value-added data
services for business-critical applications across the internet, such as virtual
private networks and priority service levels, or IP quality of service.
Additionally, our SMX products enable new voice services such as unified
messaging, which brings voice messaging and electronic mail together into a
single service. Our Unisphere Management Center products employ a graphical
JAVA-based development environment that allows communications service providers
to quickly create or modify new services for deployment.
OUR STRATEGY
Our objective is to be a leading supplier of data and voice networking
products for the new public network that enable communications service providers
to offer value-added, integrated voice and high-speed data services to business
and residential users. Key elements of our strategy include:
Leverage Our Combined Data and Voice Technology Expertise. We intend to
leverage our expertise in both data and voice technologies to offer
comprehensive solutions that enable our customers to deploy and manage
integrated data and voice services. Our highly experienced team of engineers, as
well as our software, ASIC technology and product architectures, are key
elements of our technology expertise. For example, we believe our ERX edge
router was the first to integrate software and ASIC technology to provide wire
speed routing for the edge of the internet. Wire speed routing means that our
products are able to route data packets as quickly as the connection is able to
deliver these packets. We believe our technological expertise will enable us to
be a leading provider of products facilitating next-generation services across
existing and emerging networks.
Expand and Broaden Our Customer Base. We intend to penetrate further our
existing customer base and obtain new customers by leveraging our technological
expertise and by aggressively investing in sales and marketing efforts. We
believe our products offer significant price and performance advantages to
communications service providers deploying advanced data and voice services.
Currently, our products are used by leading communications service providers
such as Global Crossing, ITC Deltacom, Pacific Century CyberWorks HKT, Portugal
Telecom and XO Communications, formerly known as Nextlink Communications. Our
target customers consist of new and established communications service
providers, including local, long distance and international telephone companies,
competitive local exchange carriers, internet service providers, cable operators
and carriers that provide services to other carriers.
Expand Global Sales and Distribution Capabilities. We plan to continue to
expand our global presence by increasing the size of our direct sales force and
by opening new domestic and international sales offices. We have offices in each
of three regions: North America; Asia and the Pacific; Europe, Middle East and
Africa. In addition, we are adding sales and support representatives at our
headquarters in Massachusetts to support our expanding worldwide sales force. To
complement our direct sales force, we have entered into value-added reseller and
other sales and distribution relationships.
Continue to Work Closely with Key Customers. We intend to continue to work
extensively with our customers to enhance our current products and to develop
new products to meet their future requirements. We have developed our products
with significant input from our customers and work with our customers to provide
customized solutions and product enhancements to meet their specific needs. Our
customer relationships provide insight into market requirements for new data and
voice services, which is critical to providing timely and innovative solutions
to our current and future customers.
Broaden Our Product Offerings Through Internal Investment, Partnerships and
Acquisitions. Through continued investment in research and development, we
intend to broaden our product offerings and functionality and to expand into
complementary markets. We intend to continue to develop products that address
the competitive demands of communications service providers to enable them to
effectively deploy the new public network. We are in the process of developing
higher-capacity IP routing and voice switching products to meet the growing
bandwidth demands of communications service providers.
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We have entered into strategic partnerships and plan to continue to do so
to complement our existing product offerings. For example, we have partnerships
with Hewlett-Packard and Micromuse to establish a broader portfolio of network
management products. In addition, we plan to pursue selective acquisition
opportunities as they may arise to enhance further our product offerings. For
example, we have entered into a definitive agreement to acquire BroadSoft, a
provider of software architecture that supports business telephony applications
for use on the internet, such as call waiting, voice mail and conferencing.
PRODUCTS
Our suite of products enable communications service providers to offer
value-added, integrated voice and high-speed data services to business and
residential users. It consists of our following carrier-class products:
- ERX-1400 and ERX-700 Edge Routing Switches and our Subscriber Access
Feature Pack Software;
- SMX-2100 Service Mediation Switch;
- SRX-3000 Softswitch; and
- Unisphere Management Center.
ERX-1400 AND ERX-700 EDGE ROUTING SWITCHES WITH SUBSCRIBER ACCESS FEATURE PACK
Our ERX-1400 and ERX-700 Edge Routing Switches are next-generation routing
devices designed to provide the features required at the edge of communications
service provider networks. Our ERX Edge Routing Switches aggregate thousands of
private line connections over T1, T3 and optical interfaces. Unlike conventional
routers that were originally developed for small-scale enterprise applications
and are increasingly inadequate in large-scale service provider networks, our
ERX Edge Routing Switches are specifically designed to accommodate the size and
scope of the new public network. By providing high port density, wire-speed
forwarding performance, carrier-class reliability and support for new
value-added services, our ERX Edge Routing Switches meet the large-scale
deployment requirements of communications service providers.
With the addition of our optional broadband access software, Subscriber
Access Feature Pack, our ERX can be placed between digital subscriber line
access multiplexers, or DSLAMs, and Internet backbone routers, providing
termination and aggregation for over 30,000 broadband connections such as DSL,
cable and wireless. This software option is designed to support the rapid
deployment of DSL services while reducing the complexity and cost of subscriber
management. A wide range of packet transport options are supported, allowing
communications service providers to purchase interoperable DSL transport from
different carriers. Our software integrates with the communications service
provider's existing back office support to provide authentication, authorization
and accounting, as well as service selection and billing support.
Our ERX-1400 is offered in a modular, 14-slot chassis with a switch fabric
that operates at up to 10 Gbps. A wide range of interface options are available,
including Channelized T1/E1, Channelized T3, Unchannelized T3/E3, OC-3/STM1,
OC-12/STM4, Fast Ethernet and Gigabit Ethernet. Our ERX-700, designed for
applications that require mid-range capacity, has the same features and
performance of the ERX-1400 in a more economical 7-slot chassis. Both models
feature a full complement of internet routing protocols, including BGP-4, IS-IS,
OSPF and RIP. The following illustration depicts the ERX-1400 and ERX-700.
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INTERNET PROTOCOL ROUTING AND BROADBAND ACCESS
NEW PUBLIC NETWORK GRAPH
[DIAGRAM - IP ROUTING AND BROADBAND ACCESS
The heading for this diagram reads "Internet Protocol Routing and Broadband
Access".
In the center of the page is a cloud depicting the new public network.
To the left of the cloud depicting the new public network is a box
depicting the ERX-700/1400. To the left of this box are four smaller diagrams
representing different broadband access methods, marked "wireless", "DSL" and
"cable network", used by small businesses and residential users to access the
new public network. Above and to the right of the ERX 700/1400 box is a line
depicting the broadband access connection provided by the ERX 700/1400 to the
new public network.
To the right of the cloud depicting the new public network is a box
depicting the ERX-700/1400. To the right of this box are three smaller diagrams
depicting different private line access methods, marked "T1/E1", "T3/E3" and
"Optical (OC3/OC12)", used by business users to access the new public network.
Above and to the left of the ERX 700/1400 box is a line depicting the private
line access connection provided by the ERX-700/1400 to the new public network.]
Key benefits of our ERX Edge Routing Switches include:
High Port Density and Scalability. As demand for internet access
increases, communications service providers must build an infrastructure
that can scale to meet demand and provide value-added services. The lack of
available point-of-presence, or co-location space, however, restricts the
number of new users that can be brought on-line. A single 22.75-inch shelf
of our ERX-1400 Edge Routing Switch supports over 30,000 concurrent
connections, while drawing less than 20 amps of power. Up to three shelves
may be stacked in a standard 7-foot rack, enabling efficient use of scarce
space at a carrier's point of presence facilities. The common hardware and
software architecture of our ERX products enables communications service
providers to scale up from our ERX-700 model to our ERX-1400 model while
preserving their investment as their access requirements grow.
Wire-Speed Performance Under Demanding Traffic Patterns. Our ERX Edge
Routing Switches are designed to provide high performance under a wide
range of operating conditions. Unlike traditional routers, which rely on
software running solely on reduced instruction set computer, or RISC,
processors, our ERX architecture features software running on custom ASICs
in addition to distributed RISC processors. This architecture provides
independent processing resources for routing, packet forwarding and service
delivery. As packets are processed by the ERX, our custom ASICs ensure the
network delivers the quality of service demanded by the application or
user. At the same time, RISC processors perform route computation tasks
independently. This architecture is designed to enable the ERX to process a
large number of small size packets at wire speed.
Carrier-Class Reliability and Availability. Our ERX Edge Routing
Switches are designed for continuous availability and consistent high
performance to achieve the service levels required by communications
service providers as critical applications are added to packet networks.
These design features include full hardware redundancy, on-line servicing,
a distributed DC power system and front-to-back airflow to ensure the
system can meet stringent NEBS standards. Our ERX internet software is
based on a high performance design that allows each program module to have
access to dedicated resources. This design improves stability and
reliability by ensuring that the performance of one program module does not
adversely affect others.
Tiered and Value-Added Services. Our ERX Edge Routing Switches
deliver different levels, or tiers, of service, allowing communications
service providers to attract and retain users, increase their revenue per
user and strengthen brand name recognition. Different service levels are
provided according to agreements that define levels of bandwidth and
network performance delivered by the communications service provider to the
user. Our ERX is designed to ensure that higher priority
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traffic is given preferential treatment according to policies defined by
the communications service provider, which is critical during periods of
network congestion. Our ERX also allows the delivery of value-added
services such as managed security and virtual private networking, which
enable the use of the internet for business-critical applications.
SMX-2100 SERVICE MEDIATION SWITCH
Our SMX-2100 Service Mediation Switch is a next-generation product for
transitioning communications traffic from the traditional circuit-switched
telephone network to the new packet-based public network. It is designed to
allow communications service providers to deliver differentiated services at
lower cost. Its applications include:
- Internet offload; and
- Voice over IP, or VoIP.
Every dial-up internet session begins with a telephone call to an internet
service provider. These calls place a tremendous strain on traditional circuit
switches because they can remain active for hours. This can result in an
inefficient use of resources and requires communications service providers to
deploy more circuit switches. Our SMX-2100 Service Mediation Switch offers a
less expensive alternative solution by offloading dial-up internet traffic away
from these expensive circuit switches, freeing up capacity and enabling
communications service providers to cap the purchase of additional circuit
switch equipment.
With the addition of our optional VoIP module, our SMX-2100 Service
Mediation Switch allows communications service providers to combine voice and
data traffic onto a single, converged network. This hardware and software option
is designed to receive voice traffic from the traditional telephone network and
to convert it into packet format for transmission over the new public network.
Our VoIP products are in the initial stages of testing and have not been
commercially deployed.
Our SMX-2100 is offered in a modular, 19-slot chassis with four slots
reserved for management modules. The remaining 15 slots may be filled with four
port DS3 modules. A single shelf will support up to 60 DS3 interfaces, or more
than 40,000 channels.
Our SMX-2100 is designed to be compatible with existing infrastructure,
allowing communication service providers to augment traditional circuit switch
equipment to cost-effectively deliver new services.
SRX-3000 SOFTSWITCH
Our SRX-3000 softswitch is being designed as an open platform that runs on
commercially available hardware and delivers real-time multi-media services.
Functions performed by our softswitch will include call signaling and
processing, call admission, authorization and authentication, address
translation, usage recording and feature processing.
Our SRX-3000 softswitch is designed to provide a service creation and
delivery platform for communications service providers to quickly and cost
effectively develop and deliver calling features, such as voice messaging, call
forwarding and caller-identification, as well as new high-value voice services,
such as unified messaging, calling card services and find-me features. It is
designed to support published industry standard interfaces for the development
and delivery of basic and advanced voice services. Our SRX-3000 is in initial
stages of testing and has not been commercially deployed. The following
illustration depicts the SMX-2100 Service Mediation Switch and the SRX-3000
softswitch.
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VOICE SWITCHING AND SERVICE MEDIATION PRODUCTS
NEW PUBLIC NETWORK GRAPH
[DIAGRAM : VOICE SWITCHING AND SERVICE MEDIATION PRODUCTS
The heading for this diagram reads "Voice Switching and Service Mediation
Products".
In the center of the page is a cloud depicting the new public network.
In the top left of the page is a box depicting the SMX-2100 Service
Mediation Switch. Below and to the right of the SMX-2100 Service Mediation
Switch box is a line, marked "VoIP", that connects it to the cloud in the center
depicting the new public network. The SMX-2100 Service Mediation Switch box is
attached on its left side to a smaller box depicting the SRX-3000 Softswitch. A
line on the lower left side of the SMX-2100 Service Mediation Switch box
connects it to a cloud depicting the traditional telephone network. To the left
of the cloud depicting the traditional telephone network are two smaller
diagrams representing different access methods to the traditional telephone
network. A line, marked "Internet Offload", on the lower right side of the cloud
depicting the traditional telephone network connects it to another box depicting
the SMX-2100 Service Mediation Switch placed in the bottom left of the page.
Above and to the right of the SMX-2100 Service Mediation Switch box is a line
that connects it to the cloud in the center depicting the new public network.
The graphical illustrations on the top and bottom of the right half of the
page mirror the graphical illustrations on the top and bottom of the left half
of the page.]
Key benefits of our SMX-2100 Service Mediation Switch and SRX-3000
softswitch include:
High Port Density and Scalability. Our voice switches are high density
carrier class products that deliver increased scalability compared to
traditional circuit switches at a lower cost. A single SMX-2100 supports over
40,000 concurrent voice lines in a 30 inch design. When multiple SMX-2100s are
combined into a clustered configuration, they will support over 100,000
concurrent voice lines. This cluster configuration is in initial stages of
testing and has not yet been commercially deployed.
Carrier-Class Reliability. Our voice switches are based on a distributed
architecture with fully redundant hardware, no single point of failure, and
online servicing and configuration to protect against network failure. In
addition, our voice switches have the ability to revert to earlier versions of
software or a prior configuration if a failure occurs while servicing our
switches. Our SRX-3000 is being designed with a full hardware and software
redundancy and an open switching platform residing on commercially available
NEBS compliant hardware. Communications service providers will be able to
designate a primary and secondary SRX to control distributed SMX-2100s. In the
event that the primary SRX-3000 fails, the SMX-2100 will automatically transfer
control over to the secondary SRX-3000 without disruption to voice calls in
process.
Rapid Deployment of Data and Voice Services. Our SMX-2100 voice switch
enables the rapid deployment of data and voice services. Our SRX-3000 softswitch
is designed to enable rapid development of new services by providing an open and
standards-based development platform. The typical deployment time for our voice
switches is shorter than the deployment of traditional circuit-based switches.
Our Unisphere Management Center products use JAVA tools and a downloadable JAVA
graphical interface, which provide the development environment necessary for
fast and consistent service roll-out. This environment allows communications
service providers to leverage third party developers, and provides access to a
large pool of external resources who are familiar with developing to these
common and open standards.
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UNISPHERE MANAGEMENT CENTER
Our Unisphere Management Center products enable communications service
providers to efficiently deliver their services and manage our products. To
date, we have focused on developing our Unisphere Management Center products to
allow enhanced service delivery for our data products. We are currently
developing our Unisphere Management Center products to extend this functionality
to our voice products. All Unisphere Management Center products provide an
easy-to-use graphical user interface, enabling service providers to monitor
network operations and physically view and configure services from local or
remote management workstations. Our Unisphere Management Center product family
consists of the following:
- Service Management and Provisioning. This product family includes our
Subscriber Management Center and Service Selection Center products. Our
Subscriber Management Center provides the ability to activate services
quickly, allowing the communications service provider to define network
wide policies that automatically configure the device and back office
applications when new users and services are added to the network. Our
Service Selection Center provides a customizable portal interface that
lets users dynamically select services via their web browser.
- Configuration Management. This product provides network operators with a
complete view of the network and network activity. Based on the HP
OpenView Network Node Manager, our Configuration Manager product
automatically learns network devices and connections and provides
immediate identification of the source of network problems. Our
Configuration Manager is also used for trend analysis, monitoring of
bandwidth utilization and measurement of service delivery performance.
- Fault Management. Our Fault Management system is based on distributed
architecture used to retrieve events from network devices and associate
these events with the services and customers affected. The Fault
Management system enables communications service providers to anticipate
problems and model future service deployments resulting in faster
deployment of new services and quicker return on investment.
- Device Management. The Device Management products provide a graphical
user interface to manage our ERX and SMX products from either a local or
remote workstation.
- Performance Monitoring and Management. This product enables
communications service providers to monitor and manage network and
service performance. The Performance Manager product is used to collect,
consolidate, store and archive critical network performance and service
analysis data.
CUSTOMERS
The following is a representative list of customers for which, as of
September 30, 2000, we have recognized at least $100,000 in revenue from the
sale of our products:
<TABLE>
<S> <C>
Arrival Communications ITC Deltacom
Beijing Telecom Authority Pacific Century CyberWorks HKT
Callino GmbH Portugal Telecom
Coserv Communications Siemens
Digital United (SEEDNet) Western Telephone Integrated
Dishnet DSL Communications
Global Crossing XO Communications, formerly known as
Hanaro Telecom Nextlink Communications
Internet Commerce & Communications,
formerly known as RMI.Net
</TABLE>
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Sales to Siemens as a value-added reseller of our products accounted for
63.5% of our net revenues for the fiscal year ended September 30, 1999 and 41.0%
of our net revenues for the fiscal year ended September 30, 2000. In addition,
for the fiscal year ended September 30, 2000, sales to ITC Deltacom accounted
for 28.3% of our net revenues. We anticipate that, as our sales increase, each
of these customers will account for a smaller percentage of our net revenues.
However, we expect to continue to derive a majority of our revenues from a
limited number of customers in the near future.
See the notes to consolidated financial statements of Unisphere, included
elsewhere in this prospectus, for geographic information related to net revenues
and assets.
SALES AND MARKETING
We sell and market our products primarily through our direct sales force
and value-added resellers. We may also establish strategic distribution
relationships with other infrastructure equipment manufacturers. Our target
customers include new and established communications service providers,
including local, long distance and international telephone companies,
competitive local exchange carriers, internet service providers, cable operators
and carriers that provide services to other carriers.
Direct Sales. Our global, direct sales organization is divided into three
regional operations: North America; Asia and the Pacific; and Europe, Middle
East and Africa. We have sales offices throughout North America, including San
Jose and Long Beach, California; Vancouver, Canada; Denver, Colorado;
Naperville, Illinois; Columbia, Maryland; Newton, Pennsylvania; Dallas, Texas;
Reston, Virginia; and Seattle, Washington. We also have sales offices throughout
Asia and Europe, including regional offices in Beijing, Hong Kong, Munich,
Paris, Seoul, Singapore and Tokyo.
Our direct sales account managers are responsible for a market on either a
geographic or named account basis and work as a team with a systems engineer.
Our systems engineers consult with and guide and assist our customers to deploy
our products. Our systems engineers also identify the features that are required
for our products to be successful in specific applications.
Value-Added Resellers. We have established a strategic distribution
relationship with Siemens. We believe that Siemens has significant customer
relationships in place and offers products that complement ours. Siemens
provides initial support to its customers that purchase our products, including
taking calls in the event that a customer needs product support. Our agreement
with Siemens allows it to distribute our products on a worldwide, non-exclusive
basis with discounts based on the type of product it orders. In addition, we
have a number of country specific value-added resellers. These resellers have
expertise in deploying complex internet infrastructure equipment in their
respective markets and provide the initial support required by customers that
purchase our products.
We have a variety of marketing programs to support the sale and
distribution of our products. These include preparation of sales tools, business
cases, competitive analyses and other marketing collateral, sales training, and
publication of customer deployments, new product information and educational
articles in industry journals. In addition, we are an active participant in
communications standards organizations such as the Internet Engineering Task
Force, the International Telecommunications Union and Optical Internetworking
Forum and Optical Domain Service Interconnect. We also employ direct marketing
to prospective customers and participate in leading industry tradeshows such as
Supercomm and Networld & InterOp.
CUSTOMER SERVICE AND SUPPORT
We are committed to providing our customers with high levels of service and
support and believe customer satisfaction is essential to our sales effort. We
support our products with web based tools, documentation, and training courses
tailored to our customers' various needs and operate customer support centers
located in Chelmsford, Massachusetts and Westford, Massachusetts. Our sales and
network engineering personnel work closely with customers, third party
contractors and others to coordinate network design, installation services and
provide continuous customer support.
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Our customer service center gives us the capability to assist our customers
by remotely diagnosing and addressing network problems that may arise. We also
offer professional services to assist our customers in utilizing our products
and Unisphere Management Center software within their network operations
centers. Our customer service and support team provides technical assistance and
support to our customers 24 hours a day, 7 days a week.
RESEARCH AND DEVELOPMENT
Our future success depends on our ability to increase the performance of
our products, to develop and introduce new products and product enhancements and
to effectively respond to our customers' changing needs. Our research and
development team is primarily responsible for, and is currently working on,
meeting these objectives. We have made, and will continue to make, a substantial
investment in research and development. Research and development expenses were
$68.4 million, including $34.9 million of development milestone and retention
payments for the year ended September 30, 1999 and $112.5 million, including
$25.8 million of development milestone and retention payments and $1.9 million
of stock based compensation expense, for the year ended September 30, 2000. In
addition to developing our ERX, SMX and SRX platforms, we are in the process of
developing higher-capacity IP routing and voice switching products to meet the
growing bandwidth demands of communications service providers.
We conduct our research and development at three facilities in the United
States: Westford, Massachusetts, Chelmsford, Massachusetts and Boca Raton,
Florida.
MANUFACTURING
We maintain only limited in-house manufacturing capability for final system
integration and testing of our products. Our internal manufacturing expertise is
focused on product design for testability, design for manufacturability and the
transfer of products from development to manufacturing.
We have established our contract manufacturing relationship with ACT and
Celestica based on quality assurance, timeliness of delivery and strengths in
the volume manufacture of our products. Using contract manufacturers allows us
to reduce our capital expenditures, achieve purchasing economies of scale and
reduce inventory warehousing. Under our manufacturing services agreement with
ACT, ACT manufactures our ERX edge routing products. The ACT agreement is
automatically renewed each month unless ACT or we provide 90 days' prior notice
of termination. Under our two-year manufacturing and purchase agreement with
Celestica, Celestica manufactures our SMX voice switching products. The
Celestica agreement is automatically renewed for one-year periods unless
otherwise terminated.
We also have a three-year custom sales agreement with IBM pursuant to which
it supplies us with our proprietary ASICs based on our design specifications.
Either party may terminate this agreement if the other party causes a material
breach of this agreement. If IBM terminates this agreement as a result of our
material breach, IBM is entitled to cancel all of our then outstanding purchase
orders. In addition, we may be required to pay all of IBM's procurement costs,
the quoted price applicable for the affected products or delivered services and
any applicable cancellation charges.
COMPETITION
The market for data and voice networking products for the new public
network is intensely competitive, subject to rapid technological changes and
significantly affected by new product introductions and other market activities.
We encounter strong competition from large suppliers, such as Cisco Systems,
Lucent Technologies and Nortel Networks, who offer a broad range of products
across multiple service areas, are substantially larger than we are and have
significantly greater financial, sales, marketing, distribution, technical,
manufacturing and other resources. This makes them better positioned to acquire
other companies, thereby obtaining new technologies or products that may
displace our product lines. We also compete with single product companies which
offer or will offer solutions that compete with one of our product areas. We
compete with Juniper Networks in the IP routing market, Redback Networks in the
broadband access market and Sonus Networks in the next-generation voice
switching market, and several other companies in each of these markets.
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The principal competitive factors in these markets include, or are likely
to include:
- product performance and price;
- features and reliability;
- technical support and service;
- compliance with industry standards; and
- sales and distribution capabilities.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of patent, trademark, copyright and trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect our intellectual
property. We have seven patent applications pending in the United States, and
several related non-United States patent applications pending, relating to the
design and operation of our products. Our pending patent applications may not
result in the issuance of any patents. If any patent is issued, it may be
invalidated or circumvented or may otherwise fail to provide us with any
meaningful protection. These legal protections afford only limited protection
for our technology. Moreover, we sell our products in foreign countries,
including Beijing, Hong Kong and other parts of Southeast Asia, that offer
significantly less protection to our intellectual property than does the United
States. We cannot assure you that others will not develop technologies that are
similar or superior to our technology.
We have incorporated third-party licensed technology into our current
products. From time to time, we may be required to license additional technology
from third parties to develop new products or product enhancements. Third-party
licenses may not be available or continue to be available to us on commercially
reasonable terms. The inability to maintain or re-license any third-party
licenses required in our current products, or to obtain any new third-party
licenses to develop new products and product enhancements could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, and delay or prevent us from making these products or
enhancements, any of which could seriously harm the competitiveness of our
products.
We have a license arrangement with Trillium Digital Systems pursuant to
which they have made available to us the programs for the signaling gateways, or
SS7s, used with our SMX-2100 voice switching product. We also use software from
Fujitsu Siemens Computers in our SRX-3000 softswitch products.
GOVERNMENT REGULATION
There are an increasing number of laws and regulations in the United States
and abroad pertaining to communications and commerce on the internet. In
addition, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governments. Due to the
increasing use of the internet as a medium for communication and commerce, new
laws and regulations may be enacted with respect to the internet and electronic
commerce covering issues such as user privacy, content, quality of products and
services, taxation, intellectual property rights, information security,
enforcement of internet transactions and dispute resolution. These new laws and
regulations could impede the growth of the internet as a medium of commerce and
thereby reduce demand for our products and services or increase our costs of
doing business. Some of these issues are elaborated below.
Privacy Concerns. The Federal Trade Commission, or the FTC, recently
recommended that Congress take legislative action to protect the privacy of
information on the internet and there are bills pending in Congress which, if
enacted into law, could impose privacy standards or authorize the FTC to
implement such standards, creating civil and criminal penalties for violations.
Additionally, the European Union has recently adopted a privacy directive
regarding the collection and transmission of data over IP networks. The European
Union directive generally prohibits transmission of personal information outside
the European Union unless the receiving country has enacted adequate individual
privacy protection laws. The United States and the European Union have
negotiated a data privacy agreement which articulates voluntary data privacy
standards that United States companies will be able to follow to comply with the
European Union directive. Member states of the European Union will also adopt
laws to implement this
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directive. These regulatory initiatives taken by the United States and the
European Union could impede the expected growth of internet commerce and IP
networks, other commercial uses of the internet and businesses such as ours that
are dependent on the growth of the internet.
Commercial Regulation. There could be new laws and regulations which
affect the enforceability of internet contracts and dispute resolutions
pertaining to them. The European Union has adopted a directive with respect to
protocols to be implemented before an internet contract is effective.
Internet Taxation. Numerous legislative proposals have been made at the
federal, state and local levels, and by various foreign governments, that would
apply existing tax laws to internet transactions or impose additional taxes on
the sale of goods and services over the internet. Although Congress has enacted
a moratorium on new state and local taxes on internet access or e-commerce,
existing state and local laws were expressly excepted from this moratorium.
Legislative or regulatory developments in this area, or other attempts to impose
or collect taxes on internet commerce both in the United States and abroad may
adversely affect the demand for our products and services, our costs of doing
business and our financial results.
Telecommunications Act of 1996. While the Federal Communications
Commission, or the FCC, does not currently regulate service providers which do
not otherwise qualify as "telecommunications providers" under the terms of the
Telecommunications Act of 1996, the FCC recently stated its intention to
consider whether to regulate voice and fax telephony services provided over IP
networks as "telecommunications." The Telecommunications Act of 1996, which
provided for significant deregulation of the United States telecommunications
industry, remains subject to judicial review and additional FCC rulemaking. The
Telecommunications Act of 1996, as well as various initiatives of the FCC to
implement its provisions, may adversely impact service providers, which would
also adversely impact the demand for our products and services.
Export. Due to the technology used in our products and services, our
products and services may be subject to the export restrictions of the United
States or other countries. The application of new or existing export constraints
could reduce our access to foreign markets, increase our costs of doing business
and adversely affect the results of our business operations.
EMPLOYEES
As of September 30, 2000, we had a total of 611 employees. Of these
employees, 576 were based in the United States and 35 were based
internationally. Of the total, 357 were in research and development, 133 in
sales and marketing, 36 in customer support and professional services, 38 in
manufacturing and 47 in finance and administration. None of our employees is
subject to a collective bargaining agreement and we believe that our relations
with our employees are good.
FACILITIES
We are headquartered in Chelmsford, Massachusetts where we lease
approximately 110,000 square feet. This lease expires in 2007. In addition, we
lease approximately 54,000 square feet in two buildings in Westford,
Massachusetts. The leases for the Westford facilities expire in 2003 and 2004.
We recently entered into leases for an additional 225,000 square feet in
Westford, Massachusetts. These leases are expected to commence between January
and March 2001, or upon the later completion of our improvements on the
premises, and will expire ten years from the commencement of the leases, with
options for extension and expansion. We also lease approximately 18,000 square
feet in Boca Raton, Florida. This lease will expire in July 2005. We also expect
to lease approximately 15,000 square feet in Kanata, Canada. This lease is
expected to commence in June 2001 and is expected to expire in 2010, with an
option for extension. We plan to consolidate some of our facilities in the
future.
We believe our existing facilities are adequate for our current needs and
that suitable additional office space will be available as needed.
LEGAL PROCEEDINGS
We are not subject to any material legal proceedings.
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UNISPHERE'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Historical and Unaudited Pro Forma Condensed Combined Financial
Information -- Unisphere Selected Historical Condensed Financial Information,"
the consolidated financial statements and the related notes included elsewhere
in this proxy statement/prospectus.
OVERVIEW
We provide data and voice networking products for the new public network.
Our suite of products enable communications service providers to offer
value-added, integrated voice and high-speed data services to business and
residential users. Our IP routing, broadband access and next-generation voice
switching products, combined with our network and service management software,
provide integrated solutions that support communications traffic ranging from
value-added, high-speed data services to basic voice services.
We were incorporated in Delaware in January 1999 as a subsidiary of
Siemens. Our business has been built upon the acquisitions of three companies.
In March 1999, Siemens purchased Argon Networks. In April 1999, Siemens
purchased Castle Networks and Redstone Communications. In June 1999, Siemens
contributed the stock of Argon, Castle and Redstone to us and we have accounted
for the acquisitions and their results of operations from the date of
acquisition as if we had effectively acquired the three companies. All three
companies were development-stage companies engaged in research and development
of next-generation products for the networking industry. In addition, in April
1999, Siemens contributed a research and development group for voice switching
products located in Boca Raton, Florida to us. From our inception through August
1999, we were a development stage company focused on developing our initial
products, recruiting personnel and building our corporate infrastructure, and
therefore had no significant product revenue. In September 1999, we began
shipping our products for commercial deployment and recorded our first
significant product revenue. We emerged from the development stage at that time.
Our cost structure has been largely independent from Siemens since our
inception. We do not expect our cost structure to change significantly as a
result of being required to fund our operations independently after this
offering.
Prior to its acquisition, Argon was exclusively engaged in the development
of a gigabit switch router. Under the terms of the acquisition agreement,
Siemens paid $200.0 million in cash to the holders of Argon securities. We
agreed to assume a retention and performance related payment obligation from
Siemens and we have paid $13.3 million in cash to the employees of Argon for
retention and performance achievements. There are no other retention and
performance payments to be made in connection with this acquisition. Prior to
the acquisition, Argon incurred cumulative net losses of $25.8 million.
Prior to its acquisition, Castle was engaged in the development of voice
switching technology. Under the terms of the acquisition agreement, Siemens paid
$300.0 million in cash to the holders of Castle securities. We agreed to assume
a milestone related payment obligation from Siemens and we have paid $15.0
million in cash to the employees of Castle for these milestone achievements.
There are no other milestone payments to be made in connection with this
acquisition. Prior to the acquisition, Castle incurred cumulative net losses of
$30.7 million.
Prior to its acquisition, Redstone was engaged in the development of an
edge router. Under the terms of the acquisition agreement, Siemens paid $450.0
million in cash to the holders of Redstone securities. We agreed to assume a
milestone related payment obligation from Siemens and we have paid $50.0 million
in cash to the employees of Redstone for these milestone achievements. There are
no other milestone payments to be made in connection with this acquisition.
Prior to the acquisition, Redstone incurred cumulative net losses of $39.0
million.
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The following is a summary of the allocation of the purchase prices for the
acquisitions, in millions:
<TABLE>
<CAPTION>
ALLOCATED TO
PURCHASED
IN-PROCESS NET
RESEARCH ALLOCATED TO TANGIBLE TOTAL
ENTITY AND ASSEMBLED ALLOCATED ASSETS PURCHASE
ACQUIRED DATE DEVELOPMENT WORKFORCE TO GOODWILL ACQUIRED PRICE
-------- ---------- ------------ ------------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Argon March 1999 $ 36.4 $1.0 $148.1 $14.5 $200.0
Castle April 1999 79.3 0.9 214.3 5.5 300.0
Redstone April 1999 101.7 1.1 342.2 5.0 450.0
------ ---- ------ ----- ------
$217.4 $3.0 $704.6 $25.0 $950.0
====== ==== ====== ===== ======
</TABLE>
Each of the acquisitions was accounted for using the purchase method of
accounting. The assembled workforce is being amortized on a straight-line basis
over a three year period and goodwill is being amortized on a straight-line
basis over a five year period. The in-process research and development
calculation was based on a discounted cash flow methodology and is discussed in
detail below. During the year ended September 30, 2000, we canceled and
abandoned Argon's original product development effort and we recorded an
impairment charge of $118.8 million for the unamortized goodwill value and a
portion of the unamortized value of the workforce intangible asset.
On October 20, 2000, we entered into a definitive agreement to acquire
BroadSoft, Inc. in a stock-for-stock merger. BroadSoft is a development stage
company that provides software architecture that supports business telephony
applications for use on the internet, such as call waiting, voice mail and
conferencing. Under the terms of the agreement, each share of BroadSoft's common
stock will be converted into shares of our common stock and all outstanding
options to acquire BroadSoft common stock will be exchanged for options to
purchase shares of our common stock. The total number of shares of our common
stock that we will issue in the BroadSoft acquisition, together with the number
of shares of our common stock issuable upon exercise of the assumed BroadSoft
options, will be between 5,710,000 and 7,460,000. The actual number will depend
upon the trading price for our common stock in the public market during a
specified period following the completion of this offering.
The closing of the BroadSoft acquisition is subject to the condition that
we have completed this offering and that the registration statement we will file
with the Securities and Exchange Commission registering the shares of our common
stock issuable to BroadSoft stockholders has been declared effective, and to a
variety of other customary conditions. We currently anticipate that the
acquisition will be closed within two months after the closing of this offering.
We expect to account for the BroadSoft acquisition using the purchase
method of accounting. The operating results of BroadSoft will be included in our
financial results from the date of acquisition. We will be obligated to record
goodwill in an amount equal to the difference between the value of the
consideration given by us in the acquisition and the value of identifiable
assets of BroadSoft. The allocation of the purchase price to the fair value of
assets acquired and liabilities assumed will be based on a valuation analysis.
We expect the majority of the purchase price will be allocated to intangible
assets and deferred compensation, all of which is expected to be amortized over
periods between two to five years. This amortization will result in significant
non-cash charges to us.
We sell and market our products through a direct sales force and
value-added resellers. To date, our principal value-added reseller has been
Siemens. Customers' decisions to purchase our products for deployment in
commercial networks often involve a significant commitment of resources and a
lengthy evaluation, testing and product qualification process. We believe these
long sales cycles, as well as our expectation that customers will deploy and
upgrade their networks infrequently and in large increments with short lead
times, will cause our revenues and results of operations to vary significantly
and unexpectedly from quarter to quarter.
We recognize revenue from product sales upon shipment, provided that
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable, there are no uncertainties regarding customer
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acceptance and collectibility is deemed probable. If uncertainties exist,
revenue is recognized when the uncertainties are resolved. A significant portion
of our sales are made through value-added resellers. Under these arrangements,
value-added resellers do not have a right of return and they purchase products
from us after they have secured a sale to the end-user. Revenue from technical
support and maintenance contracts is recognized ratably over the period of the
related agreements. Revenue from professional services are recognized when the
services are completed.
During fiscal 2000, we recorded $48.6 million in deferred compensation
related to the excess of the fair market value over the exercise price of
restricted common stock and stock options issued to our employees and the fair
value of the stock options issued to non-employees. During fiscal 2000, we
recorded non-cash compensation expense of $10.6 million and will expense $13.2
million in 2001, $13.2 million in 2002, $8.6 million in 2003, $2.6 million in
2004 and $0.4 million in 2005.
In addition, in April 2000, we changed the exercise price of 2,344,000
employee stock options to purchase common stock. At September 30, 2000, stock
options for the purchase of 370,000 shares had been exercised and 146,000 stock
options had been cancelled. The remaining 1,828,000 stock options will become
exercisable over a four-year period. During fiscal 2000, we recorded $22.7
million in deferred compensation and $11.9 million of non-cash compensation
expense related to these stock options. Deferred compensation amounts are being
amortized over the vesting periods of the applicable options.
RESULTS OF OPERATIONS
Throughout our management discussion and analysis, we refer to the period
from January 12, 1999 (date of inception) through September 30, 1999 as the
period ended September 30, 1999.
Year Ended September 30, 2000 Compared to Period Ended September 30, 1999
Net Revenues. For the year ended September 30, 2000, our net revenues were
$49.6 million, resulting from sales of our ERX edge routers, SMX voice switching
products and related services. For the period ended September 30, 1999, our net
revenues were $2.8 million. For the year ended September 30, 2000, sales to
Siemens as a value-added reseller of our products accounted for 41.0% and sales
to ITC DeltaCom accounted for 28.3%, of net revenues. We anticipate that, as our
sales increase, each of these customers will account for a smaller percentage of
our net revenues. However, we expect to continue to derive a majority of our
revenues from a limited number of customers in the near future.
Cost of Revenues. Cost of revenues includes payments to our contract
manufacturers, as well as costs associated with testing functions, warranty
costs and other costs related to the delivery of our products to our customers.
Our cost of revenues were $43.5 million, or 87.6% of net revenues, for the year
ended September 30, 2000. Our cost of revenues for the period ended September
30, 1999 were $6.5 million. Cost of revenues included milestone payments of $1.1
million and $0.9 million to employees resulting from the acquisitions of Castle
and Redstone for the year ended September 30, 2000 and period ended September
30, 1999, respectively. In addition, we recorded an $8.3 million inventory
provision in the year ended September 30, 2000 relating to excess inventory
purchased. This inventory provision was a result of material component purchases
for our first generation SMX products exceeding the amount needed to satisfy the
demand for the finished products. Demand for the first generation finished
products was less than originally forecasted as a result of our customers'
anticipation of, and willingness to wait for, the release of our second
generation SMX product which provides additional features. Excluding the
milestone payments, stock based compensation expense and the inventory
provision, our cost of revenues would have been 68.8% of net revenues in the
year ended September 30, 2000. We anticipate our cost of revenues will decrease
as a percentage of net revenues in the future as we achieve economies of scale.
Gross Profit. Our gross profit was $6.2 million, or 12.4% of net revenues,
for the year ended September 30, 2000. Excluding the milestone payments and the
inventory provision described above, our gross profit would have been 31.2% of
net revenues for the year ended September 30, 2000. Our gross loss was $3.7
million for the period ended September 30, 1999.
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Research and Development Expenses. Research and development expenses
consist primarily of salaries and related personnel costs, independent
contractor costs and prototype costs related to the design, development, testing
and enhancement of our products. We expense our research and development costs
as incurred. Our research and development expenses increased to $112.5 million
for the year ended September 30, 2000 from $68.4 million for the period ended
September 30, 1999. These expenses included milestone and retention payments of
$25.8 million and $34.9 million to employees resulting from the acquisitions of
Argon, Castle and Redstone for the year ended September 30, 2000 and period
ended September 30, 1999, respectively. The increase was the result of an
increase in personnel and personnel-related expenses, an increase in
non-recurring engineering costs and an increase in the prototype expenses for
the development of our products. Research and development is essential to our
future success and we expect that research and development expenses, excluding
milestone payments, will increase in absolute dollars in the future.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and related personnel expenses, commissions, advertising,
tradeshows, promotions, customer evaluations and other marketing expenses. Our
sales and marketing expenses increased to $42.9 million for the year ended
September 30, 2000 from $20.3 million for the period ended September 30, 1999.
These expenses included milestone and retention payments of $1.3 million and
$3.9 million to employees resulting from the acquisitions of Argon, Castle and
Redstone for the year ended September 30, 2000 and period ended September 30,
1999, respectively. During the latter half of fiscal 1999 and the first half of
fiscal 2000, we expanded and we continue to expand our distribution capabilities
both domestically and internationally. This expansion, as well as our initial
advertising and marketing campaign, resulted in a significant increase in our
spending. We expect that sales and marketing expenses, excluding milestone
payments, will increase in absolute dollars in the future as we hire additional
sales personnel and expand sales offices and distribution channels.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance,
information technology and human resource personnel, recruiting expenses and
professional fees. Our general and administrative expenses increased to $14.7
million for the year ended September 30, 2000 from $13.9 million for the period
ended September 30, 1999. These expenses included milestone payments of $3.0
million and $7.4 million to employees resulting from the acquisitions of Castle
and Redstone for the year ended September 30, 2000 and period ended September
30, 1999, respectively. We expect that general and administrative expenses,
excluding milestone payments, will increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
Amortization of Intangible Assets. Our intangible assets include goodwill
and workforce resulting from the acquisitions of Argon, Castle and Redstone. Our
amortization of intangible assets was $127.0 million for the year ended
September 30, 2000 and $61.6 million for the period ended September 30, 1999.
Impairment of Intangible Assets. During the year ended September 30, 2000,
we canceled and abandoned Argon's original product development effort, which was
the primary business focus at Argon. The cancellation of the project was due to
continuing technology problems, major delays and insufficient technical features
for the competitive marketplace.
As a result of our cancellation of the Argon gigabit switch router, we
performed an impairment review of the goodwill generated from the Argon
acquisition. At the time this impairment review was performed, we determined
that there would be no future cash flows generated from the Argon development
efforts. Accordingly, during the year ended September 30, 2000, we recorded an
impairment charge of $118.5 million for the writedown of the remaining
unamortized value of the Argon goodwill.
We also performed an impairment review of the workforce intangible asset
generated from the Argon acquisition. At the time this impairment review was
performed, we determined that there was a partial impairment of this asset,
based on the higher than expected level of employee turnover experienced to
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date. Accordingly, during the year ended September 30, 2000, we recorded an
impairment charge of $0.3 million for the writedown of a portion of the
unamortized value of the Argon workforce intangible asset.
Stock-based Compensation Expenses. Stock-based compensation expenses
consist of $10.0 million of amortization of deferred compensation related to the
excess of the fair market value at the time of grant over the exercise price of
restricted common stock and stock options issued to our employees over a four-
year straight-line vesting period and $0.6 million of amortization of
compensation expense related to non-employee stock options.
Additionally, stock-based compensation expenses consist of amortization of
deferred compensation, over a four-year vesting period, related to employee
stock options for which we changed the exercise price. We cannot estimate the
future effect of stock-based compensation related to employee stock options for
which we changed the exercise price since the determination of variable
stock-based compensation expense is based on the fair market value of our common
stock in future periods.
Stock-based compensation expenses increased from zero for the period ended
September 30, 1999 to $22.5 million for the year ended September 30, 2000.
Other Income (Expense). Our other income (expense) consists of interest
income and a loss on the disposal of fixed assets. Our interest income was the
result of investing excess cash in overnight investment vehicles and the
interest on the notes receivable from officers. Our interest income increased to
$0.7 million for the year ended September 30, 2000 from $0.2 million for the
period ended September 30, 1999. Our disposal of fixed assets related to the
cancellation and abandonment of the Argon gigabit switch router project and from
the consolidation of redundant facilities and functions in the year ended
September 30, 2000. Our loss on the disposal of fixed assets was $2.2 million.
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Quarterly Results of Operations
The following table presents our historical operating results for the three
months ended June 30, 1999, September 30, 1999, December 31, 1999, March 31,
2000, June 30, 2000 and September 30, 2000. In addition, we have included a
table to present the milestone payments included in the operating results for
those periods. The information for each of these periods is unaudited and has
been prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the unaudited consolidated quarterly results when read in
conjunction with our audited consolidated financial statements and related notes
appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999 2000 2000 2000
--------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Third parties............. $ 391 $ 636 $ 3,142 $ 8,610 $ 9,430 $ 8,103
Related parties........... 59 1,727 4,338 1,877 4,601 9,527
--------- --------- -------- --------- -------- --------
Net revenues.......... 450 2,363 7,480 10,487 14,031 17,630
Cost of revenues(1)......... 1,556 4,929 5,192 17,470 9,360 11,454
--------- --------- -------- --------- -------- --------
Gross profit
(loss)(1).......... (1,106) (2,566) 2,288 (6,983) 4,671 6,176
Operating expenses:
Research and
development(1).......... 14,486 52,987 21,812 40,954 25,677 24,008
Sales and marketing(1).... 5,319 14,908 12,094 8,903 10,579 11,298
General and
administrative(1)....... 4,361 9,512 2,795 7,546 2,093 2,302
Amortization of intangible
assets.................. 26,149 35,480 35,480 35,480 28,036 28,037
Impairment of intangible
assets.................. -- -- -- 118,810 -- --
Purchased in-process
research and
development............. 181,000 -- -- -- -- --
Stock-based
compensation............ -- -- -- -- 2,865 19,599
--------- --------- -------- --------- -------- --------
Total operating
expenses........... 231,315 112,887 72,181 211,693 69,250 85,244
--------- --------- -------- --------- -------- --------
Loss from
operations......... (232,421) (115,453) (69,893) (218,676) (64,579) (79,068)
Other expenses.............. -- -- -- (1,975) -- (189)
Interest income............. 148 51 117 120 84 377
--------- --------- -------- --------- -------- --------
Net loss.............. $(232,273) $(115,402) $(69,776) $(220,531) $(64,495) $(78,880)
========= ========= ======== ========= ======== ========
</TABLE>
---------------------
(1) Excludes non-cash, stock based compensation as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues............ -- -- -- -- $ 51 $ 593
Research and development.... -- -- -- -- 1,639 7,573
Sales and marketing......... -- -- -- -- 548 4,205
General and
administrative............ -- -- -- -- 627 7,228
--------- --------- -------- --------- -------- --------
-- -- -- -- $ 2,865 $ 19,599
========= ========= ======== ========= ======== ========
</TABLE>
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The table below reflects the milestone payments included in the expense
classifications above:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999 2000 2000 2000
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues................ $ -- $ 923 $ -- $ 1,051 $ -- $ --
Research and development........ 1,070 33,825 3,477 18,118 1,977 2,201
Sales and marketing............. -- 3,919 -- 1,278 -- --
General and administrative...... -- 7,403 -- 3,031 -- --
------ ------- ------ ------- ------ -------
Total milestone
payments............... $1,070 $46,070 $3,477 $23,478 $1,977 $ 2,201
====== ======= ====== ======= ====== =======
</TABLE>
Net revenues increased as a result of increased sales of our ERX edge
routers and SMX voice switching products since their commercial deployment in
September 1999. Sales to Siemens as a value-added reseller of our products
increased in the quarters ended December 31, 1999, June 30, 2000 and September
30, 2000 as a result of the timing of orders by Siemens' customers.
Cost of revenues increased significantly in the quarter ended March 31,
2000 primarily as a result of recording an $8.3 million inventory provision
relating to excess inventory and a $1.1 million charge for milestone payments as
noted above. In addition, during the second quarter, we significantly increased
our customer service headcount to meet anticipated future demand. These customer
service employees were primarily focused on product education and training
during the second quarter.
Research and development expenses decreased in the quarter ended September
30, 2000 due to the timing of engineering material received and non-recurring
engineering charges.
Sales and marketing expenses have fluctuated over the past six quarters
based on initial investments in new product launches and the opening of new
sales offices. Excluding the milestone payments of $3.9 million in the three
months ended September 30, 1999, our sales and marketing expenses during the
three months ended September 30, 1999 and December 31, 1999 included large
investments in advertising and marketing to promote our company and products.
The investment consisted of an initial advertising and marketing campaign with a
cost of approximately $4.0 million and the shipment of evaluation units to
potential customers. During the three months ended March 31, 2000, we reduced
our advertising and marketing investment after completion of our initial product
launches and marketing campaign.
General and administrative expenses have fluctuated over the past six
quarters based on our initial investments and organizational changes. During the
three months ended June 30, 1999, we incurred startup costs consisting of
relocation, recruiting and general organization investments that account for our
higher than normal operating expenses. During the three months ended March 31,
2000, we incurred severance costs of approximately $0.9 million related to
management changes.
Our operating expenses are largely based on anticipated organizational
growth and revenue trends. As a result, a delay in generating or recognizing
revenues could cause significant variations in our operating results. We believe
that quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance.
Liquidity and Capital Resources
Historically, Siemens has funded our operations as needed. Siemens will
continue to fund our operations until the completion of this offering. However,
after the completion of this offering, Siemens has no obligation to provide us
with additional funds. We will be required to fund our operations independently.
In June 1999, Siemens contributed the stock of Argon, Castle and Redstone to us
and we recorded the issuance of common stock to Siemens in the amount of $258.4
million and an additional equity contribution of $691.6 million. In addition,
through September 30, 2000, Siemens contributed $262.5 million to us through
capital contributions to fund our operations. As discussed below, we expect that
the proceeds from this offering, together with the capital contributions from
Siemens through the closing of this offering and our current cash and cash
equivalents, will be sufficient to meet our anticipated
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cash needs for working and capital expenditures for at least 12 months and,
therefore, we do not expect the transition from funding by Siemens to
independent funding following this offering to have a material effect on our
financial condition or results of operations.
Net cash used in operating activities was $198.7 million for the year ended
September 30, 2000 and $57.0 million for the period ended September 30, 1999.
Net cash flows from operating activities include our net loss and increases in
prepaid expenses and other current assets, inventory, long term deposits and the
payment of milestone achievements, offset in part by depreciation and
amortization and increases in accounts payable and accrued expenses. For the
year ended September 30, 2000, our net revenues increased to $49.6 million from
$2.8 million for the period from January 12, 1999 through September 30, 1999. In
addition, our accounts receivable increased to $8.4 million at September 30,
2000 from $3.4 million at September 30, 1999. In connection with these
increases, we established a sales returns and allowance reserve of $1.1 million
and an allowance for doubtful accounts of $0.8 million during the year ended
September 30, 2000. These provisions were established to account for returns and
collection problems that arise in the ordinary course of business. There have
been no material changes in our credit collection policies nor have we to date
experienced any payment delays due to product disputes.
Net cash used in investing activities was $35.7 million for the year ended
September 30, 2000 and $8.8 million for the period ended September 30, 1999. Net
cash used for investing activities primarily reflects purchases of property and
equipment, primarily computers and test equipment for product development and
final assembly and test.
Net cash provided by financing activities was $226.0 million for the year
ended September 30, 2000 and $74.9 million for the period ended September 30,
1999. Net cash provided by financing activities for these periods was derived
from capital contributions from Siemens, sales of restricted stock to employees,
and the exercise of stock options by employees.
We incurred a significant working capital deficit in the year ended
September 30, 2000 and in the period ended September 30, 1999, and we expect to
continue to incur negative cash flow for the foreseeable future. However, we
believe that the net proceeds from this offering, together with the capital
contributions from Siemens through the closing of this offering and our current
cash and cash equivalents, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least 12 months. If our
existing resources, proceeds from this offering and cash generated from
operations are insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and sales and marketing efforts, which could
harm our business, financial condition and operating results.
MARKET RISK
We do not currently use derivative financial instruments. We generally
invest our cash equivalents in high-quality credit instruments. We do not expect
any material loss from our cash equivalents and therefore believe that our
potential interest rate exposure is not material.
We do not currently invoice customers in any currency other than the United
States dollar. In addition, we do not currently incur significant expenses
denominated in foreign currencies. Therefore, we believe we are not currently
subject to significant risk as a result of currency fluctuations. As our
business continues to grow and expand into additional foreign countries, we may
incur a higher level of foreign currency denominated expenses and may begin to
transact with customers in certain foreign currencies. We do not have any
derivative hedging instruments as of September 30, 2000, nor do we have any
plans to enter into such derivative instruments. As foreign currency transaction
levels increase, we will evaluate the benefits of entering into hedging
activities to reduce our potential risk from foreign currency fluctuations.
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Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin established guidelines for revenue recognition. We recognize revenues
in accordance with this pronouncement.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We do not currently engage in trading
market risk sensitive instruments or purchase hedging instruments or "other than
trading" instruments that are likely to expose us to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
We may do so in the future as our operations expand domestically and abroad. We
will evaluate the impact of foreign currency exchange risk and other derivative
instrument risk on our results of operations when appropriate. SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, will be adopted on October 1, 2000,
and is not expected to have a material impact on our financial condition or
results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, Accounting for Certain Transactions involving
Stock Compensation -- an interpretation of APB Opinion No. 25, which clarifies
the application of Accounting Principles Board Opinion No. 25, Stock Issued to
Employees, for certain stock-based compensation issues. Among other issues, this
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occur after either December 15, 1998, or January 12, 2000. To the
extent that FIN 44 covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying FIN 44 are recognized on a prospective basis from July 1,
2000. We adopted the provisions of FIN 44 as of the required effective dates.
IN PROCESS RESEARCH AND DEVELOPMENT
We allocated $36.4 million to in-process research and development for the
gigabit switch router technology in connection with the Argon acquisition, $79.3
million for the voice switching technology in connection with the Castle
acquisition and $101.7 million for the edge router technology in connection with
the Redstone acquisition. These allocations to in-process research and
development represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the dates of acquisition, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, we expensed these costs as of the acquisition dates.
We assessed and allocated values to the in-process research and
development. The value assigned to this asset was determined by identifying
significant research projects for which technological feasibility had not been
established, including development, engineering and testing activities
associated with the introduction of these products. At the time of each
acquisition, the acquired companies had not developed any products or technology
and had not generated any revenues. At the time of the acquisitions, the Argon
project was estimated to be 51% complete, the Castle project was estimated to be
65% complete and the Redstone project was estimated to be 76% complete. We
derived the stage of completion factor for each in-process project based on a
comparison of hours and costs invested from project inception through the
acquisition date for each project and estimates of the hours and costs remaining
to achieve technological feasibility for each in-process project. Each project
included some software and hardware components that are considered complex and
unique technology. Argon had completed various hardware platform testing and
certain software; Castle had completed various field trials with its base
system; and Redstone had
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completed its hardware design. The cumulative research and development costs at
the time of acquisition for each of the acquired companies were $21.2 million
for Argon, $16.2 million for Castle and $30.3 million for Redstone.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally related to the completion of all
planning, designing, prototyping, high-volume verification and testing
activities that were necessary to establish that the proposed technologies met
their design specifications, including functional, technical and economic
performance requirements. Anticipated completion dates for the projects in
progress were expected to occur during the year following each acquisition and
we expected to begin generating the economic benefits from each of the acquired
technologies shortly after completion. Funding for such projects would have been
obtained from capital contributions from Siemens.
The value assigned to purchased in-process technology was determined using
the income approach, and included estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the in-process
research and development were based on estimates of relevant market sizes and
growth factors, expected trends in technology and the nature and expected timing
of new product introductions by us and our competitors.
The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the
forecasts and the risks associated with the projected growth, profitability and
developmental projects, a discount rate was used for the business enterprise and
for the in-process research and development. The discount rate used was 30% for
Argon, 27% for Castle and 25% for Redstone. We believed these rates were
appropriate because they were commensurate with each acquired company's stage of
development, the uncertainties in the economic estimates described above, the
inherent uncertainty surrounding the successful development of the purchased
in-process technologies, the useful life and the profitability levels of these
technologies and the uncertainty of technological advances that were unknown at
that time.
Argon's technology developments have not met the forecasted assumptions at
the time of the acquisition and therefore, during the second quarter of fiscal
2000, we cancelled the existing development effort of the Argon technology. The
cancellation of the project was due to continuing technology problems, major
delays and insufficient technical features for the competitive marketplace.
As a result of the cancellation of the Argon technology, we performed an
impairment review of the goodwill generated from the Argon acquisition. At the
time this impairment review was performed, it was determined that there would be
no future cash flows generated from the Argon development efforts. Accordingly,
in March 2000, we recorded an impairment charge of $118.5 million for the
writedown of the remaining unamortized value of the Argon goodwill.
Castle's and Redstone's in-process technologies were completed within the
anticipated time schedules for these projects. Initial customer shipments were
made in September 1999. To date, the Castle and Redstone products have not
achieved the financial results forecasted at the time of the acquisitions.
During the year ended September 30, 2000, actual revenues were significantly
lower than expected revenues as a result of longer than expected sales cycles
with significant prospective customers and additional time required to build
internal sales infrastructure and distribution channels. The lower than expected
revenues and resulting cash flows has not had, nor is expected to have, any
material adverse impact on our results of operations, including the
recoverability of intangible assets.
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UNISPHERE'S MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, their ages and their
positions as of December 15, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
James A. Dolce, Jr......... 38 President, Chief Executive Officer and Director
Thomas M. Burkardt......... 42 Chief Operating Officer and Vice President
John J. Connolly........... 43 Chief Financial Officer, Vice President and Treasurer
Jeffrey P. Lindholm........ 44 Vice President, Worldwide Sales and Support
Kurt A. Melden............. 44 Chief Technical Officer
Anthony T. Maher(2)........ 55 Chairman of the Board of Directors
Craig R. Benson(1)......... 46 Director
Dietrich A. Diehn(2)....... 54 Director
Stephan D. Howaldt......... 34 Director
Peter T. Morris(1)......... 44 Director
Daniel E. Smith(1)(2)...... 51 Director
KEY EMPLOYEES:
Christopher P. Lawler...... 45 Vice President, Engineering, Data Products Group
Dana B. Rasmussen.......... 41 Vice President, Product Line Management and Corporate
Marketing
Michael D. Regan........... 37 Vice President, Engineering, Voice Products Group
Benson M. Rosen............ 43 Vice President, Customer Service
Carl M. Simone............. 43 Vice President, Manufacturing Operations
Suzanne M. Zabitchuck...... 45 General Counsel and Secretary
</TABLE>
---------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
James A. Dolce, Jr. has served as our President and as one of our
directors since January 2000. Mr. Dolce has served as our Chief Executive
Officer since July 2000. From April 1999 to January 2000, Mr. Dolce served as
our Vice President, Data Products Group. From September 1997 to April 1999, Mr.
Dolce served as President of Redstone Communications, which he co-founded. From
May 1996 to July 1997, Mr. Dolce served as Vice President and General Manager of
the Remote Access Business Unit of Cascade Communications, a provider of wide
area network switches. From October 1995 to May 1996, Mr. Dolce served as Vice
President of Sales and Marketing for Arris Networks, a networking company, which
he co-founded. From April 1989 to June 1995, Mr. Dolce served as Vice President
of Sales and Marketing for Promptus Communications, a manufacturer of
high-speed, digital network access products, which he also founded.
Thomas M. Burkardt has served as our Chief Operating Officer and Vice
President since January 2000. From April 1999 to January 2000, Mr. Burkardt
served as our Vice President, Voice Products Group. From November 1997 to July
1998, Mr. Burkardt served as President and, from July 1998 to April 1999, as
Chief Executive Officer of Castle Networks, which he co-founded. From April 1996
to July 1997, Mr. Burkardt served as director of the xDSL Business Unit of
Cascade Communications. From September 1991 to April 1996, Mr. Burkardt created
and managed the IBM Connectivity Business Unit of Cabletron Systems, a computer
networking company.
John J. Connolly has served as our Chief Financial Officer, Vice President
and Treasurer since July 2000. From August 1994 to June 2000, he served as
Senior Vice President and Chief Financial Officer of Davox, a provider of
customer interaction management solutions.
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Jeffrey P. Lindholm has served as our Vice President, Worldwide Sales and
Support, since June 1999. From October 1998 to June 1999, Mr. Lindholm served as
Vice President of Sales and Customer Service at Redstone Communications. From
January 1998 to October 1998, Mr. Lindholm served as Vice President of Sales
Development at Bay Networks, a manufacturer of IP-based data communications
equipment. From October 1997 to January 1998, Mr. Lindholm served as Vice
President of Worldwide Sales and Service of New Oak Communications, a
manufacturer of access switches. From August 1996 to October 1997, Mr. Lindholm
served as Vice President of Sales and Customer Service at Starburst
Communications, a provider of networking software. From October 1988 to August
1996, Mr. Lindholm served as Vice President of Worldwide Sales at Wellfleet
Communications, a provider of network communications equipment, and, after its
merger with Synoptics, Bay Networks.
Kurt A. Melden has served as our Chief Technical Officer since April 2000.
From July 1997 to April 2000, Mr. Melden served as Chief Technical Officer and
director of Redstone Communications, which he co-founded. From May 1996 to July
1997, Mr. Melden served as Corporate Fellow and, from July 1991 to May 1996, as
hardware director for Cascade Communications, which he co-founded.
Anthony T. Maher has served as chairman of the board of directors of our
company since February 1999. Since May 1978, Mr. Maher has held various
executive positions within the Siemens Public Communication Networks Group of
Siemens AG, a network equipment provider, including as a member of the board of
directors from October 1997 to September 1998, Executive Director for Access
Networks from October 1995 to September 1997, and Executive Director of
Worldwide Product Planning from January 1993 to September 1995. Mr. Maher is
currently a member of the board of directors of Siemens ICN, a provider of IP
solutions for carrier and enterprise networks, Accelerated Networks, a provider
of telecommunications products, Efficient Networks, a developer of digital
subscriber line customer premises equipment, Floware Wireless Systems, a
provider of broadband fixed wireless local access communications systems, and
several private companies.
Craig R. Benson has served on our board of directors since September 2000.
Since July 1999, Mr. Benson has served as a director of Cabletron Systems, a
computer networking company, which he founded. From April 1998 to July 1999, Mr.
Benson served as Chief Executive Officer and President and, from 1983 to July
1999, as Chief Operating Officer and chairman of the board of directors of
Cabletron Systems.
Dietrich A. Diehn has served on our board of directors since April 1999.
Since October 1998, he has served as Chief Financial Officer of Siemens ICN, a
subsidiary of Siemens Corporation. From October 1997 to September 1998, Mr.
Diehn served as a member of the management board and as Chief Financial Officer
of the Private Communication Systems Group of Siemens AG. From February 1995 to
September 1997, Mr. Diehn served as Chief Financial Officer and Senior Vice
President of Siemens Stromberg Carlson, a telecommunications company.
Dr. Stephan D. Howaldt has served on our board of directors since July
2000. Since April 2000, Dr. Howaldt has been engaged by Siemens AG as an
affiliated member of its mergers and acquisitions group. From February 1994 to
April 2000, Dr. Howaldt served as an Executive Director of the Technology Team
and in various other functions within the investment banking advisory group of
UBS Warburg, a division of UBS AG, and its predecessor organizations in London.
During the term of his employment with UBS Warburg, Dr. Howaldt had been
involved with Siemens in arranging the initial public offering of EPCOS AG and
the sale of Siemens Nixdorf Retail and Banking GmbH.
Peter T. Morris has served on our board of directors since December 2000.
Mr. Morris has also served as a director of New Enterprise Associates since May
1997. Mr. Morris is a general partner at New Enterprise Associates, a venture
capital firm, where he has been employed since 1992. Prior to 1992, Mr. Morris
was also affiliated with Montgomery Securities and Bain and Co. He also serves
as a director of Gadzoox Networks, Packeteer, Inc., a bandwidth management
software company, Virata Corporation, a DSL chip provider, and several private
companies.
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Daniel E. Smith has served on our board of directors since April 1999.
Since October 1998, Mr. Smith served as President, Chief Executive Officer and a
director of Sycamore Networks, a developer of voice and data transport products.
From June 1997 to July 1998, Mr. Smith served as a director and as Executive
Vice President and General Manager of the Core Switching Division at Ascend
Communications, a provider of network communications equipment. From April 1992
to June 1997, Mr. Smith served as President, Chief Executive Officer and a
director of Cascade Communications.
Christopher P. Lawler has served as our Vice President of Engineering,
Data Products Group since April 1999. From October 1997 to April 1999, Mr.
Lawler served as Vice President of Engineering of Redstone Communications, which
he co-founded. From January 1994 to October 1997, Mr. Lawler was Director of
Engineering for the LAN switching division of 3COM, a provider of broad-based
networking systems and services.
Dana B. Rasmussen has served as our Vice President of Product Line
Management since May 1999 and as Vice President, Corporate Marketing, since
April 2000. From June 1998 to April 1999, Mr. Rasmussen served as Vice President
of Product Management for the Enterprise Router Products division at Nortel
Networks, a supplier of voice and data equipment. From April 1996 to June 1998,
Mr. Rasmussen served as Director of Product Management for the Enterprise Router
Division of Bay Networks. From February 1995 to April 1996, Mr. Rasmussen served
as Product Line Manager of Routing Software and, from June 1993 to February
1995, as Senior Product Manager of LAN and WAN protocols at Wellfleet
Communications and, after its merger with Synoptics, Bay Networks, a
manufacturer of IP-based data communications equipment.
Michael D. Regan has served as our Vice President of Engineering, Voice
Products Group since April 1999. From November 1997 to April 1999, Mr. Regan
served as Vice President of Engineering for Castle Networks, which he
co-founded. From July 1997 to November 1997, Mr. Regan served as Engineering
Manager for Lucent Technologies, a supplier of communications systems. From
March 1997 to June 1997, Mr. Regan served as Engineering Manager for Cascade
Communications. From March 1993 to February 1997, Mr. Regan served as
Engineering Manager for Cabletron Systems, a computer networking company.
Benson M. Rosen has served as our Vice President, Customer Service since
April 1999. From September 1998 to April 1999, Mr. Rosen served as Director of
Customer Service at Redstone Communications. From February 1997 to September
1998, Mr. Rosen served as Director of Systems Engineering at Harris & Jeffries,
a supplier of integrated networking protocol software products. From May 1992 to
February 1997, Mr. Rosen served as Director of Professional Services at
Wellfleet Communications and, after its merger with Synoptics, Bay Networks.
From September 1987 to May 1992, Mr. Rosen held various customer support and
systems engineering management positions at Wellfleet Communications.
Carl M. Simone has served as our Vice President, Manufacturing Operations
since January 2000. From April 1998 to January 2000, Mr. Simone was our Director
of Manufacturing. From September 1996 to March 1998, Mr. Simone served as Senior
Manufacturing Manager and, from September 1994 to September 1996, as Manager of
Engineering Services at Cascade Communications.
Suzanne M. Zabitchuck has served as our General Counsel since November
1999 and as our Secretary since July 2000. From December 1992 to November 1999,
Ms. Zabitchuck served as Corporate Counsel and Assistant Secretary of Watts
Industries, a valve manufacturing company.
Each of our executive officers is elected by, and serves at the discretion
of, the board of directors. Each executive officer serves for a term of one
year. There are no family relationships among any of our directors or executive
officers. We currently have three directors who are also senior executives of
Siemens or are affiliated with Siemens. We intend to appoint one additional
outside director prior to completion of this offering.
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BOARD COMMITTEES
We have established an audit committee and a compensation committee.
Audit Committee. The audit committee reviews our internal accounting
procedures and considers and reports to the board of directors with respect to
other auditing and accounting matters, including the selection of our
independent auditors, the scope of annual audits, fees to be paid to our
independent auditors and the performance of our independent auditors. The audit
committee currently consists of Messrs. Benson, Morris and Smith.
Compensation Committee. The compensation committee reviews and recommends
to the board of directors the benefits and stock option grants of all employees,
consultants, directors and other individuals compensated by us and the salaries
of our executive officers. The compensation committee also administers our stock
option and other employee benefit plans. The compensation committee currently
consists of Messrs. Diehn, Maher and Smith.
DIRECTOR COMPENSATION
We reimburse our directors for all out-of-pocket expenses incurred in the
performance of their duties as directors. During fiscal 2000, we also paid Mr.
Martin C. Clague, our former Chief Executive Officer and a director, and each of
Messrs. Diehn and Maher a cash retainer of $15,000. In fiscal 2000, we granted
Mr. Diehn an option to purchase 40,000 shares of common stock, Dr. Howaldt an
option to purchase 40,000 shares of common stock, Mr. Maher an option to
purchase 60,000 shares of common stock, Mr. Smith an option to purchase 20,000
shares of common stock and Mr. Benson an option to purchase 40,000 shares of
common stock. All such options were granted pursuant to our 1999 stock incentive
plan. The grant of options to directors is at the discretion of the board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except as described below, none of our executive officers serve 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. Mr. Maher, the chairman of our board of directors and a
member of our compensation committee, is a director of a division of Siemens.
Additional information concerning transactions between entities affiliated with
members of the compensation committee and us is included in this prospectus
under the caption "Unisphere's Relationships with Siemens and Related Party
Transactions."
EMPLOYMENT AGREEMENTS
James A. Dolce, Jr. In July 2000, we entered into an amended and restated
employment agreement with James A. Dolce, Jr., our President and Chief Executive
Officer. The agreement has a three-year term, subject to earlier termination by
either us or Mr. Dolce. Mr. Dolce is paid an annual base salary of $270,000,
subject to annual review. In addition, Mr. Dolce is entitled to an annual bonus
of up to 40% of his base salary. If we terminate Mr. Dolce's employment without
cause or he resigns for good reason, he is entitled to twelve months' severance
pay and accelerated vesting of all options and shares of our restricted stock
then held by him, as well as twelve months' coverage under our group health and
basic life insurance plans.
In connection with the employment agreement, in August 2000, we sold
2,500,000 shares of restricted common stock to Mr. Dolce at a purchase price of
$10.50 per share. Mr. Dolce paid substantially all of the purchase price for
these shares by delivering a promissory note, in accordance with the original
terms of the award, which matures in January 2003 and bears interest at the
six-month LIBOR index rate plus 50 basis points per annum, which rate was 7.37%
as of the date of the note on August 4, 2000. This rate is recalculated on each
six month anniversary of the date of the note. The promissory note is secured by
the purchased shares and has recourse to the general assets of Mr. Dolce as to
25% of the principal balance
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and 100% of accrued interest on the note. Interest paid is not refundable to Mr.
Dolce. These shares vest over a three-year period, 8.33% every three months
after January 1, 2000.
Thomas M. Burkardt. In March 1999, Castle Networks entered into an
employment agreement with Mr. Burkardt, our Chief Operating Officer and Vice
President. The initial term of the agreement continues until March 2002, and is
automatically renewable thereafter for successive one-year periods unless
otherwise terminated. Pursuant to the agreement, Mr. Burkardt's initial annual
compensation consisted of a base salary of $260,000 and a bonus of up to 40% of
his base salary. In fiscal 2000, Mr. Burkardt's base salary was increased to
$270,000. If we terminate Mr. Burkardt's employment without cause, Mr. Burkardt
will receive a cash payment equal to 100% of his then annual base salary as well
as twelve months' coverage under our group health and basic life insurance
plans. Mr. Burkardt has also agreed not to compete with us for a period ending
on the later of three years from the date of this agreement or one year from the
termination of Mr. Burkardt's employment.
John J. Connolly. In June 2000, we entered into an employment agreement
with Mr. Connolly, our Chief Financial Officer, Vice President and Treasurer.
The initial term of the agreement continues until July 2002, and is
automatically renewable thereafter for successive one-year periods unless
otherwise terminated. Pursuant to the agreement, Mr. Connolly receives an
initial annual base salary of $210,000, is eligible to participate in any bonus
plan for which executive employees are eligible and was awarded stock options
for 225,000 shares of common stock. On the first anniversary of Mr. Connolly's
date of hire, 25% of the total options granted to Mr. Connolly will vest, and
6.25% of the remaining options will vest upon completion of each quarterly
anniversary thereafter. If we terminate Mr. Connolly's employment without cause
or Mr. Connolly resigns for good reason, Mr. Connolly will be entitled to six
months' severance pay. In addition, if we terminate Mr. Connolly's employment
without cause or he resigns for good reason, Mr. Connolly will be entitled to
the lesser of 28,125 of the total options granted to Mr. Connolly or the
remaining balance of his initial grant of unvested options. Pursuant to the
agreement, if we terminate Mr. Connolly's employment without cause or Mr.
Connolly resigns for good reason, Mr. Connolly agrees not to compete with us for
six months after his termination.
Jeffrey P. Lindholm. In March 1999, Redstone Communications entered into
an employment agreement with Mr. Lindholm, our Vice President, Worldwide Sales
and Support. The initial term of the agreement continues until March 14, 2001,
and is automatically renewable thereafter for successive one-year periods unless
otherwise terminated. Pursuant to the agreement, Mr. Lindholm's initial annual
compensation consisted of a base salary of $140,000. In fiscal 2000, Mr.
Lindholm's base salary was increased to $260,000. If we terminate Mr. Lindholm's
employment without cause, Mr. Lindholm will receive a cash payment equal to 100%
of his then annual base salary as well as twelve months' coverage under our
group health and basic life insurance plans. Mr. Lindholm has also agreed not to
compete with us for a period ending on the later of three years from the date of
this agreement or one year from the termination of Mr. Lindholm's employment.
Kurt A. Melden. In March 1999, Redstone Communications entered into an
employment agreement with Mr. Melden, our Chief Technology Officer. The initial
term of the agreement continues until March 2001, and is automatically renewable
thereafter for successive one-year periods unless otherwise terminated. Pursuant
to the agreement, Mr. Melden's initial annual compensation consisted of a base
salary of $126,000. In fiscal 2000, Mr. Melden's base salary was increased to
$185,000. If we terminate Mr. Melden's employment without cause, Mr. Melden will
receive a cash payment equal to 100% of his then annual base salary as well as
twelve months' coverage under our group health and basic life insurance plans.
Mr. Melden has also agreed not to compete with us for a period ending on the
later of three years from the date of this agreement or one year from the
termination of Mr. Melden's employment.
Martin C. Clague. We have entered into a severance agreement with Mr.
Clague in connection with the termination of his employment as of January 31,
2000. Pursuant to the severance agreement, Mr. Clague received an aggregate of
$647,660 upon leaving the company. Mr. Clague also received a nonstatutory
option award under our 1999 stock incentive plan to purchase 46,666 shares of
our common stock at an exercise price of $7.35 per share. These options vested
in April 2000 and are exercisable until
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February 2001. Mr. Clague also has continued coverage until January 31, 2001
under our group health plans.
George S. Donahue. We have entered into a severance agreement with Mr.
Donahue in connection with the termination of his employment as of June 1, 2000.
Pursuant to the severance agreement, Mr. Donahue received a nonstatutory option
award under our 1999 stock incentive plan to purchase 16,666 shares of our
common stock at an exercise price of $9.30 per share. These options vested in
June 2000 and are exercisable until June 2001.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the fiscal years ended September 30, 2000 and September 30, 1999, as applicable,
for Mr. James A. Dolce, our Chief Executive Officer and President, Mr. Martin C.
Clague, our former Chief Executive Officer and President, and our four other
most highly compensated executive officers who were serving as executive
officers as of September 30, 2000 and September 30, 1999, as the case may be,
and who earned more than $100,000 in salary and bonus during the applicable
fiscal year. In addition, the following table sets forth total compensation paid
for the fiscal years ended September 30, 2000 and September 30, 1999 for Mr.
George S. Donahue, our former Chief Financial Officer, who earned more than
$100,000 in salary and bonus during such fiscal years. These executive officers
may also be referred to as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
----------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION AWARDS(1) OPTIONS COMPENSATION
---------------------------- ---- -------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Dolce, Jr.(2)........ 2000 $266,734 -- $ 6,596(3) --(4) -- $9,000,000(5)
Chief Executive Officer and
President
Thomas M. Burkardt............ 2000 266,734 -- 14,580(6) --(7) 533,334 --
Chief Operating Officer and
Vice President
John J. Connolly(8)........... 2000 50,081 -- -- -- 225,000 --
Chief Financial Officer,
Vice President and Treasurer
Jeffrey P. Lindholm........... 2000 253,672 -- 6,800(9) --(10) 498,667 1,750,000(11)
Vice President, Worldwide
Sales and Support
Kurt A. Melden................ 2000 151,926 -- -- --(12) -- 8,500,000(13)
Chief Technology Officer
Martin C. Clague(14).......... 2000 143,847 $183,330 -- -- 46,666 439,992(15)
Chief Executive Officer and 1999 420,000 -- 69,617(16) -- 140,000 --
President
George S. Donahue(17)......... 2000 171,730 -- 26,529(18) -- 16,666 --
Chief Financial Officer 1999 231,000 -- 10,295(19) -- 16,666 --
</TABLE>
---------------
(1) Holders of restricted common stock are entitled to receive any dividends
that may be paid on our common stock.
(2) Mr. Dolce became our President in January 2000 and our Chief Executive
Officer in July 2000.
(3) Consists of an automobile allowance of $4,000 and a payout of $2,596 for
accrued vacation time.
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(4) Mr. Dolce purchased 2,500,000 shares of restricted stock at a purchase
price of $10.50 per share. Based on a fair market value as of September 30,
2000 of $18.90 per share, the total value of Mr. Dolce's shares of
restricted stock as of such date was $21,000,000. Mr. Dolce's shares of
restricted stock vest over a three-year period, 8.33% every three months
beginning January 1, 2000.
(5) During the first half of fiscal 2000, we paid Mr. Dolce an aggregate of
$9.0 million in connection with milestone achievements relating to the
acquisition of Redstone.
(6) Consists of an automobile allowance of $4,000 and a payout of $10,580 for
accrued vacation time.
(7) Mr. Burkardt purchased 200,000 shares of restricted stock at a purchase
price of $10.50 per share. Based on a fair market value as of September 30,
2000 of $18.90 per share, the total value of Mr. Burkardt's shares of
restricted stock as of such date was $1,680,000. Mr. Burkhardt's shares of
restricted stock vest over a four-year period, 6.25% every three months
beginning January 1, 2000.
(8) Mr. Connolly became our Chief Financial Officer, Vice President and
Treasurer in July 2000.
(9) Consists of an automobile allowance of $4,800 and a payout of $2,000 for
accrued vacation time.
(10) Mr. Lindholm purchased 143,000 shares of restricted stock at a purchase
price of $10.50 per share. Based on a fair market value as of September 30,
2000 of $18.90 per share, the total value of Mr. Lindholm's shares of
restricted stock as of such date was $1,201,200. Mr. Lindholm's shares of
restricted stock vest over a four-year period. As of September 30, 2000,
25,120 of these shares have vested, 55,262 shares vest at a rate of 6.25%
every three months beginning July 27, 2000 and the remaining 62,618 shares
will vest 25% on the first anniversary of January 1, 2000 and 6.25% every
three months thereafter.
(11) During the first half of fiscal 2000, we paid Mr. Lindholm an aggregate of
$1.75 million in connection with milestone achievements relating to the
acquisition of Redstone.
(12) Mr. Melden purchased 378,334 shares of restricted stock at a purchase price
of $10.50 per share. Based on a fair market value as of September 30, 2000
of $18.90 per share, the total value of Mr. Melden's shares of restricted
stock as of such date was $3,178,006. Mr. Melden's shares of restricted
stock vest over a four-year period. As of September 30, 2000, 13,542 of
these shares have vested, 29,792 shares vest at a rate of 6.25% every three
months beginning July 27, 2000 and the remaining 335,000 shares will vest
25% on the first anniversary of January 1, 2000 and 6.25% every three
months thereafter.
(13) During the first half of fiscal 2000, we paid Mr. Melden an aggregate of
$8.5 million in connection with milestone achievements relating to the
acquisition of Redstone.
(14) Mr. Clague ceased to be our Chief Executive Officer and President as of
January 31, 2000.
(15) Consists of payments made to Mr. Clague pursuant to the terms of his
severance agreement.
(16) Consists of a hiring bonus of $60,000, an automobile allowance of $9,000
and flexible credits under our benefit plan of approximately $617.
(17) Mr. Donahue ceased to be our Chief Financial Officer as of June 1, 2000.
(18) Consists of an automobile allowance of $4,800 and a payout of $21,729 for
accrued vacation time.
(19) Consists of an automobile allowance of $7,200 and flexible credits under
our benefit plan of approximately $3,095.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning grants of options to
purchase shares of our common stock made during the fiscal year ended September
30, 2000 to our named executive officers. In the fiscal year ended September 30,
2000, we granted options to purchase up to an aggregate of 13,370,326 shares to
our employees, directors and consultants. These options were granted pursuant to
our 1999 stock incentive plan. These options have a maximum term of ten years.
These options generally vest at the rate of 25% of the total number of shares on
the first anniversary of the date of grant and 6.25% every three months
thereafter. Upon our change of control, unexercisable but outstanding options to
purchase shares of
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our common stock will become exercisable for that number of shares of common
stock for which the option would have become exercisable in the 12 months after
the consummation of the change in control event. In addition, our board of
directors has the right, at its discretion, to accelerate the vesting of
unexercisable options at any time, including upon our change of control.
The potential realizable values are based on an assumption that the price
of our common stock will appreciate from an assumed initial public offering
price of $21.00 per share at the compounded annual rate shown from the date of
grant until the end of the option term. These values do not take into account
amounts required to be paid as income taxes under the Internal Revenue Code and
any applicable state laws or option provisions providing for termination of an
option following termination of employment. These amounts are calculated based
on the requirements promulgated by the Securities and Exchange Commission and do
not reflect our estimate of future price growth of shares of our common stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE OR ------------------------------
NAME GRANTED FISCAL YEAR BASE PRICE EXPIRATION DATE 5% 10%
---- ---------- ------------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James A. Dolce, Jr........... -- -- -- -- -- --
Thomas M. Burkardt........... 533,334 4.0% $10.50 7/28/10 $3,521,814 $8,924,969
John J. Connolly............. 225,000 1.7% 10.50 7/6/10 1,485,764 3,765,217
Jeffrey P. Lindholm.......... 485,334 3.6% 10.50 7/28/10 3,204,851 8,121,723
13,333 0.1% 8.10 11/15/09 67,919 172,120
Kurt A. Melden............... -- -- -- -- -- --
Martin C. Clague............. 46,666 0.3% 7.35 2/1/01 215,708 546,646
George S. Donahue............ 16,666 0.1% 9.30 6/1/01 97,475 247,020
</TABLE>
FISCAL YEAR END OPTION VALUES
No options were exercised by any of the named executive officers during
fiscal 2000. The following table sets forth information regarding exercisable
and unexercisable stock options held as of September 30, 2000 by the named
executive officers. There was no public trading market for our common stock as
of September 30, 2000. Accordingly, the value of our options has been calculated
by determining the difference between the exercise price per share and an
assumed initial public offering price of $21.00 per share. During fiscal 2000,
no stock appreciation rights were granted or outstanding.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James A. Dolce, Jr.............................. 20,834 45,832 $284,984 $ 625,607
Thomas M. Burkardt.............................. 62,502 537,498 721,898 5,788,100
John J. Connolly................................ -- 225,000 -- 2,632,500
Jeffrey P. Lindholm............................. 14,465 517,535 184,696 5,538,302
Kurt A. Melden.................................. 6,771 14,895 92,424 203,317
Martin C. Clague................................ 46,666 -- 636,991 --
George S. Donahue............................... 16,666 -- 194,992 --
</TABLE>
STOCK PLANS
1999 Stock Incentive Plan
Our 1999 stock incentive plan was adopted by our board of directors in June
1999, and was amended in April 2000 and July 2000. Our 1999 stock incentive plan
provides for the initial issuance of up to 19,690,839 shares of our common
stock, to be increased annually by 5% of the outstanding shares of our
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common stock, 7,000,000 shares of common stock or such lesser amount as is
determined by our board of directors. The aggregate number of shares of our
common stock that may be issued under the plan is 34,690,839 shares.
Under our 1999 stock incentive plan, we are authorized to grant incentive
stock options to our employees and non-statutory stock options, stock
appreciation rights and restricted stock awards to our officers, directors,
employees, consultants and advisors. In general, options granted pursuant to our
1999 stock incentive plan expire ten years after the original grant date. Upon
our change of control, unexercisable but outstanding options will become
exercisable for that number of shares of common stock for which the option would
have become exercisable in the 12 months after the consummation of the change in
control event. In the case of our non-employee directors, however, unexercisable
but outstanding options will become exercisable in full upon our change in
control. In addition, our board of directors has the right, at its discretion,
to accelerate the vesting of unexercisable options at any time, including upon
our change of control. Options are not assignable or transferable except by will
or the laws of descent or distribution. These restrictions on transfer will
terminate automatically upon the closing of this offering. As of September 30,
2000, under our 1999 stock incentive plan, an aggregate of 1,400,031 shares of
common stock were available for grant under the plan and 14,139,381 options were
issued and outstanding under the plan.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by our board of directors
in July 2000 and was amended in December 2000. Our 2000 employee stock purchase
plan provides for the initial issuance of up to 600,000 shares of our common
stock, to be increased annually by 0.7% of the outstanding shares of our common
stock, or such lesser amount as is determined by our board of directors. The
aggregate number of shares of our common stock that may be issued under the plan
is 5,000,000 shares, or such other number as determined by our board of
directors.
Our 2000 employee stock purchase plan will be administered by the
compensation committee of our board of directors. All of our employees whose
customary employment is for more than 20 hours per week and for more than five
months in a calendar year are eligible to participate in our 2000 employee stock
purchase plan. Employees who would own 5% or more of the total combined voting
power or value of our common stock immediately after the grant of the option to
purchase our common stock are not eligible to participate in our 2000 employee
stock purchase plan. To participate in our 2000 employee stock purchase plan,
other than with respect to the first plan period, an employee must authorize us
to deduct an amount, not less than one percent nor more than 10 percent of a
participant's total compensation, from his or her pay during six month plan
periods. With respect to the first plan period, which will commence on the
effective date of this registration statement, every eligible employee will
automatically become a participant in the 2000 employee stock purchase plan at a
compensation contribution rate of 10 percent. A participant may, at any time
after the effectiveness of the registration statement with respect to the 2000
employee stock purchase plan, elect to have payroll deductions up to such
compensation contribution rate or decline to participate by filing an
appropriate subscription agreement. The exercise price for the option granted in
each payment period is 85% of the lesser of the closing price of our common
stock on the first or last business day of the applicable plan period. During
the first plan period, however, the closing price of our common stock shall be
the price at which we are offering shares of our common stock to the public
pursuant to this registration statement. The compensation committee may, in its
discretion, choose an offering period of six months or less for each of the
offerings and choose a different offering period for each offering.
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UNISPHERE'S RELATIONSHIPS WITH SIEMENS AND RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH SIEMENS
As of , 2001, Siemens owned % of our common stock and will
own approximately % upon the consummation of our merger with BroadSoft and
assuming no additional shares are issued as a result of the trading price of
Unisphere common stock during the 20 day measurement period. Siemens has
indicated that, as of the date of this proxy statement/prospectus, it has no
intention to sell shares of our common stock that it owns, though it may do so
in the future.
Since inception, we have been funded by Siemens through capital
contributions. In June 1999, Siemens contributed the stock of Argon, Castle and
Redstone to us and we recorded the issuance of common stock to Siemens in the
amount of $258.4 million and an additional equity contribution of $691.6
million. In addition, through September 30, 2000, Siemens contributed $262.5
million to us through capital contributions to fund our operations. We do not
intend to recast any funds provided by Siemens as loans.
Siemens has the power, by virtue of its majority ownership of our common
stock, to elect our entire board of directors and to approve or disapprove any
corporate transactions or other matters submitted to our stockholders for
approval, including the approval of mergers or other significant corporate
transactions.
We have entered into the agreements described below with Siemens for the
purpose of defining various present and prospective arrangements and
transactions between us. These agreements were negotiated between a parent and a
subsidiary and therefore are not the result of negotiations between independent
parties. Siemens and we intend that these agreements and the transactions
provided for in such agreements, taken as a whole, accommodate our and their
interests in a manner that is fair to both of us. However, because of the
complex nature of the various relationships between Siemens, its affiliates and
us and our subsidiaries, we cannot assure you that each of the agreements
described below, or the transactions provided for in the agreements, were
effected on terms at least as favorable to us as we could have obtained from
unaffiliated third parties.
We and our subsidiaries may enter into additional or modified arrangements
and transactions in the future with Siemens and its affiliates. We or our
subsidiaries, or Siemens or its affiliates, as the case may be, will negotiate
the terms of such arrangements and transactions.
The following is a summary of the material arrangements and transactions
between Siemens and us.
Software Development Services Agreements
In October 1999, we entered into a software development arrangement with
Siemens Canada Limited evidenced in the form of purchase orders. Pursuant to
this arrangement, Siemens Canada Limited provides engineering services to assist
in the development of our ERX edge routing products. It is a month-to-month
arrangement that may be terminated at will. In October 2000, pursuant to the
terms of the purchase order, we did not renew this arrangement.
In May 2000, we entered into a software development services agreement with
Siemens Canada Limited. Pursuant to this agreement, Siemens Canada Limited
provides engineering services to assist in the development of some of our
Unisphere Management Center products. We own the intellectual property rights of
any developments under this agreement. Either party may terminate this agreement
upon 180 days' prior notice. Pursuant to the terms of the agreement, in October
2000 we gave notice to terminate this agreement.
OEM Software Distribution Agreement for DirX-Metadirectory Software
In March 2000, we entered into a five year software development and
distribution agreement with Siemens AG. Pursuant to this agreement, Siemens AG
grants us a license to develop and distribute Siemens AG's DirX-Metadirectory
software for use with some of our Unisphere Management Center products and
applications.
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Vendor Distribution Agreement
In July 2000, we entered into a master purchase and reseller/distributor
agreement with Siemens AG, ICN Group, Carrier Sales Germany. Pursuant to this
agreement, Siemens receives discounts of between 50% and 60% depending on the
type and quantity of products purchased, and distributes our ERX edge routing
and Unisphere Management Center products within Germany and upon mutual
agreement to defined customers in other countries. This agreement has a five
year term. Additional products may be added at Siemens' request and based on
terms and conditions to be mutually agreed by the parties. This agreement can be
extended to other Siemens divisions. On December 15, 2000, we extended the
agreement to Siemens SAS, ICN Fixed Networks. In addition, this agreement may be
extended to Siemens' affiliates on a global basis on the same terms and
conditions, or similar terms and conditions by mutual agreement of the parties.
Tax Sharing Agreement
We entered into a tax sharing agreement with Siemens Corporation setting
forth our respective obligations and responsibilities with respect to federal,
state and local income taxes for periods in which we are included in the Siemens
Corporation consolidated income tax returns. Under the terms of the tax
agreement, we are required to calculate our income taxes as if we were separate
from Siemens Corporation and pay over to Siemens Corporation the amount of tax
we would have paid had we not been part of the Siemens Corporation tax return.
If any of our tax attributes generated after the date of this offering are
utilized by another member of the Siemens group, Siemens Corporation is required
to reimburse us for benefits from these attributes in the year that we would
have used the attributes had such member of the Siemens Group not used them,
even if that is after we are no longer included in the Siemens Corporation tax
return. Under this agreement, payments received by us after we are no longer
included in the Siemens Corporation tax return will not result in a tax benefit
in our statement of operations. In addition, under this agreement, we will not
receive a tax benefit from our net operating losses incurred prior to this
offering.
The agreement also provides that Siemens Corporation has the right to
prepare and control any tax returns and control and settle any tax audits
relating to periods in which we are included in Siemens Corporation's tax
return. The agreement applies to us and any future subsidiaries.
OEM Agreement for the Purchase of SMX Products
In December 1998, we entered into a three-year agreement with Siemens ICN.
Pursuant to this agreement, Siemens ICN licenses our SMX-2100 product for use
with Siemens' products and resale to third parties and receives discounts of 50%
on purchases of certain of our SMX products, which may increase or decrease
based on revenue requirements being met and the type of product or configuration
being purchased. This agreement may be renewed by mutual agreement for an
additional two years and may be terminated upon default by a party.
Software License Agreement for RTP Software
In August 2000, Fujitsu Siemens Computers granted us a preliminary license
to use its Reliant Telco Platform, or RTP, software source code for the limited
purpose of permitting us to evaluate the software for use with our voice
switching products. The preliminary license is due to expire on January 31,
2001. The preliminary license also contemplates that it may be superseded by a
license agreement which is under negotiation with Fujitsu Siemens.
Engineering Services Agreement
In October 2000, we formally entered into an engineering services agreement
with Siemens ICN. Pursuant to this agreement, Siemens ICN provided engineering
services to assist in the development of our SMX-2100 product. Siemens ICN
completed its services under this agreement in July 2000. We own the
intellectual property rights of any developments under this agreement. We
granted Siemens ICN a
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perpetual license to use, sell and sublicense specific elements of this
intellectual property excluding any intellectual property related to the
SMX-2100 product.
License-Back of Voice Over Internet Protocol
In April 1999, Siemens ICN transferred to us the assets, employees and the
VoIP intellectual property rights associated with the research and development
group for voice switching products. We granted Siemens ICN a license to use that
intellectual property which was transferred to us and to sublicense the same to
its subsidiaries.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In fiscal 1999, we granted options to purchase shares of common stock to
Mr. Dolce, our President and Chief Executive Officer, Mr. Burkardt, our Chief
Operating Officer and a Vice President, Mr. Lindholm, our Vice President,
Worldwide Sales and Support, and Mr. Melden, our Chief Technology Officer.
Messrs. Dolce and Burkardt each received an option to purchase 66,666 shares of
common stock. Mr. Lindholm received an option to purchase 33,333 shares of
common stock and Mr. Melden received an option to purchase 21,666 shares of
common stock. The exercise price of each of these options is $7.35 per share. In
November 1999, Mr. Lindholm also received an option to purchase 13,333 shares of
common stock with an exercise price of $8.10 per share. Each of these options is
exercisable for up to ten years. These options generally vest over a four-year
period, 25% on the first anniversary of the date of grant and 6.25% every three
months thereafter.
During the first half of fiscal 2000, we paid Mr. Dolce an aggregate of
$9.0 million, Mr. Lindholm an aggregate of $1.75 million and Mr. Melden an
aggregate of $8.5 million in connection with milestone achievements relating to
the acquisition of Redstone Communications.
In June and July 2000, we granted options to purchase shares of common
stock to each of Messrs. Burkardt, Lindholm and Connolly, our Chief Financial
Officer. Mr. Burkardt received options to purchase 533,334 shares of common
stock at an exercise price of $10.50 per share. Mr. Lindholm received options to
purchase 485,334 shares of common stock at an exercise price of $10.50 per
share. Mr. Connolly received options to purchase 225,000 shares of common stock
at an exercise price of $10.50 per share. Each of these options is exercisable
for up to ten years. These options vest over a four-year period, 25% on the
first anniversary of the stated initial vesting date and 6.25% every three
months thereafter.
In August 2000, we sold restricted common stock to each of Messrs.
Burkardt, Lindholm and Melden. Mr. Burkardt purchased 200,000 shares of
restricted common stock at a purchase price of $10.50 per share. These shares
vest over a four-year period, 6.25% every three months beginning January 1,
2000. Mr. Burkardt paid substantially all of the purchase price for these shares
by delivering a promissory note, in accordance with the original terms of the
award, which matures in January 2003 and bears interest at the six month LIBOR
index rate plus 50 basis points per annum, which rate was 7.4% as of the date of
the note on August 1, 2000. This rate is recalculated on each six month
anniversary of the date of the note. The promissory note is secured by the
purchased shares and has recourse to the general assets of Mr. Burkardt as to
25% of the principal balance and 100% of the accrued interest on the note.
Interest paid is not refundable to Mr. Burkardt. Mr. Lindholm purchased 143,000
shares of restricted common stock at a purchase price of $10.50 per share. Mr.
Melden purchased 378,334 shares of restricted common stock at a purchase price
of $10.50 per share. Mr. Lindholm's and Mr. Melden's shares of restricted common
stock vest over a four-year period, 25% on the first anniversary of the stated
initial vesting date and 6.25% every three months thereafter.
With respect to shares of restricted common stock sold to Mr. Dolce in
August 2000, see "Unisphere's Management -- Employment Agreements."
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DESCRIPTION OF BROADSOFT'S BUSINESS
BroadSoft provides software service delivery and creation systems that
support business telephony applications for use on the internet, such as call
waiting, voice mail and conferencing. BroadSoft products are designed to enable
rapid and economical design and deployment of enhanced services to business and
residential customers on an open, hardware-independent software platform.
BroadSoft products are intended to focus on the needs of competitive local
exchange carriers, cable operators, integrated communications providers,
inter-exchange carriers, and internet service providers that desire to offer
their small and medium-sized business customers differentiated, value-added
communication and data services. BroadSoft's product line offers the following
to these carriers, operators and providers:
- a set of web-enabled business telephony applications such as call
waiting, voice mail, auto-attendant and follow-me-anywhere services and
web-controlled multimedia conferencing, in each case accessible via
web-based user interfaces, allowing customization by the user or the
operator;
- an open environment combined with service creation tools allowing
third-party service developers to rapidly and economically design and
deploy the applications and services that small business and residential
customers seek, including web-enabled enhanced telephony services and
applications that will run on the broadband infrastructure; and
- a platform for easy upgrades, service additions, and online purchase of
services.
By accelerating the convergence of telephony, the internet and messaging
devices, BroadSoft believes that its products enable next-generation service
operators to offer more innovative packet-based communications services to
customers.
BroadSoft is headquartered in Gaithersburg, Maryland and was co-founded in
1998 by its President and Chief Executive Officer, Michael Tessler, and Chief
Technology Officer, Scott Hoffpauir. BroadSoft's employee base has grown
substantially over the past two years and, as of November 30, 2000, BroadSoft
had approximately 120 employees.
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BROADSOFT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Historical and Unaudited Pro Forma Condensed Combined Financial
Information -- BroadSoft Selected Historical Condensed Financial Information" on
page 24 and the BroadSoft financial statements and the notes to the financial
statements included elsewhere in this proxy statement/prospectus.
OVERVIEW
BroadSoft provides software service delivery and creation systems that
support business telephony applications for use on the internet, such as call
waiting, voice mail and conferencing. Our products are designed to enable rapid
and economical design and deployment of enhanced services to business and
residential customers on an open, hardware-independent software platform.
We were incorporated under the name iKNOW, Inc., on November 17, 1998 under
the laws of the State of Delaware. We changed our name to BroadSoft, Inc. in
January 1999. We are based in Gaithersburg, Maryland, and have an office in
Montreal, Canada.
We are in the development stage, have limited operating history, and have
not recognized revenues to date. Since our inception, our operations have
consisted of raising capital, developing our products and conducting selling and
marketing activities designed to identify marketing potential and to create
customer awareness of the products being developed.
DISCUSSION OF PERIOD FROM INCEPTION (NOVEMBER 17, 1998) THROUGH DECEMBER 31,
1999
Activities occurring from November 17, 1998 (date of inception) through
December 31, 1998 were limited to capital funding. This limited activity
resulted in $410 of interest earned on capital raised. Therefore, we have only
included a discussion of our December 31, 1999 financial results.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries and related personnel costs, recruiting expenses, travel
expenses, outside printing, consulting services, trade shows and marketing
activities. Sales and marketing expenses were $561,000 for the period from
inception through December 31, 1999. During this time period we hired a Vice
President of Marketing, a Director of Sales and a Corporate Marketing
Specialist. These personnel concentrated on performing market research and
analysis and implemented a plan to increase customer awareness of our products
and services.
Research and Development. Research and development costs consist primarily
of salaries and related personnel costs, recruiting, training and travel costs.
Research and development expenses were $1,707,000 for the period from inception
through December 31, 1999. During this period we hired technical employees that
were involved in the design and development of our products. These personnel
worked to develop critical product features for potential customers.
General and Administrative. General and administrative costs consist
primarily of salaries and related personnel costs, facility costs, travel costs,
depreciation, office related expenses and stock based compensation expenses.
General and administrative expenses were $771,000 for the period from inception
through December 31, 1999. During this period we hired a Chief Executive
Officer, a Vice President and General Counsel and support personnel. These
personnel were involved with the formation of BroadSoft, establishing banking
and vendor relationships, securing facilities and performing administrative
services.
Other Income, net. Other income, net was $64,000 for the period from
inception through December 31, 1999 and consisted primarily of interest income
earned on cash balances.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Sales and Marketing Expenses. Sales and marketing expenses increased to
$1,895,000 for the nine months ended September 30, 2000 from $333,000 for the
nine months ended September 30, 1999. The increase is primarily due to the
addition of sales and marketing personnel, recruiting and travel costs,
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increased participation in trade shows, stock-based compensation expense, and
other promotional activities. Salary and related personnel costs, including
recruiting and travel and entertainment, increased to $1,085,000 for the nine
months ended September 30, 2000 from $65,000 for the nine months ended September
30, 1999. Trade shows and other marketing and public relation programs increased
to $339,000 for the nine months ended September 30, 2000 from $58,000 for the
nine months ended September 30, 1999.
Research and Development. Research and development expenses increased to
$4,376,000 for the nine months ended September 30, 2000 from $1,066,000 for the
nine months ended September 30, 1999. The increase is due primarily to the
addition of research and development employees, travel costs, recruiting costs,
and consulting expenses.
General and Administrative. General and administrative costs increased to
$3,173,000 for the nine months ended September 30, 2000 from $551,000 for the
nine months ended September 30, 1999. The increase is primarily due to the
addition of employees, as well as the recognition of stock-based compensation
expense, increased facility related expenses, and consulting services. Salary
and related expenses increased to $572,000 for the nine months ended September
30, 2000, compared to $238,000 for the corresponding period in 1999. During the
nine months ended September 30, 2000, we issued stock options and, in some
cases, restricted common shares to employees and advisors and consultants for
retention and incentive purposes. Certain options and shares were issued with
exercise prices that were less than the estimated fair value of the underlying
common stock. Accordingly, $1,368,000 has been recorded in stock-based
compensation expense. In addition, due to our growth in our employee base, our
rent and related facility costs increased to $617,000 for the nine months ended
September 30, 2000 from $129,000 for the nine months ended September 30, 1999.
Also, we utilize outside financial and facilities management, and these costs
increased to $136,000 for the nine months ended September 30, 2000 from $8,000
during the nine months ended September 30, 1999.
Other Income, net. Other income, net consists primarily of interest income
earned on the investment of available cash reserves, net of interest expense
incurred on bank credit facilities. Our other income, net increased to $219,000
for the nine months ended September 30, 2000 from $36,000 for the nine months
ended September 30, 1999, as a result of interest earned on higher cash and cash
equivalent balances.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations through a series of equity and debt
transactions. All funds raised through these transactions are being used to
provide the necessary working capital for us to complete the development of our
products and bring our products to market. Our excess cash and cash equivalents
are invested in investment grade money market instruments.
Initial capital funding at the time of incorporation was provided by a
series of notes payable, totaling $500,000, issued to parties that subsequently
became stockholders. The notes bore interest at eight percent and were due on
demand. In April 1999, the company sold 9,000,000 shares of Series A redeemable
preferred stock and 20,448,980 shares of common stock at $0.48 and $0.01 per
share, respectively, for approximately $4.5 million in net proceeds. At the time
of the sale of the Series A preferred stock, the outstanding balances on the
notes payable were exchanged as partial consideration for the Series A preferred
stock.
In July 1999, we entered into an agreement with a commercial lender which
provided for a working capital line of credit of $1,000,000 and a $750,000
equipment facility. The line of credit bears interest at prime plus 1.5 percent
(11% at September 30, 2000). Amounts borrowed on the line of credit are due at
maturity date, which is the earlier of 12 months from the date of the borrowing
or the closing of a qualified financing. The equipment facility was issued to
finance equipment and software purchases. Three notes were issued against the
facility and are each due 36 months from the date of borrowing, are repayable in
monthly installments and bear interest at the 36-month treasury rate plus 3.5
percent (9.56% to 10.16% at September 30, 2000). As of September 30, 2000, no
amounts were outstanding on the working capital line and $569,000 was
outstanding on the equipment facility.
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During the nine months ended September 30, 2000, we sold 3,850,000 shares
of Series B preferred stock at $4.54 per share for $17.5 million in net
proceeds.
In May 2000, we entered into an agreement with a commercial lender which
provided for working capital of up to $6.0 million in the form of two $3.0
million term loans. Each loan, when consummated will bear interest at 12.5
percent per year. Loans under this agreement are subordinate to all senior bank
debt and are repayable in 36 monthly installments. In June 2000, we executed the
first term loan.
Net cash used in operating activities was $6,131,000 for the nine months
ended September 30, 2000 and $2,884,000 for the year ended December 31, 1999.
Net cash used in operations included the net loss and increases in prepaid
expenses, partially offset by increases in accounts payable and accrued
expenses, decreases in amounts due from employees and consultants, increases in
deferred rent, depreciation expenses and charges for stock-based compensation.
Net cash used in investing activities was $2,882,000 for the nine months
ended September 30, 2000 and $281,000 for the year ended December 31, 1999, and
related to the purchases of property and equipment.
Net cash provided by financing activities was $20,263,000 for the nine
months ended September 30, 2000 and $4,799,000 for the year ended December 31,
1999. During the nine months ended September 30, 2000, cash was generated
through the sale of Series B preferred stock and common stock discussed above,
as well as borrowings under the credit and equipment facilities offset by
repayments on the credit and equipment facilities and term loans. During the
year ended December 31, 1999, cash was primarily generated through the sale of
Series A preferred stock.
BroadSoft will require additional capital to meet our anticipated cash
needs for working capital and capital expenditures in 2001. We plan to obtain
the necessary capital through our pending merger with Unisphere. Should the
merger not be consummated, and should our existing resources and cash generated
from operations be insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity or debt securities. The sale of additional equity
or convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and sales and marketing efforts, which could
harm our business, financial condition and operating results.
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BROADSOFT'S RELATED PARTY TRANSACTIONS
STOCK RESTRICTION AGREEMENTS
BroadSoft has issued shares of its common stock to Michael Tessler, Scott
Hoffpauir, Jeffrey Jordan, Scott Wharton and Paul Davis pursuant to certain
stock restriction agreements.
Under the terms of these stock restriction agreements, BroadSoft has the
right to repurchase the unvested portion of an executive officer's shares at
their original purchase price in the event of termination of such executive
officer's employment with BroadSoft for any reason other than (i) termination
"without cause" or (ii) the voluntary termination by such executive officer of
his employment for "good reason" (as those terms are defined in the applicable
stock restriction agreements). Upon a change of control, BroadSoft will forfeit
its repurchase right with respect to 25% of the unvested portion of such
executive officer's shares. In addition, if upon a change of control an
executive officer's employment is terminated "without cause" or for "good
reason" (as those terms are defined in the applicable stock restriction
agreements), BroadSoft will forfeit its repurchase right with respect to 100% of
the unvested portion of such executive officer's shares, provided, however, that
Messrs. Hoffpauir and Tessler have agreed that the merger, in and of itself,
will not be deemed a termination of their employment for purposes of the
definition of "good reason." The merger will constitute a change of control for
purposes of these agreements. See "The Merger -- Interests of Executive Officers
and Directors of BroadSoft in the Merger -- Effect of Merger on Stock Options
and Restricted Stock Grants."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
AND MANAGEMENT OF BROADSOFT
The table below sets forth, as of October 20, 2000, the stock ownership of
the directors, executive officers and principal stockholders of BroadSoft
(including all holders of greater than 5% of BroadSoft common stock). The share
ownership and percentages listed in the table under the column "Common Stock"
include shares of common stock issuable upon conversion of the Series B
preferred stock and any shares of BroadSoft common stock held by the listed
stockholders that are subject to options currently exercisable or exercisable
within sixty days from the date of these tables. The persons and entities listed
have, to BroadSoft's knowledge, sale, voting and investment power with respect
to all shares of BroadSoft stock shown as being beneficially owned by them,
except as may otherwise be described in the footnotes to the tables. Beneficial
ownership is determined in accordance with the rules and regulation of the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
SERIES A SERIES B
NAME OF BENEFICIAL OWNER COMMON STOCK(1) %(2) PREFERRED STOCK % PREFERRED STOCK %
------------------------ --------------- ----- --------------- ----- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Robert Goodman(3).............. 14,318,980 37.64% 5,050,000 56.11% 880,000 22.86%
Michael Tessler(4)............. 2,787,602 7.32% -- * -- *
Scott Hoffpauir(5)............. 2,313,418 6.07% -- * -- *
Jeffrey Jordan................. 612,244 1.61% -- * -- *
Rob Soni(6).................... 10,554,490 27.74% 4,000,000 44.44% 660,000 17.14%
Jeffrey Hinck(7)............... 1,980,000 5.20% -- * 990,000 25.71%
All executive officers and
directors as a group (6
persons)....................... 22,012,244 57.78% 5,050,00 56.11% 1,870,000 48.57%
OTHER 5% STOCKHOLDERS:
Entities associated with
Bessemer Venture
Partners(8).................. 10,554,490 27.74% 4,000,000 44.44% 660,000 17.14%
Charles River Partnership
IX(9)........................ 6,120,000 16.09% 2,400,000 26.67% 660,000 17.14%
Columbia BroadSoft Investors,
LLC(10)...................... 3,320,000 8.73% 1,000,000 11.11% 660,000 17.14%
Entities associated with
Crescendo Ventures(11)....... 1,980,000 5.20% -- * 990,000 25.71%
BroadBand Office, Inc.(12)..... 660,000 1.73% -- * 330,000 8.57%
</TABLE>
---------------
(1) Includes, where applicable, shares of common stock issuable upon conversion
of the Series B preferred stock and shares of common stock issuable upon
exercise of stock options exercisable within sixty days of .
(2) Calculated based on total shares of common stock outstanding, shares of
common stock issuable upon conversion of the Series B preferred stock and
shares of common stock issuable upon exercise of stock options exercisable
within sixty days of with respect to listed parties.
(3) Mr. Goodman is a director of BroadSoft. Represents 459,184 shares of common
stock held by Deer IV & Co., LLC; 6,051,182 shares of common stock (giving
effect to the conversion of the Series B preferred stock), 2,400,000 shares
of Series A preferred stock and 396,000 shares of Series B preferred stock
held by Bessemer Venture Partners IV, L.P.; 4,034,124 shares of common
stock (giving effect to the conversion of the Series B preferred stock),
1,600,000 shares of Series A preferred stock and 264,000 shares of Series B
preferred stock held by Bessec Ventures IV, L.P.; 10,000 shares of common
stock held by Bessemer Search Group LLC; 1,724,490 shares of common stock
and 1,050,000 shares of Series A preferred stock held by Mr. Goodman;
1,600,000 shares of common stock held by Plum Bush, Inc.; and 440,000
shares of common stock (giving effect to the conversion of the Series B
preferred stock) and 220,000 shares of Series B preferred stock held by
Cove Ventures, LLC. Mr. Goodman is a member of the general partners of Deer
IV & Co., LLC,; Bessemer Venture Partners IV, L.P., Bessec Venture Partners
IV, L.P. and Bessemer Search Group
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LLC and disclaims beneficial ownership of the shares held by such entities
except to the extent of his pecuniary interest therein. The address for Mr.
Goodman, Plum Bush Inc. and Cove Ventures, LLC is 1865 Palmer Avenue, Suite
104, Larchmont, NY 10538.
(4) Includes 220,000 shares held by Michael Tessler 1999 Irrevocable Trust. Mr.
Tessler disclaims beneficial ownership of these shares.
(5) Includes 100,000 shares held by Scott D. Hoffpauir 2000 Family Irrevocable
Trust. Mr. Hoffpauir disclaims beneficial ownership of these shares.
(6) Mr. Soni, is a director of BroadSoft. Represents 459,184 shares of common
stock held by Deer IV & Co., LLC; 6,051,182 shares of common stock (giving
effect to the conversion of the Series B preferred stock), 2,400,000 shares
of Series A preferred stock and 396,000 shares of Series B preferred stock
held by Bessemer Venture Partners IV, L.P.; 4,034,124 shares of common
stock (giving effect to the conversion of the Series B preferred stock),
1,600,000 shares of Series A preferred stock and 264,000 shares of Series B
preferred stock held by Bessec Ventures IV, L.P.; and 10,000 shares of
common stock held by Bessemer Search Group LLC. Mr. Soni does not own any
shares of BroadSoft in his individual capacity. Mr. Soni is a member of the
general partners of these entities and disclaims beneficial ownership of
the shares held by such entities except to the extent of his pecuniary
interest therein. The address for Mr. Soni is 83 Walnut Street, Wellesley
Hills, MA 02181.
(7) Mr. Hinck, General Partner of Crescendo Ventures, is a director of
BroadSoft. Represents 1,795,464 shares of common stock (giving effect to
the conversion of the Series B preferred) and 897,732 shares of Series B
preferred stock held by Crescendo IV, L.P.; 108,108 shares of common stock
(giving effect to the conversion of the Series B preferred) and 54,054
shares of Series B preferred stock held by Crescendo IV AG & Co.
Beteiligungs KG; 53,064 shares of common stock (giving effect to the
conversion of the Series B preferred) and 26,532 shares of Series B
preferred stock held by Crescendo IV Entrepreneur Fund, L.P.; and 23,364
shares of common stock (giving effect to the conversion of the Series B
preferred) and 11,682 shares of Series B preferred stock held by Crescendo
IV Entrepreneur Fund A, L.P. Mr. Hinck does not own any shares of BroadSoft
in his individual capacity. Mr. Hinck disclaims beneficial ownership of the
shares held by any of the above entities except to the extent of his
pecuniary interest therein. The address of Mr. Hinck is 800 LaSalle Avenue,
Suite 2250, Minneapolis, MN 55402.
(8) Represents 459,184 shares of common stock held by Deer IV & Co., LLC;
6,051,182 shares of common stock (giving effect to the conversion of the
Series B preferred stock), 2,400,000 shares of Series A preferred stock and
396,000 shares of Series B preferred stock held by Bessemer Venture
Partners IV, L.P.; 4,034,124 shares of common stock (giving effect to the
conversion of the Series B preferred stock), 1,600,000 shares of Series A
preferred stock and 264,000 shares of Series B preferred stock held by
Bessec Ventures IV, L.P.; and 10,000 shares of common stock held by
Bessemer Search Group LLC. Does not include shares held by Robert Goodman,
Plum Bush, Inc. and Cove Ventures, LLC, as to which Bessemer Venture
Partners disclaims beneficial ownership. The address for Bessemer Venture
Partners is 1400 Old Country Road, Suite 407, Westbury, NY 11590.
(9) The 6,120,000 shares of common stock includes 1,320,000 shares of common
stock issuable upon conversion of the Series B preferred stock. The address
for Charles River Partnership IX is Bay Colony Corporate Center, 1000
Winter Street, Suite 3300, Waltham, MA 02451.
(10) The 3,320,000 shares of common stock includes 1,320,000 shares of common
stock issuable upon conversion of the Series B preferred stock. The address
for Columbia BroadSoft Investors, LLC is c/o Columbia Capital, L.L.C., 201
North Union Street, Suite 300, Alexandria, VA 22314.
(11) Represents 1,795,464 shares of common stock (giving effect to the
conversion of the Series B preferred) and 897,732 shares of Series B
preferred stock held by Crescendo IV, L.P.; 108,108 shares of common stock
(giving effect to the conversion of the Series B preferred) and 54,054
shares of Series B preferred stock held by Crescendo IV AG & Co.
Beteiligungs KG; 53,064 shares of common stock (giving effect to the
conversion of the Series B preferred) and 26,532 shares of
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Series B preferred stock held by Crescendo IV Entrepreneur Fund, L.P.; and
23,364 shares of common stock (giving effect to the conversion of the
Series B preferred) and 11,682 shares of Series B preferred stock held by
Crescendo IV Entrepreneur Fund A, L.P. The address for Crescendo Ventures
is 800 LaSalle Avenue, Suite 2250, Minneapolis, MN 55402.
(12) The 660,000 shares of common stock constitutes shares of common stock
issuable upon conversion of the Series B preferred stock. The address for
BroadBand Office, Inc. is 2900 Telestar Court, Falls Church, VA 22039.
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DESCRIPTION OF UNISPHERE CAPITAL STOCK
Our authorized capital stock consists of 295,000,000 shares of common
stock, $.01 par value per share, and 5,000,000 shares of preferred stock, $.01
par value per share.
The following summary description of our capital stock may not contain all
the information that is important to you. You should also refer to the
provisions of applicable law and to our amended and restated certificate of
incorporation and amended and restated by-laws filed as exhibits to the
registration statement of which this proxy statement/prospectus is a part.
COMMON STOCK
As of , 2001 there were shares of common stock
outstanding and held of record by stockholders. Based upon the number of
shares outstanding as of , 2001 and giving effect to the issuance of
the shares of common stock offered by us at the closing of the merger (excluding
any additional shares that may be issued pursuant to the merger agreement,
depending on the trading price of our common stock during the specified
measurement period), there will be shares of common stock
outstanding upon the completion of the merger. In addition, as of ,
2001, there were outstanding stock options for the purchase of shares
of common stock.
Holders of our common stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of stockholders and do
not have cumulative voting rights. Our directors are elected by a plurality of
the votes of the shares of common stock present in person or by proxy at the
meeting. The holders of common stock are entitled to receive ratably such lawful
dividends as may be declared by our board of directors. However, such dividends
are subject to preferences that may be applicable to the holders of any
outstanding shares of preferred stock. In the event of our liquidation,
dissolution or winding up of our affairs, whether voluntarily or involuntarily,
the holders of common stock will be entitled to receive pro rata all of our
remaining assets available for distribution to our stockholders. Any such pro
rata distribution would be subject to the rights of the holders of any
outstanding shares of preferred stock. The common stock has no preemptive,
redemption, conversion or subscription rights. All outstanding shares of our
common stock are fully paid and non-assessable. The shares of common stock to be
issued by us in this offering will be fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the future. Upon
the completion of this merger, there will be no shares of preferred stock
outstanding.
PREFERRED STOCK
Our board of directors will be authorized, subject to any limitations
prescribed by Delaware law, without further stockholder approval, to issue from
time to time up to an aggregate of 5,000,000 shares of preferred stock, in one
or more series. Each share of preferred stock would be entitled to no more than
one vote per share. Our board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. Our
board of directors is authorized to issue preferred stock with conversion and
other rights and preferences that could adversely affect the other rights of the
holders of common stock.
We have no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding common stock.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Our certificate of incorporation contains a provision expressly electing
not to be governed by Section 203 of the Delaware General Corporation Law. In
general, Section 203 restricts some business
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combinations involving interested stockholders, defined as any person or entity
that is the beneficial owner of at least 15% of a corporation's voting stock or
is an affiliate or associate of the corporation or the owner of 15% or more of
the outstanding voting stock of the corporation at any time in the past three
years, or their affiliates. Because of such election, Section 203 will not apply
to us.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that none of our directors shall
be personally liable to us or to our stockholders for monetary damages for
breach of fiduciary duty as a director, except to the extent that the
elimination or limitation of such liability is not permitted by Delaware General
Corporation Law as it exists or may later be amended.
Our certificate of incorporation further provides for the indemnification
of our directors and officers to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary.
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COMPARISON OF RIGHTS OF COMMON STOCKHOLDERS OF UNISPHERE
AND STOCKHOLDERS OF BROADSOFT
This section of the proxy statement/prospectus describes differences
between the rights of holders of Unisphere common stock and BroadSoft stock.
While we believe that the description covers the material differences between
the two, this summary may not contain all of the information that is important
to you. You should carefully read this entire proxy statement/prospectus and the
other documents we refer to for a more complete understanding of the differences
between being a stockholder of BroadSoft and being a stockholder of Unisphere.
As a stockholder of BroadSoft, your rights are governed by BroadSoft's
restated certificate of incorporation and BroadSoft's by-laws, each as currently
in effect. After completion of the merger, you will become a stockholder of
Unisphere. As a Unisphere stockholder, your rights will be governed by
Unisphere's certificate of incorporation and Unisphere's by-laws, each as in
effect from time to time. We are each incorporated under the laws of the State
of Delaware and accordingly, your rights as a stockholder will continue to be
governed by the Delaware General Corporation Law after completion of the merger.
CAPITALIZATION
Unisphere. Unisphere's authorized capital stock is described above under
"Description of Unisphere Capital Stock."
BroadSoft. BroadSoft's charter provides that the total number of
authorized shares of BroadSoft capital stock is 63,015,004 shares, which
consists of 50,000,000 shares, par value $.01 per share, of BroadSoft common
stock and 13,015,004 shares, par value $.01 per share, of BroadSoft preferred
stock. Of the authorized preferred stock, 9,000,000 shares are designated Series
A preferred stock and 4,015,004 shares are designated Series B preferred stock.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office.
Unisphere. Unisphere's by-laws provide that the Unisphere board shall
consist of at least one person, as the board shall designate. The board may
decrease the number of directors at any time to eliminate vacancies. Whenever
the number of directors is increased between annual meetings of Unisphere
stockholders, under the Unisphere charter and by-laws, a majority of the
directors then in office or a sole remaining director have the power to elect
the new directors for the balance of the term until their successors are elected
and qualified.
BroadSoft. BroadSoft's by-laws provide that BroadSoft's board of directors
shall consist of at least one person, as the board shall designate by resolution
of a majority of the directors then in office. BroadSoft's board of directors
currently consists of four members. BroadSoft has only one class of directors,
with each director being elected by stockholders at an annual meeting. Each
director so elected shall hold office until his or her successor is elected and
qualified. In the case of a newly created directorship or a vacancy occurring in
the board of directors, such directorship or vacancy shall be filled either by
the board of directors, by a vote of a majority of the remaining members of the
board, even though less than a quorum, or by the stockholders, by a plurality of
the votes cast at a meeting of stockholders. Each director so elected shall hold
office until the term of office of the director whom he or she has replaced, or
until his or her successor is elected and qualified.
REMOVAL OF DIRECTORS
Unisphere. Unisphere's by-laws provide that the holders of the majority of
the shares then entitled to vote at an election of directors may remove any
director, with or without cause, except that the directors
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elected by the holders of a particular class or series of stock may be removed
without cause only by vote of the holders of a majority of the outstanding
shares of such class or series.
BroadSoft. Any director or the entire board of directors of BroadSoft may
be removed with or without cause by the holders of a majority of shares entitled
to vote at an election of directors.
VOTING
Unisphere. Unisphere's charter and by-laws provide that each stockholder
of record shall have one vote for each share of stock entitled to vote and a
proportionate vote for each fractional share so held. Cumulative voting is not
allowed.
BroadSoft. BroadSoft's charter provides that each holder of common stock
is entitled to one vote for each share held. Holders of BroadSoft Series B
preferred stock shall be entitled to vote with holders of common stock as a
single class on all matters submitted for a vote of stockholders, and each
holder of Series B preferred stock shall have the number of votes per share
equal to the number of shares of common stock into which each such share of
Series B preferred stock held by such holder is convertible at the time of such
vote. As of the record date, each share of Series B preferred stock is
convertible into two shares of common stock. Holders of BroadSoft Series A
preferred stock are not entitled to vote, except as otherwise required by law.
However, holders of Series A preferred stock are entitled to vote with holders
of Series B preferred stock as a single class, with each share of Series A
preferred stock having one vote and each share of Series B preferred stock
having that number of votes as is equal to the number of shares of common stock
into which it is then convertible, on matters involving:
- the authorization or issuance of any stock senior to or on par with the
Series A preferred stock or the Series B preferred stock with respect to
dividends, redemption or liquidation;
- the amendment or elimination of any provision of the BroadSoft
certificate of incorporation or the BroadSoft by-laws in any manner that
would materially and adversely affect the rights, preferences or
privileges of the Series A preferred stock or the Series B preferred
stock;
- any sale, consolidation, merger or liquidation of BroadSoft; or
- the declaration or payment of any dividend on, or repurchase of, any
class of BroadSoft capital stock other than in certain instances
specified in BroadSoft's certificate of incorporation.
LIQUIDATION PREFERENCE
Unisphere. Holders of Unisphere common stock have no preferential rights
with respect to liquidation.
BroadSoft. In the event of a liquidation, dissolution or winding up of
BroadSoft, holders of the BroadSoft preferred stock are entitled to receive the
following amounts, plus any declared but unpaid dividends, in preference to any
distribution to holders of BroadSoft common stock:
- $0.48 per share of BroadSoft Series A preferred stock; and
- $4.54545 per share of BroadSoft Series B preferred stock.
Unless holders of a majority of the shares of the BroadSoft Series A
preferred stock and Series B preferred stock, voting as a single class (with
each share of Series A preferred stock having one vote and each share of Series
B preferred stock having that number of votes as is equal to the number of
shares of common stock into which it is then convertible), request otherwise,
holders of each series of BroadSoft preferred stock are entitled to treat any
merger, consolidation or sale of BroadSoft, or a sale of substantially all of
BroadSoft's assets, in which BroadSoft stockholders will not own more than 50%
of the outstanding voting power of the surviving corporation, as a liquidation,
dissolution or winding up of BroadSoft.
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REDEMPTION
Unisphere. Holders of Unisphere common stock have no redemption rights.
BroadSoft Unless holders of a majority of the shares of the BroadSoft
Series A preferred stock request otherwise, the Series A preferred stock is
automatically redeemable on the earlier of (i) April 22, 2004 on demand of the
holders of a majority of the shares of Series A preferred stock then
outstanding; (ii) upon a merger, consolidation or sale of BroadSoft in which
BroadSoft stockholders will not own more than 50% of the outstanding voting
power of the surviving corporation; or (iii) the date twenty days after the
closing of a public offering of BroadSoft common stock resulting in net proceeds
of at least $15,000,000 at a price per share of at least $1.00. BroadSoft
intends to amend its certificate of incorporation so that it can redeem the
Series A preferred stock prior to the effective time of the merger at its
option. Holders of more than a majority of the shares of Series A preferred
stock have agreed that they will vote in favor of such an amendment. After
effecting such amendment, BroadSoft intends to redeem all outstanding shares of
Series A preferred stock prior to the effective time of the merger. See "The
Merger -- Interests of BroadSoft's Executive Officers and Directors in the
Merger -- Redemption of Series A Preferred Stock."
Similarly, unless holders of a majority of the shares of the BroadSoft
Series B preferred stock request otherwise, each share of the Series B preferred
stock is automatically redeemable on the earlier of (i) April 22, 2004 on demand
of the holders of a majority of Series B preferred stock then outstanding; (ii)
upon a merger, consolidation or sale of BroadSoft in which BroadSoft
stockholders will not own more than 50% of the outstanding voting power of the
surviving corporation or (iii) the date twenty days after the closing of a
public offering of BroadSoft common stock resulting in net proceeds of at least
$15,000,000 at a price per share of at least $1.00.
CONVERSION
Unisphere. Holders of Unisphere common stock have no conversion rights.
BroadSoft. Each share of BroadSoft Series B preferred stock is
convertible, at the option of the holder, into shares of BroadSoft common stock,
subject to weighted average antidilution adjustment. In addition, each share of
BroadSoft Series B preferred stock is automatically convertible into shares of
BroadSoft common stock, subject to weighted average and antidilution adjustment,
(i) immediately upon the closing of an underwritten public offering of BroadSoft
common stock resulting in aggregate proceeds to BroadSoft exceeding $30 million
at a price per share of at least $9.00 (adjusted for any stock split, dividend,
reclassification, exchange or similar transaction) or (ii) upon the affirmative
vote of holders of at least two-thirds of the then outstanding shares of Series
B preferred stock. In each case, the conversion ratio will also be adjusted for
any stock split, dividend, subdivision, reclassification, exchange or similar
transaction. Because of a two-for-one stock split effected in the form of a
stock dividend on August 29, 2000, each share of Series B preferred stock is
presently convertible into two shares of common stock. We expect that all of the
issued and outstanding shares of BroadSoft Series B preferred stock will be
converted into shares of BroadSoft common stock before the completion of the
merger.
DIVIDENDS
Unisphere. Holders of Unisphere common stock are entitled to receive
ratably such lawful dividends as may be declared by Unisphere's board of
directors, subject to preferences that may be applicable to the holders of any
outstanding shares of preferred stock.
BroadSoft. BroadSoft's certificate of incorporation prohibits BroadSoft
from paying any dividends on the common stock or any other class or series of
capital stock unless BroadSoft shall simultaneously declare and pay a dividend
on each share of preferred stock equal to the amount of dividend paid on each
outstanding share of common stock.
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AMENDMENT OF CERTIFICATE OF INCORPORATION
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote for the amendment, unless a higher vote is
required by the corporation's certificate of incorporation.
Unisphere. Unisphere's charter provides that the Unisphere board may
amend, repeal or adopt any provision contained in Unisphere's amended and
restated certificate of incorporation by the affirmative vote of the holders of
a majority of the shares of Unisphere capital stock outstanding and entitled to
vote thereon.
BroadSoft. Subject to the restriction requiring preferred stock approval
for certain amendments or repeals of BroadSoft's certificate of incorporation
identified above, BroadSoft's board of directors and the holders of BroadSoft
stock are expressly authorized to amend or repeal BroadSoft's certificate of
incorporation in accordance with Delaware law.
AMENDMENT OF BY-LAWS
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal by-laws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal by-laws, even though the board
may also be delegated such power.
Unisphere. Unisphere's by-laws provide that the Unisphere board may amend
the by-laws by a majority vote of the directors present at any regular or
special meeting at which a quorum is present. In addition, Unisphere's by-laws
provide that Unisphere stockholders may amend the by-laws by the affirmative
vote of the holders of at least a majority of the votes which all of the
stockholders would be entitled to cast in any annual election of directors.
BroadSoft. Subject to the restriction requiring preferred stock approval
for certain amendments or repeals of BroadSoft's by-laws identified above,
BroadSoft's board of directors is expressly authorized to adopt, amend or repeal
BroadSoft's by-laws in accordance with Delaware law. BroadSoft's by-laws also
permit amendment and repeal by action of the stockholders.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Unisphere. Unisphere's by-laws allow stockholders to take any corporate
action without a meeting by written consent. Whenever stockholders act by
written consent to elect directors and such consent is less than unanimous, such
action by written consent may be taken in lieu of holding an annual meeting only
if all of the directorships to which directors could be elected at an annual
meeting held at the effective time of such action are vacant and are filled by
such action. Unisphere must provide prompt notice of the taking of corporation
action without a meeting by less than unanimous written consent to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of such meeting.
BroadSoft. BroadSoft stockholders may take action without a meeting by the
written consent of BroadSoft stockholders having at least 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 were present and voted. BroadSoft must provide
prompt notice of the taking of corporation action without a meeting by less than
unanimous written consent to those stockholders who have not consented in
writing and who, if the action had been taken at a meeting, would have been
entitled to notice of such meeting.
NOTICE OF STOCKHOLDER MEETINGS
Unisphere. Unisphere's by-laws provide that all notices of stockholder
meetings must be given in writing not less than ten nor more than 60 days before
the date of the meeting to each stockholder entitled
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to vote at such meeting. Unisphere's by-laws further provide that no proposals
of business or nominations for directors of Unisphere by any person other than
the Unisphere board may be presented to any stockholder meeting unless the
person making the proposal or nomination is a stockholder (and, in the case of a
nomination, a stockholder entitled to vote for directors) and has delivered a
written notice to the secretary of Unisphere (a) no earlier than 60 days before
and no later than 90 days before the first anniversary of the preceding year's
annual meeting, or (b) if the date of the annual meeting is advanced by more
than 20 days or delayed by more than 60 days from the first anniversary date,
(i) no earlier than 90 days before the annual meeting and (ii) no later than the
later of 60 days before the annual meeting or ten days after notice of the
annual meeting was mailed or publicly disclosed, whichever occurs first.
BroadSoft. BroadSoft's by-laws provide that all notices of stockholder
meetings must be given in writing not less than ten nor more than 60 days before
the date of the meeting to each stockholder entitled to vote at such meeting.
ABILITY TO CALL SPECIAL MEETING
Unisphere. Unisphere's by-laws provide that special meetings of the
Unisphere stockholders for any purposes prescribed in the notice of meeting may
be called by the Unisphere chairman of the board, chief executive officer,
president, board of directors or the holders of at least 25% of the votes which
all stockholders would be entitled to cast in any annual election of directors.
BroadSoft. Special meetings of BroadSoft's stockholders may be called by
BroadSoft's board of directors, or by a committee of the board of directors that
has been duly designated by the board of directors and whose powers and
authority, as expressly provided in a resolution of the board of directors,
include the power to call such meetings.
TRANSACTIONS WITH INTERESTED PARTIES
Unisphere. Neither Unisphere's charter nor its by-laws contain provisions
governing the validity of transactions with interested parties.
BroadSoft. Neither BroadSoft's charter nor its by-laws contain provisions
governing the validity of transactions with interested parties.
STATE ANTI-TAKEOVER STATUTES
Unisphere. Unisphere's certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 of the Delaware General
Corporation Law. In general, Section 203 restricts some business combinations
involving interested stockholders, defined as any person or entity that is the
beneficial owner of at least 15% of a corporation's voting stock or is an
affiliate or associate of the corporation or the owner of 15% or more of the
outstanding voting stock of the corporation at any time in the past three years,
or their affiliates. Because of such election, Section 203 will not apply to
Unisphere.
BroadSoft. As prescribed by Delaware law, BroadSoft is not subject to
Section 203 of the Delaware General Corporation Law.
LIMITATION OF LIABILITY OF DIRECTORS
Each of BroadSoft's and Unisphere's certificates of incorporation provide
that none of their respective directors shall be personally liable to BroadSoft
or Unisphere, as applicable, or to the stockholders of BroadSoft or Unisphere,
as applicable, for monetary damages for breach of fiduciary duty as a director,
except to the extent that the elimination or limitation of such liability is not
permitted by Delaware General Corporation Law as it exists or may later be
amended.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law permits a corporation to indemnify
officers and directors for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
Unisphere. Unisphere's charter provides that Unisphere will indemnify its
directors, officers and people serving in similar capacities to the extent
available under current Delaware law and any future amendment to Delaware law.
Unisphere's charter further provides that any directors, officers and people
serving in similar capacities for Unisphere must provide Unisphere with written
notice as soon as practical regarding any action, suit, proceeding or
investigation against him for which he will seek indemnification. Unisphere will
not indemnify anyone who initiates a proceeding unless the initiation was
approved by the Unisphere board.
BroadSoft. BroadSoft's charter and by-laws provide that any person who was
or is a party or is threatened to be a party to or is otherwise involved in any
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, because that person is or was a director or officer, or is or was
serving at the request of BroadSoft, as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, will be indemnified against all liability and loss suffered and
expenses, including attorney's fees, by BroadSoft to the fullest extent
permitted by the Delaware General Corporation Law.
Additionally, BroadSoft may pay expenses incurred by its directors or
officers in defending a civil or criminal action, suit or proceeding because
that person is a director or officer, in advance of the final disposition of
that action, suit or proceeding. However, payment will be made only if BroadSoft
receives an undertaking by that director or officer to repay all amounts
advanced if it is ultimately determined that he or she is not entitled to be
indemnified by BroadSoft, as authorized by its by-laws.
BroadSoft's indemnification rights conferred are not exclusive of any other
right to which persons seeking indemnification or advancement of expenses may be
entitled under any statute, BroadSoft's certificate of incorporation or by-laws,
any agreement, or vote of stockholders or disinterested directors or otherwise.
LEGAL MATTERS
The validity of the shares of Unisphere common stock to be issued in
connection with the merger will be passed upon for Unisphere by Hale and Dorr
LLP.
EXPERTS
The consolidated financial statements and schedule of Unisphere Networks,
Inc. as of September 30, 1999 and 2000 and for the period from January 12, 1999
(date of inception) to September 30, 1999 and for the year ended September 30,
2000, have been included herein and in this registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Redstone Communications, Inc. as of April 27,
1999 and for the period from January 1, 1999 to April 27, 1999 and cumulative
from inception (September 16, 1997) to April 27, 1999, have been included herein
and in this registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Redstone Communications, Inc. at December 31,
1997 and 1998, and for the period from inception (September 16, 1997) to
December 31, 1997, for the year ended December 31, 1998 and cumulative from
inception through December 31, 1998, included in this proxy statement/
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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 accounting and auditing.
The financial statements of Castle Networks, Inc. as of April 20, 1999 and
for the period from January 1, 1999 to April 20, 1999 and cumulative from
inception (October 16, 1997) to April 20, 1999, have been included herein and in
this registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Castle Networks, Inc. at December 31, 1997 and
1998, and for the period from inception (November 18, 1997) to December 31,
1997, for the year ended December 31, 1998 and for the period from inception
(October 16, 1997) to December 31, 1998, included in this proxy statement/
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 accounting and auditing.
The financial statements of Argon Networks, Inc. as of March 31, 1998 and
March 12, 1999, and for the year ended March 31, 1998, for the period from April
1, 1998 to March 12, 1999, and for the period from inception (March 13, 1997) to
March 12, 1999, included in this proxy statement/prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
The financial statements of BroadSoft, Inc. included in this proxy
statement/prospectus and elsewhere in the registration statement, to the extent
and for the periods indicated in their report, have been audited by Arthur
Andersen LLP, independent public accountants as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
Unisphere files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that Unisphere files at the
Securities and Exchange Commission's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. Securities and Exchange Commission filings are also available
to the public from commercial document retrieval services and at the Web site
maintained by the Securities and Exchange Commission at "http://www.sec.gov."
Unisphere filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933, as amended, to register
with the Securities and Exchange Commission the Unisphere common stock issuable
pursuant to the merger agreement. This proxy statement/prospectus does not
contain all the information you can find in the registration statement or the
exhibits and schedules to the registration statement. For further information
with respect to Unisphere, BroadSoft and the Unisphere common stock, please
refer to the registration statement, including the exhibits and schedules. You
may inspect and copy the registration statement, including the exhibits and
schedules, as described above. Statements contained in this proxy
statement/prospectus about the contents of any contract or other document are
not necessarily complete, and Unisphere refers you, in each case, to the copy of
such contract or other document filed as an exhibit to the registration
statement.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the merger. Unisphere
and BroadSoft have not authorized anyone to provide you with information that is
different from what is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated , 2001. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than , 2001, and neither the mailing of the proxy
statement/prospectus to BroadSoft stockholders nor the issuance of Unisphere
common stock in the merger shall create any implication to the contrary.
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UNISPHERE NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
UNISPHERE NETWORKS, INC.
Independent Auditors' Report.............................. F-3
Consolidated Statements of Operations for the period from
January 12, 1999 (date of inception) through September
30, 1999 and for the year ended September 30, 2000..... F-4
Consolidated Balance Sheets at September 30, 1999 and
2000................................................... F-5
Consolidated Statements of Stockholder's Equity for the
period from January 12, 1999 (date of inception)
through September 30, 1999 and for the year ended
September 30, 2000..................................... F-6
Consolidated Statements of Cash Flows for the period from
January 12, 1999 (date of inception) through September
30, 1999 and for the year ended September 30, 2000..... F-7
Notes to Consolidated Financial Statements................ F-8
REDSTONE COMMUNICATIONS, INC.
Independent Auditors' Report.............................. F-23
Statements of Operations for the period from January 1,
1999 to April 27, 1999 and for the cumulative period
from inception (September 16, 1997) to April 27,
1999................................................... F-24
Balance Sheet at April 27, 1999........................... F-25
Statements of Stockholders' Deficit for the periods from
inception (September 16, 1997) to April 27, 1999....... F-26
Statements of Cash Flows for the period from January 1,
1999 to April 27, 1999 and for the cumulative period
from inception (September 16, 1997) to April 27,
1999................................................... F-27
Notes to Financial Statements............................. F-28
REDSTONE COMMUNICATIONS, INC.
Report of Independent Accountants......................... F-36
Statements of Operations for the period from inception
(September 16, 1997) to December 31, 1997, the year
ended December 31, 1998, and for the cumulative period
from inception to December 31, 1998.................... F-37
Balance Sheets at December 31, 1997 and 1998.............. F-38
Statements of Stockholders' Equity for the periods from
inception (September 16, 1997) to December 31, 1998.... F-39
Statements of Cash Flows for the period from inception
(September 16, 1997) to December 31, 1997, the year
ended December 31, 1998, and for the cumulative period
from inception to December 31, 1998.................... F-40
Notes to Financial Statements............................. F-41
</TABLE>
F-1
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
CASTLE NETWORKS, INC.
Independent Auditors' Report.............................. F-49
Statements of Operations for the period from January 1,
1999 to April 20, 1999 and for the cumulative period
from inception (October 16, 1997) to April 20, 1999.... F-50
Balance Sheet at April 20, 1999........................... F-51
Statements of Stockholders' Deficit for the periods from
inception (October 16, 1997) to April 20, 1999......... F-52
Statements of Cash Flows for the period from January 1,
1999 to April 20, 1999 and for the cumulative period
from inception (October 16, 1997) to April 20, 1999.... F-53
Notes to Financial Statements............................. F-54
CASTLE NETWORKS, INC.
Report of Independent Accountants......................... F-63
Statements of Operations for the period from inception
(October 16, 1997) to December 31, 1997, the year ended
December 31, 1998 and for the period from inception
(October 16, 1997) to December 31, 1998................ F-64
Balance Sheets at December 31, 1997 and 1998.............. F-65
Statements of Stockholders' Deficit for the periods from
inception (October 16, 1997) to December 31, 1998...... F-66
Statements of Cash Flows for the period from inception
(October 16, 1997) to December 31, 1997, the year ended
December 31, 1998, and for the period from inception
(October 16, 1997) to December 31, 1998................ F-67
Notes to Financial Statements............................. F-68
ARGON NETWORKS, INC.
Report of Independent Public Accountants.................. F-75
Statement of Operations for the year ended March 31, 1998,
for the period from April 1, 1998 to March 12, 1999 and
for the cumulative period from inception (March 13,
1997) to March 12, 1999................................ F-76
Balance Sheets at March 31, 1998 and March 12, 1999....... F-77
Statements of Redeemable Preferred Stock and Stockholders'
Deficit for the period from inception (March 13, 1997)
to March 12, 1999...................................... F-78
Statements of Cash Flows for the year ended March 31,
1998, for the period from April 1, 1998 to March 12,
1999 and for the cumulative period from inception
(March 13, 1997) to March 12, 1999..................... F-79
Notes to Financial Statements............................. F-80
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Unisphere Networks, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Unisphere
Networks, Inc. and Subsidiaries (an indirect majority-owned subsidiary of
Siemens AG) as of September 30, 1999 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the period
from January 12, 1999 (date of inception) to September 30, 1999 and for the year
ended September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Unisphere
Networks, Inc. and Subsidiaries as of September 30, 1999 and 2000 and the
results of their operations and their cash flows for the period from January 12,
1999 (date of inception) to September 30, 1999 and for the year ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
October 16, 2000
Boston, Massachusetts
F-3
<PAGE> 138
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues:
Third parties............................................. $ 1,027 $ 29,285
Related parties........................................... 1,786 20,343
--------- ---------
Net revenues...................................... 2,813 49,628
Cost of revenues(1)......................................... 6,485 43,476
--------- ---------
Gross profit (loss)(1)............................ (3,672) 6,152
Operating expenses:
Research and development(1)............................... 68,369 112,451
Sales and marketing(1).................................... 20,291 42,874
General and administrative(1)............................. 13,919 14,736
Amortization of intangible assets......................... 61,629 127,033
Impairment of intangible assets........................... -- 118,810
Purchased in-process research and development............. 217,400 --
Stock-based compensation.................................. -- 22,464
--------- ---------
Total operating expenses.......................... 381,608 438,368
--------- ---------
Loss from operations.............................. (385,280) (432,216)
Other income (expense):
Other expense............................................. -- (2,164)
Interest income........................................... 227 698
--------- ---------
Total other income (expense)........................... 227 (1,466)
--------- ---------
Net loss.......................................... $(385,053) $(433,682)
========= =========
Basic and diluted net loss per share........................ $ (4.47) $ (5.02)
========= =========
Weighted average shares used in computing basic and diluted
net loss per share........................................ 86,133 86,399
========= =========
</TABLE>
------------------------
(1) Excludes non-cash, stock based compensation expense as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Cost of revenues............................................ $ -- $ 644
Research and development.................................... -- 9,212
Sales and marketing......................................... -- 4,753
General and administrative.................................. -- 7,855
--------- ---------
$ -- $ 22,464
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 139
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,082 $ 634
Accounts receivable, net of allowances of $0 in 1999 and
$1,890 in 2000......................................... 424 1,424
Accounts receivable from related parties.................. 2,939 6,989
Inventories............................................... 532 14,359
Prepaid expenses and other current assets................. 1,105 4,872
--------- ----------
Total current assets.............................. 14,082 28,278
Property and equipment, net................................. 14,205 34,299
Long-term deposit........................................... -- 9,250
Intangible assets, net...................................... 645,970 400,127
--------- ----------
Total assets...................................... $ 674,257 $ 471,954
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,764 $ 13,519
Accounts payable to related parties....................... 3,992 1,091
Accrued milestone payments................................ 37,717 --
Accrued expenses.......................................... 11,886 19,334
Deferred revenue.......................................... -- 8,347
--------- ----------
Total current liabilities......................... 59,359 42,291
Stockholders' equity:
Common stock, $.01 par value; 105,824,172 shares
authorized; 86,133,333 and 90,284,760 shares issued and
outstanding in 1999 and 2000, respectively............. 861 903
Additional paid-in capital................................ 999,090 1,324,683
Accumulated deficit....................................... (385,053) (818,735)
Notes receivable from officers............................ -- (28,323)
Deferred compensation..................................... -- (48,865)
--------- ----------
Total stockholders' equity........................ 614,898 429,663
--------- ----------
Total liabilities and stockholders' equity........ $ 674,257 $ 471,954
========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 140
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN ACCUMULATED NOTES DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE COMPENSATION EQUITY
---------- ------ ---------- ----------- ---------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 86,133,333 $861 $ 257,540 $ -- $ -- $ -- $ 258,401
Capital contribution from
parent................. -- -- 741,550 -- -- -- 741,550
Net loss................. -- -- -- (385,053) -- -- (385,053)
---------- ---- ---------- --------- -------- -------- ---------
Balance, September 30,
1999................... 86,133,333 861 999,090 (385,053) -- -- 614,898
Capital contribution from
parent................. -- -- 212,503 -- -- -- 212,503
Sale of restricted common
stock in exchange for
notes.................. 2,700,000 27 28,323 -- (28,323) -- 27
Sale of restricted common
stock.................. 521,334 5 5,469 -- -- -- 5,474
Issuance of common stock
upon the exercise of
stock options.......... 930,093 10 7,969 -- -- -- 7,979
Deferred compensation on
employee stock
grants................. -- -- 70,699 -- -- (70,699) --
Amortization of
compensation expense
related to employee
stock grants........... -- -- -- -- -- 21,834 21,834
Deferred compensation
related to the issuance
of stock options to
non-employees.......... -- -- 630 -- -- (630) --
Amortization of
compensation expense
related to non-employee
stock options.......... -- -- -- -- -- 630 630
Net loss................. -- -- -- (433,682) -- -- (433,682)
---------- ---- ---------- --------- -------- -------- ---------
Balance, September 30,
2000................... 90,284,760 $903 $1,324,683 $(818,735) $(28,323) $(48,865) $ 429,663
========== ==== ========== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 141
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(385,053) $(433,682)
Adjustments to reconcile net loss to net cash used in
operating activities:
Purchased in-process research and development............. 217,400 --
Depreciation and amortization............................. 63,810 140,519
Amortization of deferred compensation on employee stock
grants.................................................. -- 21,834
Amortization of deferred compensation on non-employee
stock grants............................................ -- 630
Impairment of intangible assets........................... -- 118,810
Loss on disposal of fixed assets.......................... -- 2,164
Changes in operating assets and liabilities (net of
acquired balances):
Accounts receivable.................................. (232) (1,000)
Related party accounts receivable.................... (2,939) (4,050)
Inventories.......................................... 2,286 (13,827)
Prepaids expenses and other current assets........... (1,471) (3,767)
Long-term deposit.................................... -- (9,250)
Accounts payable..................................... 3,213 7,755
Related party accounts payable....................... 3,364 (2,901)
Accrued milestone payments........................... 37,717 (37,717)
Accrued expenses..................................... 4,898 7,448
Deferred revenue..................................... -- 8,347
--------- ---------
Net cash used in operating activities.............. (57,007) (198,687)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (8,849) (35,918)
Proceeds from sale of assets.............................. -- 174
--------- ---------
Net cash used in investing activities.............. (8,849) (35,744)
--------- ---------
Cash flows from financing activities:
Capital contributions by parent........................... 49,951 212,503
Cash contributed with acquired companies by parent........ 27,054 --
Repayment of capital lease obligation..................... (2,067) --
Proceeds from sales of restricted stock................... -- 5,501
Proceeds from exercise of stock options................... -- 7,979
--------- ---------
Net cash provided by financing activities.......... 74,938 225,983
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 9,082 (8,448)
Cash and cash equivalents, beginning of period.............. -- 9,082
--------- ---------
Cash and cash equivalents, end of period.................... $ 9,082 $ 634
========= =========
Non cash activities:
Common stock issued and additional capital contribution
recorded upon receipt of acquired companies from
parent.................................................. $ 950,000 $ --
========= =========
Increase to deferred compensation and additional
paid-in-capital upon issuance of stock options.......... $ -- $ 71,329
========= =========
Increase to additional paid-in capital and notes
receivable upon the sale of restricted stock in exchange
for notes............................................... $ -- $ 28,323
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 142
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) NATURE OF THE BUSINESS
Unisphere Networks, Inc. (the "Company") was incorporated in Delaware on
January 12, 1999 as Unisphere Solutions, Inc. and is an indirect majority-owned
subsidiary of Siemens AG. The Company changed its name from Unisphere Solutions,
Inc. to Unisphere Networks, Inc. in September 2000. The Company develops,
markets and supports data and voice networking products for the delivery of
integrated voice and high speed data services to businesses and residential
users. In March 1999, Siemens purchased Argon Networks, Inc. ("Argon"). In April
1999, Siemens purchased Castle Networks, Inc. ("Castle") and Redstone
Communications, Inc. ("Redstone"). All three companies were development-stage
companies engaged in research and development of next generation products for
the networking industry. In April 1999, Siemens contributed a research and
development group for voice switching products to the Company as an equity
contribution (net assets were equal to zero). In June 1999, Siemens contributed
the stock of Argon, Castle and Redstone to the Company. In accordance with AICPA
Interpretation AIN-APB 16, #39, Transfers and Exchanges Between Companies Under
Common Control, the assets and liabilities of the businesses contributed to
Unisphere were recorded at historical cost. The results of operations of Argon,
Castle and Redstone are included in the consolidated financial statements of the
Company from the respective dates of acquisition. The Company considers Redstone
and Castle to be the predecessor business as these two businesses represent the
primary ongoing business operations of the Company.
Through August 31, 1999, the Company was considered to be in the
development stage and was principally engaged in research and development, and
building its management team. As of September 30, 1999, the Company had begun
shipping product for commercial deployment.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to meet its product plans. The Company
has a limited operating history and has never achieved profitability. To date
the Company has been funded by Siemens, which has agreed to continue funding the
Company's operations until the successful completion of a public offering.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company reflect
the application of certain significant accounting policies as described below.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Unisphere
Networks, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
(b) 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.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).
F-8
<PAGE> 143
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:
<TABLE>
<S> <C>
Computer and telecommunications
equipment 2 to 3 years
Evaluation and service components 6 months to 2 years
Furniture and office equipment 5 years
Shorter of lease term or useful life of
Leasehold improvements asset
</TABLE>
The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost and related accumulated
depreciation of the assets are removed from the accounts and any resulting gain
or loss is reflected in the determination of net income or loss.
(e) Intangible Assets
Intangible assets include goodwill and other intangible assets resulting
from business combinations accounted for using the purchase method of
accounting. Goodwill is amortized on a straight-line basis over five years and
other intangible assets are amortized on a straight-line basis over three years.
(f) Impairment of Long-Lived Assets and Goodwill
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Intangible assets, including goodwill, are reviewed continually to
determine whether events and circumstances warrant revised estimates of useful
life. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. Recoverability of goodwill is measured by
a comparison of the carrying amount of goodwill to future net undiscounted cash
flows expected to be generated by the business from which the goodwill was
generated. If such assets or goodwill are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets or goodwill exceeds the related fair value. Estimated fair
value is generally based on either appraised value or measured by discounted
estimated future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows.
During the second quarter of fiscal 2000, management of the Company
cancelled Argon's original development effort of its gigabit switch router,
which was the primary focus of Argon. The cancellation of the project was due to
continuing technology problems, major delays and insufficient technical features
for the competitive marketplace. The cancellation of this development effort
included discarding and abandoning all software development and substantially
all hardware components.
As a result of the cancellation of the Argon gigabit switch router, the
Company performed an impairment review of the goodwill generated from the Argon
acquisition. At the time this impairment review was performed, it was determined
that there would be no future cash flows generated from the Argon development
concept. Accordingly, the Company recorded an impairment charge of $118,495 for
the writedown of the remaining unamortized value of the Argon goodwill during
the year ended September 30, 2000.
The Company also performed an impairment review of the workforce intangible
asset generated from the Argon acquisition. At the time this impairment review
was performed, it was determined that there was a partial impairment of this
asset, based on the higher than expected level of employee turnover experienced
to date. Accordingly, the Company recorded an impairment charge of $315 for the
writedown
F-9
<PAGE> 144
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of a portion of the unamortized value of the Argon workforce intangible asset
during the year ended September 30, 2000.
(g) Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair values due to the
short-term nature of these instruments.
(h) Revenue Recognition
Revenue from product sales is recognized upon shipment provided that there
are no uncertainties regarding customer acceptance, persuasive evidence of an
arrangement exists, the sales price is fixed or determinable and collectibility
is deemed probable. If uncertainties exist, revenue is recognized when such
uncertainties are resolved. A significant portion of the Company's sales are
made through value-added resellers, including various Siemens sales entities.
Under these arrangements, value-added resellers do not have a right of return
and they purchase products from the Company after they have secured a sale to an
end-user. The Company recognizes revenue provided there are no uncertainties
regarding customer acceptance and generally ships the product directly to the
end-user. Revenue from professional services is recognized when the services are
completed. Revenue from technical support and maintenance contracts is
recognized ratably over the period of the related agreements.
A provision for sales returns and allowances is recorded at the time of
revenue recognition based on estimated future returns and allowances. In
addition, the Company records a warranty liability for parts and labor on its
products at the time of revenue recognition. Warranty periods are generally one
year from installation date.
(i) Research and Development and Software Development Costs
The Company's products are highly technical in nature and require a large
and continuing research and development effort. All research and development
costs are expensed as incurred. Software development costs incurred prior to the
establishment of technological feasibility are charged to expense. Software
development costs incurred subsequent to the establishment of technological
feasibility are capitalized until the product is available for general release
to customers. Amortization is based on the straight-line method over the
remaining estimated life of the product. To date, the period between achieving
technological feasibility and the general availability of the related products
has been short and software development costs qualifying for capitalization have
not been material. Accordingly, the Company has not capitalized any software
development costs.
(j) Advertising Costs
The Company expenses advertising costs in the period in which they are
incurred. Advertising costs for the period ended September 30, 1999 and for the
year ended September 30, 2000 were $736 and $7,493, respectively.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
F-10
<PAGE> 145
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company does not file separate income tax returns, but rather is
included in the consolidated income tax returns of its parent, Siemens
Corporation, a majority-owned subsidiary of Siemens AG. The Company has entered
into a tax sharing agreement with Siemens Corporation. Under this agreement, the
Company will reimburse Siemens Corporation for the Company's federal and state
income tax liability computed as if its tax returns were filed on a stand alone
basis. The Company may use the tax benefits of net operating losses and credits
generated by the Company solely to reduce its liability to Siemens Corporation.
Siemens Corporation is not obligated to reimburse the Company for any tax
benefits in excess of the aggregate liability to Siemens Corporation up to the
date of an initial public offering ("IPO") of the Company's stock. Subsequent to
the date of the IPO, Siemens Corporation will reimburse the Company for any tax
attributes utilized by Siemens Corporation when the Company could have used them
on a separate return basis. The Company is obligated to pay Siemens Corporation
for any adjustment made by a taxing authority in a consolidated return year, the
benefit of which is subsequently realized by the Company in a non-consolidated
tax year.
(l) Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of unrestricted common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period, if dilutive. Common equivalent
shares are composed of restricted common shares and incremental common shares
issuable upon the exercise of stock options. There were no dilutive common
equivalent shares for the period ended September 30, 1999 and for the year ended
September 30, 2000.
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH
SEPTEMBER 30, YEAR ENDED
1999 SEPTEMBER 30, 2000
------------------- ------------------
<S> <C> <C>
Numerator:
Net loss........................................... $(385,053) $(433,682)
========= =========
Denominator:
Weighted average common shares outstanding......... 86,133 86,399
========= =========
Basic and diluted net loss per share................. $ (4.47) $ (5.02)
========= =========
</TABLE>
At September 30, 1999 and 2000, options to purchase 2,896 and 14,139 shares
of common stock, respectively, at an average exercise price of $7.35 and $9.64
per share, respectively, and restricted common shares of 0 and 2,741,
respectively, have not been included in the computation of diluted net loss per
share as their effect would have been anti-dilutive.
(m) Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for the period from inception to September
30, 1999. This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. To date, comprehensive loss and net loss are the same.
F-11
<PAGE> 146
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
receivables. The Company invests its excess cash primarily in deposits with
commercial banks.
(o) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
(p) Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. The Company has determined that it conducts its operations
in one business segment.
(q) Risks and Uncertainties
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 at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Certain components and parts used in the Company's products are procured
from a single source. The Company obtains some of its parts from one vendor
only, even where multiple sources are available, to maintain quality control and
enhance working relationships with suppliers. These purchases are made on a
purchase order basis. In addition, the majority of the Company's products are
manufactured by a single contract manufacturer. The failure of a supplier or the
contract manufacturer to deliver on schedule could delay or interrupt the
Company's delivery of products and thereby adversely affect the Company's
revenues and profits.
The Company is subject to the rapid technological change inherent in the
networking industry. This change includes new product introduction, changes in
customer requirements and new technologies. The Company works closely with its
customers to understand its customers and the industry requirements. The delay
in product and feature introductions could adversely affect the Company's
revenues and profits.
(3) ACQUISITIONS
On April 27, 1999, Siemens purchased Redstone. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Redstone for $450,000
in cash. The transaction was accounted for as a purchase. In conjunction with
the acquisition, Siemens entered into a Milestone Incentive Compensation Plan
whereby if certain performance criteria and development milestones were
achieved, Siemens would compensate the employees of Redstone with cash
incentives. In June 1999, Siemens contributed the stock of Redstone to the
Company, which has accounted for the acquisition and Redstone's results of
operations from the date of acquisition, as if the Company had effectively
acquired Redstone. During the period ended September 30, 1999 and the year ended
September 30, 2000, the Company expensed $35,000 and $15,000, respectively,
related to the Milestone Incentive Compensation
F-12
<PAGE> 147
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan for milestones which had been achieved as of those dates. No additional
milestone payments remain as of September 30, 2000.
On April 20, 1999, Siemens acquired Castle. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Castle for $300,000
in cash. The transaction was accounted for as a purchase. In conjunction with
the acquisition, Siemens entered into a Milestone Incentive Compensation Plan
whereby if certain performance criteria and development milestones were
achieved, Siemens would compensate the employees of Castle with cash incentives.
In June 1999, Siemens contributed the stock of Castle to the Company, which has
accounted for the acquisition and Castle's results of operations from the date
of acquisition, as if the Company had effectively acquired Castle. During the
period ended September 30, 1999 and the year ended September 30, 2000, the
Company had expensed and paid $10,000 and $5,000, respectively, related to the
Milestone Incentive Compensation Plan for milestones which had been achieved as
of those dates. No additional milestone payments remain as of September 30,
2000.
On March 12, 1999, Siemens acquired Argon. Under the terms of the
Agreement, Siemens purchased all outstanding securities of Argon for $200,000 in
cash. The transaction was accounted for as a purchase. In conjunction with the
acquisition, Siemens entered into a Milestone Incentive Compensation Plan
whereby if certain performance criteria and development milestones were
achieved, Siemens would compensate the employees of Argon with cash incentives.
In June 1999, Siemens contributed the stock of Argon to the Company, which has
accounted for the acquisition and Argon's results of operations from the date of
acquisition, as if the Company had effectively acquired Argon. No development
milestones had been achieved during the period ended September 30, 1999,
therefore no costs were accrued. At the time of acquisition, Siemens also
initiated a retention bonus plan, for which the Company expensed $2,140 and
$11,133 of cost related to time-based payments in the period ended September 30,
1999 and the year ended September 30, 2000, respectively. No additional
retention bonus plan payments remain as of September 30, 2000.
The amounts allocated to purchased in-process research and development were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition, because
technological feasibility had not been established and no future alternative
uses existed.
Summary of purchase transactions:
<TABLE>
<CAPTION>
ALLOCATED TO
PURCHASED ALLOCATED NET
IN-PROCESS TO ALLOCATED TANGIBLE TOTAL
RESEARCH AND ASSEMBLED TO ASSETS PURCHASE
ENTITY ACQUIRED DEVELOPMENT WORKFORCE GOODWILL ACQUIRED PRICE
--------------- ------------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Redstone Communications $101,700 $1,130 $342,127 $ 5,043 $450,000
Castle Networks 79,300 870 214,363 5,467 300,000
Argon Networks 36,400 990 148,119 14,491 200,000
-------- ------ -------- ------- --------
$217,400 $2,990 $704,609 $25,001 $950,000
======== ====== ======== ======= ========
</TABLE>
F-13
<PAGE> 148
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All payments related to the milestone incentive compensation plans and
retention plan are being recorded as expense in the consolidated financial
statements of Unisphere in the periods following the acquisitions. The expense
is recorded as the milestones are achieved for the milestone plans and ratably
over the retention period for the retention plan. For the period from January
12, 1999 (date of inception) to September 30, 1999 and for the year ended
September 30, 2000, aggregate expense of $47,140 and $31,133, respectively, was
recorded as follows in the accompanying consolidated statement of operations:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- -------------
<S> <C> <C>
Cost of revenues....................................... $ 923 $ 1,051
Research and development............................... 34,895 25,773
Sales and marketing.................................... 3,919 1,278
General and administrative............................. 7,403 3,031
------- -------
$47,140 $31,133
======= =======
</TABLE>
F-14
<PAGE> 149
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) FINANCIAL STATEMENT DETAILS
The following table summarizes balance sheet items by major component:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Inventories, net:
Component parts......................................... $ -- $ 4,390
Finished goods.......................................... 532 9,969
-------- ---------
$ 532 $ 14,359
======== =========
Prepaid expenses and other current assets:
Deposits................................................ 447 1,190
Non-trade receivables................................... -- 606
Service contracts....................................... 211 570
Offering costs.......................................... -- 1,209
Interest receivable from officers....................... -- 322
Other................................................... 447 975
-------- ---------
$ 1,105 $ 4,872
======== =========
Property and equipment:
Computer and telecommunications equipment............... $ 15,152 $ 40,444
Evaluation and service components....................... 1,178 5,612
Furniture and office equipment.......................... 986 1,560
Leasehold improvements.................................. 248 1,841
-------- ---------
17,564 49,457
Less: accumulated depreciation and amortization......... (3,359) (15,158)
-------- ---------
Property and equipment, net........................ $ 14,205 $ 34,299
======== =========
Intangible assets:
Goodwill................................................ $704,609 $ 556,490
Workforce............................................... 2,990 2,555
-------- ---------
707,599 559,045
Less: accumulated amortization.......................... (61,629) (158,918)
-------- ---------
Intangible assets, net............................. $645,970 $ 400,127
======== =========
Accrued expenses:
Accrued employee-related expenses....................... $ 4,732 $ 9,226
Accrued professional fees............................... 850 2,413
Accrued warranty........................................ 19 3,446
Accrued marketing....................................... 930 542
Other liabilities....................................... 5,355 3,707
-------- ---------
$ 11,886 $ 19,334
======== =========
</TABLE>
F-15
<PAGE> 150
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
The Company's primary office facilities are leased under noncancelable
leases that expire at various times through 2004. Rent expense under operating
leases was $1,252 and $4,347 for the period from inception through September 30,
1999 and for the year ended September 30, 2000, respectively. At September 30,
2000, future minimum lease payments under all non-cancelable operating leases
were as follows:
<TABLE>
<S> <C>
2001....................................................... $ 5,135
2002....................................................... 6,037
2003....................................................... 5,930
2004....................................................... 5,482
2005....................................................... 4,161
Thereafter................................................. 23,251
-------
Total future minimum lease payments........................ $49,996
=======
</TABLE>
In March 2000, the Company entered into a 10-year lease for a 225,000
square foot building in Westford, Massachusetts. The landlord is in the process
of constructing the building and the Company anticipates occupancy in January
2001. The Company has placed $9,250 in escrow to cover the cost of tenant
improvements. At the time of occupancy, the escrow account will be released to
the lessor and the Company will commence paying annual lease payments ranging
from $2,386 to $2,829, which are included in the table above. The escrow payment
is included in long-term deposits in the accompanying consolidated balance
sheets.
(6) RELATED PARTY TRANSACTIONS
The Company has been funded since inception by Siemens. The funding is
provided based on the Company's operating needs and is accounted for as a
capital contribution. Total capital contributions from Siemens includes the
contribution of the stock of Argon, Castle and Redstone, valued at $950,000, and
capital contributions to fund operations of $49,951 and $212,503 for the period
ended September 30, 1999 and for the year ended September 30, 2000,
respectively.
The Company has transactions in the normal course of business with Siemens
group companies. Balances resulting from these transactions are reflected on the
balance sheet as accounts receivable from related parties and accounts payable
to related parties. Transactions included in the statement of operations for the
period ended September 30, 1999 and for the year ended September 30, 2000 are as
follows:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- -------------
<S> <C> <C>
Sales to related parties............................... $1,786 $20,343
Engineering expenses................................... 1,350 9,216
Rent expenses.......................................... 269 861
Other expenses......................................... 806 762
</TABLE>
F-16
<PAGE> 151
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has authorized 105,824 shares of common stock, $.01 par value,
of which 86,133 and 90,285 were outstanding at September 30, 1999 and 2000,
respectively. The holders of the common stock are entitled to one vote for each
share held.
On April 21, 2000, the Board of Directors approved a 1-for-3 reverse stock
split. The accompanying financial statements reflect the effects of this reverse
split for all periods presented. In addition, the Board of Directors increased
the authorized number of shares of common stock to 104,404 and increased the
common stock reserved for issuance pursuant to the 1999 Stock Incentive Plan to
18,271 shares. In July 2000, the Board of Directors further increased the
authorized number of shares of common stock to 105,824 and increased the common
stock reserved for issuance pursuant to the 1999 Stock Incentive Plan to 19,690
shares.
(b) Notes Receivable From Officers
In connection with the sale of restricted stock and in accordance with the
original terms of the award, the Company accepted promissory notes from its
Chief Executive Officer and Chief Operating Officer in the amounts of $26,225
and $2,098, respectively. The notes are secured by the purchased shares and have
recourse to the general assets of the officers of 25% of the principal balance
and 100% of the accrued interest on the notes. Interest paid is not refundable
to the officers. The notes mature in January 2003 and bear interest at the
six-month LIBOR index rate plus fifty basis points per annum (7.4% at September
30, 2000).
(8) INCOME TAXES
The Company prepared its tax provision as if it filed tax returns on a
stand-alone basis. No current provision for federal or state income taxes has
been recorded as the Company has incurred net operating losses since inception.
The following table reconciles the federal statutory income tax rate to the
Company's effective income tax rate:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH
SEPTEMBER 30, YEAR ENDED
1999 SEPTEMBER 30, 2000
------------------- -------------------
<S> <C> <C>
Income taxes at federal statutory rate............... 34.0% 34.0%
Write-off of acquired in-process research and
development........................................ (19.2) --
Non-deductible goodwill amortization................. (5.4) (10.0)
Write-off of impaired intangible asset............... -- (9.3)
Tax benefit utilized by parent company............... (9.0) (13.3)
Change in valuation allowance and other.............. (0.4) (1.4)
----- ------
--% --%
===== ======
</TABLE>
F-17
<PAGE> 152
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1999 and 2000, the Company had net operating loss and tax
credit carryforwards resulting from current operations and from its acquisitions
of Redstone, Castle and Argon. The Company has recorded a full valuation
allowance against these net operating loss and tax credit carryforwards, as well
as the net deferred tax assets since management believes that, after considering
all the available objective evidence, both positive and negative, it is more
likely than not that these assets will not be realized. No deferred income tax
provision has been recorded because of the valuation allowance. Temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities that give rise to significant portions of federal
deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards............... $ 18,192 $ 20,531
Employee-related costs.................................... 5,070 9,868
Accrued compensation...................................... 1,532 377
Amortizable start-up costs................................ 546 480
Inventory reserves........................................ 256 5,585
Bad debt reserves......................................... -- 961
Warranty reserves......................................... -- 1,267
Accrued pension........................................... -- 457
Other..................................................... 8 854
-------- --------
Total gross deferred tax asset.................... 25,604 40,380
Less valuation allowance.......................... (24,542) (39,780)
-------- --------
Net deferred tax asset............................ 1,062 600
-------- --------
Deferred tax liabilities:
Basis differences in acquired intangible assets........... 1,027 527
Depreciation.............................................. 35 73
-------- --------
Total gross deferred tax liability................ 1,062 600
-------- --------
Net deferred tax asset............................ $ -- $ --
======== ========
</TABLE>
Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of June 30, 2000 will be allocated as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
-------------
<S> <C>
Income tax benefit that would be reported in the statement
of operations............................................. $29,200
Income tax benefit that would be reported as a decrease to
goodwill.................................................. 10,438
Income tax benefit that would increase additional paid-in
capital................................................... 142
-------
$39,780
=======
</TABLE>
The Company has federal and state net operating loss carryforwards of
approximately $6,013 and $258,641, respectively, as of September 30, 2000. The
federal net operating loss carryforward will expire in 2018 and the state net
operating loss carryforwards will expire from 2002 through 2005. In addition,
the Company has federal and state tax credit carryforwards of approximately
$1,070 and $1,818, respectively, as of September 30, 2000, which will expire
from 2011 through 2018. The utilization of the net operating
F-18
<PAGE> 153
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses may be limited pursuant to Internal Revenue Code Section 382 as a result
of prior and future ownership changes. In addition, to the extent these net
operating losses can be utilized by Siemens Corporation, the Company is not
entitled to any reimbursement under the existing tax sharing arrangement and the
Company will not receive any current or future income tax benefit related to
these net operating losses.
(9) STOCK-BASED COMPENSATION
In July 1999, the Company adopted the 1999 Stock Incentive Plan (the
"Plan"). The Plan provides for the granting of stock options to acquire common
stock to employees, advisors and consultants of the Company. Options granted
under the Plan may be either incentive stock options or non-statutory (i.e.,
nonqualified) stock options. Incentive stock options ("ISO") may be granted only
to Company employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") may be granted to Company employees,
non-employee directors, advisors and consultants. The Company has reserved
19,690 shares of common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices to be determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO shall not be less than 100% of the estimated fair
value of the shares on the date of grant, respectively, and (ii) the exercise
price of an ISO granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant. Options granted
generally vest over four years.
A restricted stock award provides for the issuance of common stock to
directors, officers, consultants and other key personnel at prices determined by
the Board of Directors or a Committee selected by the Board of Directors.
Participants' unvested shares are subject to repurchase by the Company at the
original sale price. Generally, vesting occurs over a three to four year period.
As of September 30, 2000, the Company had the right to repurchase up to 2,741
unvested shares at the original sale price of $10.50 per share.
The following table presents activity under the Plan for the period from
January 12, 1999 (date of inception) to September 30, 1999 and for the year
ended September 30, 2000:
<TABLE>
<CAPTION>
SHARES STOCK RESTRICTED
AVAILABLE OPTIONS STOCK WEIGHTED AVERAGE
FOR GRANT OUTSTANDING OUTSTANDING EXERCISE PRICE
--------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Shares authorized................. 4,533 -- $ --
Options granted................... (3,104) 3,104 -- 7.35
Options terminated................ 208 (208) -- 7.35
------- ------ ------
Balance at September 30, 1999..... 1,637 2,896 -- 7.35
Shares authorized................. 15,157 -- -- --
Options and restricted stock
granted......................... (16,592) 13,371 3,221 10.02
Options exercised................. -- (930) -- 8.58
Restricted stock purchased........ -- -- (3,221) 10.50
Options terminated................ 1,198 (1,198) -- 7.79
------- ------ ------
Balance at September 30, 2000..... 1,400 14,139 -- 9.64
======= ====== ======
</TABLE>
F-19
<PAGE> 154
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock options outstanding and exercisable at
September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING REMAINING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------ ----------- ---------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$7.35-$10.50 13,737 9.12 $9.42 1,097 $9.02
$17.10 402 9.91 17.10 -- --
------ ----- -----
14,139 9.14 9.64 1,097 9.02
====== =====
</TABLE>
The weighted average grant date fair value of options granted in the period
ended September 30, 1999 and the year ended September 30, 2000 was $0.00 and
$4.85, respectively. The weighted average modification date fair value of stock
options modified in April 2000, as discussed below, was $3.62. Had compensation
cost for the Company's stock-based compensation plan been determined based on
the fair value at the grant dates for the awards under a method prescribed by
SFAS No. 123, the Company's net loss would have been $385,053 and $432,975 and
basic and diluted net loss per share would have been $4.47 and $5.01, for the
period ended September 30, 1999 and for the year ended September 30, 2000,
respectively.
The Company calculated the fair value of each option on the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
-------------------- -------------
<S> <C> <C>
Expected life (years)................... 5 5
Risk free interest rate................. 6.03% 6.25%
Volatility.............................. -- 65%
Dividend yield.......................... -- --
</TABLE>
During the year ended September 30, 2000, the Company issued 176
non-qualified stock options to non-employees for services rendered and has
valued these stock options using a Black-Scholes option pricing model. The
Company used a volatility factor of 65%, a risk free interest rate of 6.03%, a
dividend rate of zero and the contractual lives of the grants, which ranged from
one to ten years. At September 30, 2000, the Company had 176 non-qualified stock
options outstanding to non-employees. The Company has fully amortized the
deferred compensation of $630 into expense during the year ended September 30,
2000 for the grant of options to non-employees.
During the year ended September 30, 2000, the Company sold 3,221 shares of
restricted common stock and granted 4,530 stock options to purchase common stock
at amounts lower than the estimated fair market value. Accordingly, the Company
has recorded deferred compensation related to the restricted common stock and
common stock options that were sold or issued at amounts less than estimated
fair market value. During fiscal 2000, the Company recorded $48,045 in deferred
compensation related to restricted common stock and stock options issued to
employees of the Company. In addition, the Company recorded compensation expense
of $9,985 in fiscal 2000 related to the amortization of deferred compensation
over the vesting period. Future amortization of the deferred compensation will
be $13,215 in 2001, $13,215 in 2002, $8,639 in 2003, $2,558 in 2004 and $433 in
2005.
In April 2000, the Company changed the exercise price of 2,344 employee
stock options to purchase common stock. At September 30, 2000, stock options for
the purchase of 370 shares of common stock had been exercised and 146 stock
options had been cancelled. The remaining 1,828 stock options will become
F-20
<PAGE> 155
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercisable over a four-year period. During the year ended September 30, 2000,
the Company recorded $22,654 in deferred compensation and $11,849 of non-cash
compensation expense related to these stock options. Deferred compensation
amounts are being amortized over the vesting periods of the applicable stock
options. We cannot estimate the effect of stock-based compensation related to
employee stock options for which we changed the exercise price since
determination of variable stock-based compensation expense is based on the fair
market value of our common stock in future periods.
(10) EMPLOYEE BENEFIT PLAN
The Company sponsors several defined contribution plans covering
substantially all of its employees which are designed to be qualified under
Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to
contribute to the 401(k) plans through payroll deductions within statutory and
plan limits. The Company recorded expense of $13 and $0 related to the plans in
the period from January 12, 1999 (date of inception) to September 30, 1999 and
for the year ended September 30, 2000, respectively.
(11) GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment encompassing the design,
development, manufacture, marketing, and technical support of networking
products and services.
In the period ended September 30, 1999 and for the year ended September 30,
2000, Siemens accounted for approximately 63.5% and 41.0%, respectively, of net
revenues. In addition, the Company had a customer who accounted for 28.3% of net
revenue for the year ended September 30, 2000.
Geographic revenues, which are attributed to countries based on the
location of the customer, are as follows:
<TABLE>
<CAPTION>
JANUARY 12, 1999
(DATE OF INCEPTION)
THROUGH YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------- ------------------
<S> <C> <C>
United States........................... $2,020 $29,173
International
Asia Pacific.......................... 229 9,886
South and Latin America............... -- 711
Europe................................ 564 9,858
------ -------
Total international
revenues.................... 793 20,455
------ -------
Total net revenues............ $2,813 $49,628
====== =======
</TABLE>
There were no significant long-lived assets located in foreign countries at
September 30, 1999 and 2000.
(12) SUBSEQUENT EVENT (UNAUDITED)
On October 20, 2000, the Company entered into a definitive agreement to
acquire BroadSoft, Inc. in a stock-for-stock merger. BroadSoft is a development
stage company that provides software architecture that supports business
telephony applications for use on the internet, such as call waiting, voice mail
and conferencing. Under the terms of the agreement, each share of BroadSoft
common stock will be converted into shares of the Company's common stock and all
outstanding options to acquire BroadSoft common stock will be exchanged for
options to purchase shares of the Company's common stock. The total number of
shares of the Company's common stock that will be issued in the BroadSoft
acquisition, together with the number of shares of the Company's common stock
issuable upon exercise of the assumed BroadSoft options, will be between
5,710,000 and 7,460,000. The actual number will depend upon the trading price
F-21
<PAGE> 156
UNISPHERE NETWORKS, INC.
(AN INDIRECT MAJORITY-OWNED SUBSIDIARY OF SIEMENS AG)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the Company's common stock in the public market during a specified period
following the completion of the Company's initial public offering of its common
stock.
The closing of the BroadSoft acquisition is subject to the condition that
the Company has completed an initial public offering of its common stock and
that the registration statement that the Company will file with the Securities
and Exchange Commission registering the shares of common stock issuable to
BroadSoft stockholders has been declared effective, and to a variety of other
customary conditions.
F-22
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Redstone Communications, Inc.:
We have audited the accompanying balance sheet of Redstone Communications,
Inc. (a development stage enterprise) as of April 27, 1999 and the related
statements of operations, stockholders' deficit and cash flows for the period
from January 1, 1999 to April 27, 1999 and for the cumulative period from
inception (September 16, 1997) to April 27, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Redstone Communications,
Inc. as of April 27, 1999, and the results of its operations and its cash flows
for the period from January 1, 1999 to April 27, 1999 and for the cumulative
period from inception (September 16, 1997) to April 27, 1999, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
June 28, 2000
Boston, Massachusetts
F-23
<PAGE> 158
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 27, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO APRIL 27, 1999
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO CUMULATIVE
APRIL 27, 1999 FROM INCEPTION
------------------ --------------
<S> <C> <C>
Operating expenses:
Research and development.................................. $ 21,002,559 $ 30,272,565
Sales and marketing....................................... 6,446,254 7,218,075
General and administrative................................ 1,169,394 2,066,991
------------ ------------
Total operating expenses.......................... 28,618,207 39,557,631
------------ ------------
Loss from operations........................................ (28,618,207) (39,557,631)
------------ ------------
Other income (expense), net:
Interest income........................................... 124,709 614,819
Interest expense.......................................... (15,455) (38,629)
Other income (expense).................................... (2,446) (24,284)
------------ ------------
Other income (expense), net....................... 106,808 551,906
------------ ------------
Net loss.......................................... $(28,511,399) $(39,005,725)
============ ============
Net loss per share -- basic and diluted..................... $ (19.84)
============
Weighted average shares outstanding -- basic and diluted.... 1,436,754
============
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 159
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
APRIL 27, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,969,424
Inventory................................................. 419,857
Prepaid expenses and other current assets................. 305,879
------------
Total current assets.............................. 4,695,160
Property and equipment, net................................. 1,753,710
------------
Total assets...................................... $ 6,448,870
============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 983,578
Accrued expenses.......................................... 966,417
------------
Total current liabilities......................... 1,949,995
------------
Commitments and contingencies
Redeemable preferred stock, $.01 par value; 10,000,000
shares authorized:
Series A redeemable convertible preferred stock, $.01 par
value; 5,670,000 shares designated, issued and
outstanding; liquidation value of $7,200,900........... 7,200,900
Series B redeemable convertible preferred stock, $.01 par
value; 2,486,702 shares designated, issued and
outstanding; liquidation value of $12,433,510.......... 12,433,510
Stockholders' deficit:
Common stock, $.001 par value; 20,000,000 shares
authorized, 5,005,250 shares issued and outstanding.... 5,005
Additional paid-in capital................................ 23,869,854
Deficit accumulated during the development stage.......... (39,005,725)
Common stock in treasury, at cost, 54,375 shares.......... (4,669)
------------
Total stockholders' deficit....................... (15,135,535)
------------
Total liabilities, redeemable preferred stock and
stockholders' deficit............................. $ 6,448,870
============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 160
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIODS FROM INCEPTION (SEPTEMBER 16, 1997) TO APRIL 27, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TREASURY STOCK TOTAL
------------------- PAID-IN DEVELOPMENT DEFERRED ----------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE COMPENSATION SHARES COST DEFICIT
--------- ------- ----------- ------------ ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.................. 3,437,500 $3,438 $ 12,932 $ -- $ -- -- $ -- $ 16,370
Net loss................. -- -- -- (592,207) -- -- -- (592,207)
--------- ------ ----------- ------------ ------------ ------- ------- ------------
Balance at December 31,
1997................... 3,437,500 $3,438 $ 12,932 $ (592,207) $ -- -- $ -- $ (575,837)
Issuance of common
stock.................. 1,501,500 1,502 291,259 -- -- -- -- 292,761
Repurchase of common
stock.................. -- -- -- -- -- (45,000) $ (450) (450)
Options exercised........ 5,000 4 45 -- -- -- -- 49
Deferred compensation on
employee grants........ -- -- 7,349,675 -- (7,349,675) -- -- --
Amortization of deferred
compensation on
employee grants........ -- -- -- -- 541,774 -- -- 541,774
Deferred compensation on
non-employee grants.... -- -- 2,456,793 -- (2,456,793) -- -- --
Amortization of deferred
compensation on non-
employee grants........ -- -- -- -- 808,306 -- -- 808,306
Net loss................. -- -- -- (9,902,119) -- -- -- (9,902,119)
--------- ------ ----------- ------------ ------------ ------- ------- ------------
Balance at December 31,
1998................... 4,944,000 $4,944 $10,110,704 $(10,494,326) $ (8,456,388) (45,000) $ (450) $ (8,835,516)
Options exercised........ 14,750 15 1,380 -- -- -- -- 1,395
Issuance of common
stock.................. 46,500 46 23,205 -- -- -- -- 23,251
Repurchase of common
stock.................. -- -- -- -- -- (9,375) (4,219) (4,219)
Deferred compensation on
employee grants........ -- -- 10,836,241 -- (10,836,241) -- -- --
Amortization of deferred
compensation on
employee grants........ -- -- -- -- 17,644,142 -- -- 17,644,142
Deferred compensation on
non-employee grants.... -- -- 2,898,324 -- (2,898,324) -- -- --
Amortization of deferred
compensation on non-
employee grants........ -- -- -- -- 4,546,811 -- -- 4,546,811
Net loss................. -- -- -- (28,511,399) -- -- -- (28,511,399)
--------- ------ ----------- ------------ ------------ ------- ------- ------------
Balance at April 27,
1999................... 5,005,250 $5,005 $23,869,854 $(39,005,725) $ -- (54,375) $(4,669) $(15,135,535)
========= ====== =========== ============ ============ ======= ======= ============
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 161
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 27, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO APRIL 27, 1999
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO CUMULATIVE
APRIL 27, 1999 FROM INCEPTION
------------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(28,511,399) $(39,005,725)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 211,750 581,632
Amortization of deferred compensation on employee
grants............................................... 17,644,142 18,185,916
Amortization of deferred compensation on non-employee
grants............................................... 4,546,811 5,355,117
Changes in operating assets and liabilities:
Inventory............................................ (419,857) (419,857)
Prepaid expenses and other current assets............ (213,546) (305,879)
Accounts payable..................................... 94,116 983,578
Accrued expenses..................................... 699,189 966,417
------------ ------------
Net cash used in operations....................... (5,948,794) (13,658,801)
------------ ------------
Cash flows from investing activity:
Purchases of property and equipment....................... (523,790) (2,335,342)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 24,646 333,826
Proceeds from issuance of preferred stock, Series A....... -- 7,200,900
Proceeds from issuance of preferred stock, Series B....... -- 12,433,510
Repurchase of common stock................................ (4,219) (4,669)
Proceeds from issuance of long-term debt.................. -- 550,000
Repayment of long-term debt............................... (550,000) (550,000)
------------ ------------
Net cash provided by (used in) financing
activities...................................... (529,573) 19,963,567
------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... (7,002,157) 3,969,424
Cash and cash equivalents at beginning of period............ 10,971,581 --
------------ ------------
Cash and cash equivalents at end of period.................. $ 3,969,424 $ 3,969,424
============ ============
Supplemental cash flow information:
Interest paid............................................. $ 14,233 $ 23,742
============ ============
Income taxes paid......................................... $ -- $ 1,190
============ ============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 162
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 27, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO APRIL 27, 1999
(1) NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Redstone Communications, Inc. (the "Company") was incorporated in Delaware
on September 16, 1997. The Company was founded to develop a high density routing
solution that concentrates hundreds of permanent access lines into the public IP
network. The Company's products will allow service providers to increase
revenues by offering tiered bandwidth and pricing options.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, and is devoting substantially all of its
efforts to conducting research and development and raising capital to fund
operations. The ultimate success of the Company is dependent upon the
development and marketing of its products and its ability to secure adequate
financing until the Company is operating profitably.
The Company is subject to a number of risks similar to other companies in
the industry, including rapid technological change, uncertainty of market
acceptance of products, competition from substitute products and larger
companies, protection of proprietary technology and dependence on key
individuals.
On March 14, 1999, the Company entered into an agreement and plan of merger
(the "Merger") by and among Siemens Corporation ("Siemens"), Wolf Acquisition
Corp. ("WAC"), a wholly owned subsidiary of Siemens, and Redstone Communications
Inc., whereby WAC acquired all of the outstanding capital stock of the Company
for $450 million in cash (the "Consideration") and WAC merged with and into the
Company, with the Company becoming a wholly owned subsidiary of Siemens. In
addition, the employees of the Company are entitled to receive an additional $50
million based on certain project milestones and employee retention criteria as
defined.
Upon consummation of the Merger on April 27, 1999, all shares of treasury
stock owned by the Company were canceled and retired and the vesting for all
unvested restricted common shares and outstanding common stock options was
accelerated by 50%. In addition, Siemens settled all remaining unvested stock
options. The consideration received by the common stockholders, preferred
stockholders and common stock option holders was equal to $32.59 per share.
The financial statements and notes to financial statements herein have been
prepared to reflect the financial position of the Company immediately prior to
the effective time of the Merger and do not include any adjustments for the
application of push-down accounting, except that the Company has expensed all of
the remaining unamortized deferred compensation related to the restricted common
shares and outstanding common stock options. See Note 9.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Financial and Credit Risk
Financial investments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company maintains a bank account with a major financial institution.
(b) Cash and Cash Equivalents
Cash equivalents consist of commercial paper, mutual funds, discount notes
and repurchase agreements with remaining maturities at acquisition of three
months or less and are carried at cost plus accrued interest which approximates
fair value.
F-28
<PAGE> 163
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
typically three years. Upon sale or retirement, the asset cost and the related
accumulated depreciation would be removed from the accounts and any resulting
gain or loss would be reflected in operations. Expenditures for maintenance and
repair are charged to expense when incurred.
(d) Research and Development Costs
Research and development costs are charged to expense as incurred.
(e) Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax basis of assets and liabilities
using current statutory tax rates. A valuation reserve against deferred tax
assets is recorded if, based upon the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions regarding
items that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
(g) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.
(h) Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, Earnings per Share, and is calculated by dividing the net loss for
the period by the weighted average number of unrestricted common shares
outstanding during the period. Since the Company incurred a net loss for the
periods presented, common stock options of 701,313 and restricted common shares
of 3,381,836 outstanding at April 27, 1999 were excluded from the diluted net
loss per share calculation, as their effect would be antidilutive. As a result,
diluted net loss per share is the same as basic net loss per share, and has not
been presented separately.
F-29
<PAGE> 164
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(i) Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Estimated
fair value is generally based on either appraised value or measured by
discounted estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows.
(j) Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
(k) Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for the period from inception to April 27,
1999. This statement requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. To date, comprehensive loss and net loss are the same.
(l) Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company is a development stage enterprise and has not generated
any revenue. The Company has determined that it conducts its operations in one
business segment.
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 27, 1999:
<TABLE>
<S> <C>
Computer equipment.......................................... $2,174,685
Furniture and fixtures...................................... 129,782
----------
2,304,467
Less: accumulated depreciation.............................. 550,757
----------
Property and equipment, net................................. $1,753,710
==========
</TABLE>
F-30
<PAGE> 165
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following at April 27, 1999:
<TABLE>
<S> <C>
Accrued legal expenses...................................... $360,000
Payroll and related benefits and taxes...................... 297,563
Other accruals.............................................. 308,854
--------
Total accrued expenses............................ $966,417
========
</TABLE>
(5) LINE OF CREDIT
On January 6, 1998, the Company entered into a $1,000,000 commercial
equipment line of credit agreement with interest at one quarter of one (.25%)
percentage point in excess of the bank's prime rate. On October 15, 1998, the
Company entered into an interest rate swap with a notional amount of $600,000
(the outstanding balance on the line of credit on that date), which effectively
established an interest rate collar between 7.5% and 8.75% on the interest the
Company pays on the outstanding line of credit. During the period ended April
27, 1999, the Company repaid the line of credit and settled the interest rate
swap agreement.
(6) INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. The actual tax
benefit for the period from January 1, 1999 to April 27, 1999 differed from the
expected tax benefit (computed by applying the U.S. federal income tax rate of
34% to loss before income taxes) as a result of the following:
<TABLE>
<S> <C>
Computed expected tax benefit............................... $(9,693,876)
Increase in deferred tax asset valuation allowance.......... 2,500,000
Nondeductible expenses, primarily deferred compensation..... 7,547,791
Increase in federal tax credits............................. (356,718)
Other....................................................... 2,803
-----------
$ --
===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes were as follows:
<TABLE>
<S> <C>
Gross deferred tax assets:
Net operating losses and tax credit carryforwards......... $ 6,420,000
Start-up costs............................................ 382,000
Reserves.................................................. 16,000
-----------
Total............................................. 6,818,000
Valuation allowance......................................... (6,778,000)
-----------
Net deferred tax asset............................ 40,000
Deferred tax liability:
Excess of tax over financial statement depreciation....... $ 40,000
-----------
$ --
===========
</TABLE>
F-31
<PAGE> 166
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, and has determined that
based on the weight of the available evidence, it is more likely than not that
all of the deferred tax assets will not be realized, accordingly, the net
deferred tax asset has been fully reserved. If the Company achieves
profitability, the net deferred tax asset would be available to offset future
income tax expense.
At April 27, 1999, the Company had federal and state net operating loss
carryforwards of approximately $14.6 million and $14.4 million, respectively,
which expire in 2017 through 2019 and 2002 through 2004. The use of net
operating loss carryforwards may be limited due to changes in ownership of the
Company's stock.
(7) REDEEMABLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock of which
1,843,298 remain undesignated and 5,670,000 shares are designated and issued as
Series A Redeemable Convertible Preferred Stock ("Series A"), and 2,486,702
shares are designated and issued as Series B Redeemable Convertible Preferred
Stock ("Series B"). During 1997, the Company issued 5,500,000 shares of Series A
and recorded net proceeds of $6,985,000. During 1998, the Company issued 170,000
shares of Series A and 2,486,702 shares of Series B and recorded net proceeds of
$215,900 and $12,433,510, respectively. The terms of Series A and Series B are
as follows:
Conversion
Each share of Series A and Series B is convertible into one share of common
stock at the option of the stockholder, subject to antidilution and other
adjustments, by dividing $1.27 for Series A and $5.00 for Series B by the
conversion price (in effect at the time). The conversion price shall initially
be $1.27 for Series A and $5.00 for Series B. If the Company issues additional
shares without consideration or for consideration per share less than the
applicable conversion price in effect on the date of such issue, such conversion
price shall be reduced, concurrently with such issue, to a price calculated
pursuant to the guidelines outlined in the preferred stock agreement.
Upon the closing of an initial public offering of the Company's common
stock, which results in proceeds of at least $10,000,000 and a per share price
of at least $10.00, all outstanding shares of Series A and Series B shall be
automatically converted into shares of common stock at the then effective
conversion rate.
Dividend, Voting and Other Rights
Stockholders of Series A and Series B are entitled to the amount of
noncumulative dividends per share as would be payable as if the Series A and
Series B had been converted into common shares. The holders of Series A and
Series B are entitled to vote on all matters and are entitled to the number of
votes equal to the number of common shares into which the Series A and Series B
are convertible as of the date of record.
Liquidation Preferences
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A and Series B are entitled to a liquidation preference of
$1.27 and $5.00 per share, respectively, subject to adjustment under certain
events as defined in the preferred stock agreement, prior to any distribution to
holders of common stock. If upon such liquidation the remaining assets shall be
insufficient to pay the holders of Series A and Series B, the holders of Series
A, Series B and any other class or series of stock
F-32
<PAGE> 167
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ranking on liquidation on a parity with Series A and Series B shall share
ratably in any distribution of the remaining assets of the Company.
Redemption
The Company is required to redeem Series A and Series B at a price of $1.27
and $5.00 per share, respectively, plus all accrued but unpaid dividends. The
Company will be required to redeem the following respective portions of the
number of shares of Series A and Series B held by such holder on the following
dates:
<TABLE>
<CAPTION>
PORTION OF THEN OUTSTANDING
SHARES OF SERIES A AND SERIES B
MANDATORY REDEMPTION DATE PREFERRED STOCK TO BE REDEEMED
------------------------- -------------------------------
<S> <C>
August 26, 2003 33 1/3%
August 26, 2004 50%
August 26, 2005 All shares then held
</TABLE>
(8) COMMON STOCK
The Company has authorized 20,000,000 shares of common stock, $.001 par
value. Common stock has full voting rights. Dividend and liquidation rights of
common stock are subordinated to those of all series of preferred stock.
Additionally, 8,156,702 shares of common stock are reserved for the conversion
of preferred stock.
(9) STOCK INCENTIVE PLAN
In 1997, the Company adopted the 1997 Stock Incentive Plan (the "Plan") for
directors, officers, employees and consultants of the Company. In accordance
with the Plan, the Company has reserved 4,500,000 shares of common stock for
issuance of stock options, restricted stock, and other awards as determined by
the Board of Directors (the "Board"). As of April 27, 1999, 836,502 shares of
common stock were available for future awards.
Stock Options
The Plan provides for the granting of incentive stock options and
nonstatutory stock options. All options granted under the Plan are subject to
terms and conditions, as determined by the Board, including exercise price,
vesting and expiration period. The Board shall establish the exercise price and
vesting period at the time each option is granted and specify it in the
applicable option agreement. Options typically are granted at fair value and
vest over 4 to 5 years with partial acceleration upon certain acquisition
events, as defined. The options expire ten years from the date of grant.
The following is a summary of the Company's stock option plan as of April
27, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES WEIGHTED AVERAGE
--------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1998.................. 286,500 $ 0.30
Granted................................................... 440,813 1.33
Exercised................................................. (14,750) (0.09)
Cancelled................................................. (11,250) (0.02)
-------
Options outstanding at April 27, 1999..................... 701,313 0.96
=======
</TABLE>
F-33
<PAGE> 168
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes stock options outstanding and exercisable at
April 27, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING REMAINING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .01 48,000 8.88 $ .01 41,127 $ .01
.10 33,500 9.05 .10 32,876 .10
.45 182,500 9.50 .45 96,792 .45
.50 168,813 9.70 .50 86,123 .50
1.00 152,500 9.83 1.00 76,250 1.00
3.00 116,000 9.87 3.00 58,000 3.00
------- -------
701,313 9.58 .96 391,168 .87
======= =======
</TABLE>
Restricted Stock
All restricted stock awards granted under the Plan are subject to terms and
conditions, as determined by the Board including the right of the Company to
repurchase any vested shares a stockholder desires to sell at fair market value.
In the event that employment is terminated, the Company may elect to repurchase
any unvested shares for the original purchase price.
During the period from January 1, 1999 to April 27, 1999, the Company
issued 46,500 shares of restricted common stock to various employees and
consultants at a purchase price of $.50 per share. Prior to the inception of the
plan, 2,000,000 shares were issued at a purchase price of $.001 per share.
Pursuant to the plan, 1,863,500 were issued at $.01 per share, 558,500 at $.10
per share and 517,000 shares were issued at $.45 per share. These shares
generally vest between four and five years and are subject to accelerated
vesting in the event the Company is acquired. At April 27, 1999, 1,603,664
shares of restricted stock had vested.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants to employees of stock, stock options, and other
equity instruments based on fair value, or provide pro forma disclosure of net
income or loss in the notes to the financial statements. For stock-based awards
granted to employees, the Company has adopted the disclosure provisions of SFAS
123 and recognizes compensation cost using the intrinsic value based method
described in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." For stock-based awards granted to non-employees,
the Company recognizes compensation costs in accordance with the requirements of
SFAS 123. Had compensation expense for stock-based awards issued to employees
been determined based upon the fair value at the grant dates in accordance with
SFAS 123 for the period from January 1, 1999 to April 27, 1999, net loss would
have been $28,946,673 and net loss per share would have been $20.15.
The fair value of stock options granted to employees at the date of grant
was estimated using a Black Scholes option pricing model. The following table
details the weighted-average assumptions used in the calculations of fair value
for stock options for the period from January 1, 1999 to April 27, 1999:
<TABLE>
<S> <C>
Expected volatility......................................... 0%
Risk-free interest rate..................................... 6.5%
Dividend rate............................................... 0%
Expected life............................................... 8 years
</TABLE>
The weighted average grant date fair value for options granted during 1999
was $23.48.
F-34
<PAGE> 169
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred compensation recognized in connection with the issuance of stock
options and restricted stock to nonemployees was $2,898,324 for the period ended
April 27, 1999, and $4,546,811 was amortized into expense. This compensation
cost was calculated using the Black-Scholes option pricing model and the
following weighted average assumptions; expected volatility of 70%, risk-free
interest rate of 5%, zero dividend rate and a contractual life of 10 years.
In connection with the Merger discussed in Note 1, the Company's common and
preferred stockholders and common stock option holders received consideration
equal to $32.59 per share. During the period from January 1, 1999 to April 27,
1999, the Company sold 46,500 shares of restricted common stock and granted
440,813 options to purchase common stock at amounts, in some cases, lower than
the estimated fair market value. Accordingly, the Company has estimated and
recorded deferred compensation related to the restricted common stock and common
stock options that were sold or issued at amounts less than estimated fair
market value.
During fiscal 1998 and the period from January 1, 1999 to April 27, 1999,
the Company recorded $7,349,675 and $10,836,241, respectively, in deferred
compensation related to restricted common stock and stock options issued to
employees of the Company. In addition, the Company recorded compensation expense
of $541,774 for fiscal 1998 and $17,644,142 for the period from January 1, 1999
to April 27, 1999 related to the amortization of the deferred compensation
balances. The amount amortized in the period from January 1, 1999 to April 27,
1999 included the recognition of all remaining unamortized deferred compensation
at April 27, 1999 as a result of the merger discussed in Note 1.
(10) EMPLOYEE BENEFIT PLAN
The Company maintains the Redstone Communications, Inc. 401(k) Plan and
Trust (the "Plan") for all eligible employees which provides for matching
employer contributions determined annually by the Board of Directors. There have
been no matching employer contributions made to the Plan for the period ended
April 27, 1999.
(11) COMMITMENTS AND CONTINGENCIES
The Company entered into an operating lease in March 1999 for its office
facility, which expires March 2004. Under the office facility lease agreement,
the Company is also obligated to pay for utilities. The Company has also entered
into three other leases for office equipment. Total rent expense for the period
ended April 27, 1999 was $89,953.
At April 27, 1999, the Company has commitments under these long-term leases
requiring approximate annual payments as follows:
<TABLE>
<CAPTION>
CALENDAR YEAR ENDING DECEMBER 31,
---------------------------------
<S> <C>
1999..................................................... $ 465,233
2000..................................................... 662,732
2001..................................................... 678,827
2002..................................................... 698,873
2003..................................................... 717,213
2004..................................................... 180,414
----------
Total minimum rental payments.................. $3,403,292
==========
</TABLE>
The Company, from time to time, is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
F-35
<PAGE> 170
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Redstone Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Redstone Communications, Inc. (a
development stage enterprise) (the "Company") at December 31, 1997 and 1998, and
the results of its operations and its cash flows for the period from inception
(September 16, 1997) through December 31, 1997, for the year ended December 31,
1998, and cumulative from inception through December 31, 1998, in conformity
with accounting principles generally accepted in the United States of America.
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 of America 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
February 8, 1999,
except for Note 11, as to which
the date is March 14, 1999
Boston, Massachusetts
F-36
<PAGE> 171
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO DECEMBER 31, 1997, THE
YEAR ENDED DECEMBER 31, 1998, AND FOR THE CUMULATIVE PERIOD FROM INCEPTION
THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE
1997 1998 FROM INCEPTION
--------- ------------ --------------
<S> <C> <C> <C>
Operating expenses:
Research and development......................... $ 502,776 $ 8,767,230 $ 9,270,006
Sales and marketing.............................. 40,657 731,164 771,821
General and administrative....................... 132,738 764,859 897,597
--------- ------------ ------------
Total operating expenses................. 676,171 10,263,253 10,939,424
--------- ------------ ------------
Loss from operations............................... (676,171) (10,263,253) (10,939,424)
--------- ------------ ------------
Interest income, net............................... 83,964 361,134 445,098
========= ============ ============
Net loss........................................... $(592,207) $ (9,902,119) $(10,494,326)
========= ============ ============
Net loss per share -- basic and diluted............ $ (13.35)
============
Weighted average shares outstanding -- basic and
diluted.......................................... 741,832
============
</TABLE>
F-37
<PAGE> 172
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $6,318,337 $10,971,581
Prepaid expenses and other current assets................. 16,149 92,333
---------- -----------
Total current assets.............................. 6,334,486 11,063,914
Property and equipment, net................................. 223,448 1,441,670
---------- -----------
Total assets...................................... $6,557,934 $12,505,584
========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.......................................... 300 889,462
Accrued expenses.......................................... 148,471 267,228
Debt currently due........................................ -- 200,000
---------- -----------
Total current liabilities......................... 148,771 1,356,690
Long-term debt.............................................. -- 350,000
---------- -----------
Total liabilities................................. 148,771 1,706,690
---------- -----------
Commitments and contingencies (Note 9)
Redeemable preferred stock, $.01 par value; 10,000,000
shares authorized:
Series A redeemable convertible preferred stock, $.01 par
value; 5,500,000 and 5,670,000 shares designated,
issued and outstanding at December 31, 1997 and 1998,
respectively; liquidation value of $6,985,000 and
$7,200,900............................................. 6,985,000 7,200,900
Series B redeemable convertible preferred stock, $.01 par
value; 2,486,702 shares designated, issued and
outstanding at December 31, 1998; liquidation value of
$12,433,510............................................ -- 12,433,510
Stockholders' equity:
Common stock, $.001 par value; 20,000,000 shares
authorized, 3,437,500 and 4,944,000 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 3,438 4,944
Additional paid-in capital................................ 12,932 10,110,704
Deficit accumulated during the development stage.......... (592,207) (10,494,326)
Deferred compensation..................................... -- (8,456,388)
Common stock in treasury, at cost -- 45,000 shares in
1998................................................... -- (450)
---------- -----------
Total stockholders' equity........................ (575,837) (8,835,516)
---------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity............................ $6,557,934 $12,505,584
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 173
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO DECEMBER 31, 1997, FOR THE
YEAR ENDED DECEMBER 31, 1998, AND CUMULATIVE FROM INCEPTION TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TREASURY STOCK TOTAL
------------------ PAID-IN DEVELOPMENT DEFERRED --------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE COMPENSATION SHARES COST EQUITY
--------- ------ ----------- ------------ ------------ ------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock....... 3,437,500 $3,438 $ 12,932 -- -- -- -- $ 16,370
Net loss....................... $ (592,207) -- -- -- (592,207)
--------- ------ ----------- ------------ ----------- ------- ----- -----------
Balance, December 31, 1997..... 3,437,500 3,438 12,932 (592,207) -- -- -- (575,837)
--------- ------ ----------- ------------ ----------- ------- ----- -----------
Issuance of common stock....... 1,501,500 1,502 291,259 -- $ -- -- -- 292,761
Repurchase of common stock..... -- -- -- -- -- (45,000) $(450) (450)
Options exercised.............. 5,000 4 45 -- -- -- -- 49
Deferred compensation on
employee grants.............. -- -- 7,349,675 -- (7,349,675) -- -- --
Amortization of deferred
compensation on employee
grants....................... -- -- -- -- 541,774 -- -- 541,774
Deferred compensation on non-
employee grants.............. -- -- 2,456,793 -- (2,456,793) -- -- --
Amortization of deferred
compensation on non-employee
grants....................... -- -- -- -- 808,306 808,306
Net loss....................... -- -- -- (9,902,119) -- -- -- (9,902,119)
--------- ------ ----------- ------------ ----------- ------- ----- -----------
Balance, December 31, 1998..... 4,944,000 $4,944 $10,110,704 $(10,494,326) $(8,456,388) (45,000) $(450) $(8,835,516)
========= ====== =========== ============ =========== ======= ===== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 174
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 16, 1997) TO DECEMBER 31, 1997, FOR THE
YEAR ENDED DECEMBER 31, 1998, AND FOR THE CUMULATIVE PERIOD FROM INCEPTION TO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE
1997 1998 FROM INCEPTION
---------- ----------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (592,207) $(9,902,119) $(10,494,326)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation................................... 12,116 357,766 369,882
Amortization of deferred compensation on
employee grants.............................. -- 541,774 541,774
Amortization of deferred compensation on non-
employee grants.............................. -- 808,306 808,306
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.... (16,149) (76,184) (92,333)
Accounts payable............................. 300 889,162 889,462
Accrued expenses............................. 148,471 118,757 267,228
---------- ----------- ------------
Net cash used in operations............... (447,469) (7,262,538) (7,710,007)
---------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment............... (235,564) (1,575,988) (1,811,552)
---------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.......... -- 550,000 550,000
Proceeds from issuance of preferred stock, Series
A.............................................. 6,985,000 215,900 7,200,900
Proceeds from issuance of preferred stock, Series
B.............................................. -- 12,433,510 12,433,510
Proceeds from issuance of common stock............ 16,370 292,810 309,180
Repurchase of common stock........................ -- (450) (450)
---------- ----------- ------------
Net cash provided by financing
activities.............................. 7,001,370 13,491,770 20,493,140
---------- ----------- ------------
Net increase in cash and cash equivalents........... 6,318,337 4,653,244 10,971,581
Cash and cash equivalents, beginning of period...... -- 6,318,337 --
---------- ----------- ------------
Cash and cash equivalents, end of period............ $6,318,337 $10,971,581 $ 10,971,581
---------- ----------- ------------
Supplemental cash flow information:
Interest paid..................................... -- $ 9,509 $ 9,509
Income taxes paid................................. -- $ 1,190 $ 1,190
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 175
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION:
Redstone Communications, Inc. (the "Company") was incorporated in Delaware
on September 16, 1997. The Company was founded to develop a high density routing
solution that concentrates hundreds of permanent access lines into the public IP
network. The Company's products will allow service providers to increase
revenues by offering tiered bandwidth and pricing options.
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, and is devoting substantially all of its
efforts to conducting research and development and raising capital to fund
operations. The ultimate success of the Company is dependent upon the
development and marketing of its products and its ability to secure adequate
financing until the Company is operating profitably.
The Company is subject to a number of risks similar to other companies in
the industry, including rapid technological change, uncertainty of market
acceptance of products, competition from substitute products and larger
companies, protection of proprietary technology and dependence on key
individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Financial and Credit Risk
Financial investments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company maintains a bank account with a major financial institution.
Cash and Cash Equivalents
Cash equivalents consist of commercial paper, mutual funds, discount notes
and repurchase agreements with remaining maturities at acquisition of three
months or less and are carried at cost plus accrued interest which approximates
fair value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
typically three years. Upon sale or retirement, the asset cost and the related
accumulated depreciation would be removed from the accounts and any resulting
gain or loss would be reflected in operations. Expenditures for maintenance and
repair are charged to expense when incurred.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax basis of assets and liabilities
using current statutory tax rates. A valuation reserve against deferred tax
assets is recorded if, based upon the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
F-41
<PAGE> 176
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions regarding
items that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure of SFAS No. 123.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, "Earnings per Share." Since the Company incurred a net loss in
1998, common stock options of 286,500 and restricted common shares of 3,698,040
outstanding at December 31, 1998 were excluded from the diluted net loss per
share calculation, as their effect would be antidilutive. As a result, diluted
net loss per share is the same as basic net loss per share, and has not been
presented separately. No loss per share calculation is presented for 1997
because all of the 3,437,500 common shares outstanding were restricted.
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Numerator:
Net loss.................................................. $(9,902,119)
===========
Denominator:
Weighted average unrestricted common shares outstanding... 741,832
===========
Basic and diluted net loss per share........................ $ (13.35)
===========
</TABLE>
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Estimated fair value
is generally based on either appraised value or measured by discounted estimated
future cash flows. Considerable management judgment is necessary to estimate
discounted future cash flows.
F-42
<PAGE> 177
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This statement requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. To date, comprehensive loss
and net loss are the same.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company is a development stage enterprise and has not generated
any revenue. The Company has determined that it conducts its operations in one
business segment.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment.......................................... $229,314 $1,780,677
Furniture and fixtures...................................... 6,250 30,875
-------- ----------
235,564 1,811,552
Less: accumulated depreciation.............................. (12,116) (369,882)
-------- ----------
Property and equipment, net................................. $223,448 $1,441,670
======== ==========
</TABLE>
F-43
<PAGE> 178
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES:
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes were as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Gross deferred tax assets:
Net operating losses...................................... $103,079 $3,036,640
Start-up costs............................................ 134,973 --
Temporary differences..................................... -- 676,162
-------- ----------
Total............................................. 238,052 3,712,802
Valuation allowance....................................... (238,052) (3,712,802)
-------- ----------
Net deferred tax asset............................ -- --
======== ==========
</TABLE>
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, and has determined that
based on the weight of the available evidence, it is more likely than not that
all of the deferred tax assets will not be realized, accordingly, the deferred
tax assets have been fully reserved. If the Company achieves profitability, the
net deferred tax asset would be available to offset future income tax expense.
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of $7,540,842 and $7,539,530, respectively, which expire in the
year 2018 and 2013. The use of net operating loss carryforwards may be limited
due to changes in ownership of the Company's stock.
5. REDEEMABLE PREFERRED STOCK:
The Company has authorized 10,000,000 shares of preferred stock of which
1,843,298 remain undesignated and 5,670,000 shares are designated and issued as
Series A Redeemable Convertible Preferred Stock ("Series A"), and 2,486,702
shares are designated and issued as Series B Redeemable Convertible Preferred
Stock ("Series B").
The terms of Series A and Series B are as follows:
Conversion
Each share of Series A and Series B is convertible into one share of common
stock at the option of the stockholder, subject to antidilution and other
adjustments, by dividing $1.27 for Series A and $5.00 for Series B by the
conversion price (in effect at the time). The conversion price shall initially
be $1.27 for Series A and $5.00 for Series B. If the Company issues additional
shares without consideration or for a consideration per share less than the
applicable conversion price in effect on the date of such issue, such conversion
price shall be reduced, concurrently with such issue, to a price calculated
pursuant to the guidelines outlined in the preferred stock agreement.
Upon the closing of an initial public offering of the Company's common
stock, which results in proceeds of at least $10,000,000 and a per share price
of at least $10.00, all outstanding shares of Series A and Series B shall be
automatically converted into shares of common stock at the then effective
conversion rate.
F-44
<PAGE> 179
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Dividend, Voting and Other Rights
Stockholders of Series A and Series B are entitled to the amount of
noncumulative dividends per share as would be payable as if the Series A and
Series B had been converted into common shares. The holders of Series A and
Series B are entitled to vote on all matters and are entitled to the number of
votes equal to the number of common shares into which the Series A and Series B
are convertible as of the date of record.
Liquidation Preferences
In the event of liquidation, dissolution or winding up of the Company, the
holders of Series A and Series B are entitled to a liquidation preference of
$1.27 and $5.00 per share, respectively, subject to adjustment under certain
events as defined in the preferred stock agreement, prior to any distribution to
holders of common stock. If upon such liquidation the remaining assets shall be
insufficient to pay the holders of Series A and Series B, the holders of Series
A, Series B and any other class or series of stock ranking on liquidation on a
parity with Series A and Series B shall share ratably in any distribution of the
remaining assets of the Company.
Redemption
The Company is required to redeem Series A and Series B at a price of $1.27
and $5.00 per share, respectively, plus all accrued but unpaid dividends. The
Company will be required to redeem the following respective portions of the
number of shares of Series A and Series B held by such holder on the following
dates:
<TABLE>
<CAPTION>
PORTION OF THEN OUTSTANDING
SHARES OF SERIES A AND SERIES B
MANDATORY REDEMPTION DATE PREFERRED STOCK TO BE REDEEMED
------------------------- -------------------------------
<S> <C>
August 26, 2003 33 1/3%
August 26, 2004 50%
August 26, 2005 All shares then held
</TABLE>
6. COMMON STOCK:
The Company has authorized 20,000,000 shares of common stock, $.001 par
value. Common stock has full voting rights. Dividend and liquidation rights of
common stock are subordinated to those of all series of preferred stock.
Additionally, 8,156,702 shares of common stock are reserved for the conversion
of preferred stock.
7. STOCK INCENTIVE PLAN:
In 1997, the Company adopted the 1997 Stock Incentive Plan (the "Plan") for
directors, officers, employees and consultants of the Company. In accordance
with the Plan, the Company has reserved 4,500,000 shares of common stock for
issuance of stock options, restricted stock, and other awards as determined by
the Board of Directors (the "Board"). As of December 31, 1998, 1,314,500 shares
of common stock were available for future awards.
Stock Options
The Plan provides for the granting of incentive stock options and
nonstatutory stock options. All options granted under the Plan are subject to
terms and conditions, as determined by the Board, including exercise price,
vesting and expiration period. The Board shall establish the exercise price and
vesting
F-45
<PAGE> 180
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
period at the time each option is granted and specify it in the applicable
option agreement. Options typically vest over 4 to 5 years with partial
acceleration upon acquisition. The options expire ten years from the date of
grant.
The following is a summary of the Company's stock option plan as of
December 31, 1997 and 1998 and the change during the period and year ending on
those dates:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding at September 16, 1997................. -- --
Granted................................................. 43,500 $ 0.01
Exercised............................................... -- --
Canceled................................................ -- --
------- ------
Options outstanding at December 31, 1997.................. 43,500 0.01
Granted................................................. 248,000 0.35
Exercised............................................... (5,000) (0.01)
Canceled................................................ -- --
------- ------
Options outstanding at December 31, 1998.................. 286,500 $ 0.30
======= ======
</TABLE>
The following table summarizes stock options outstanding and exercisable at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF ------------------------------------------------------- -------------------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING REMAINING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISABLE PRICE
-------- ----------- ---------------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.01 69,500 1.7 $0.01 44,688 $0.01
0.10 34,500 2.2 0.10 24,500 0.10
0.45 182,500 9.5 0.45 5,542 0.45
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants to employees of stock, stock options, and other
equity instruments based on fair value, or provide pro forma disclosure of net
income or loss in the notes to the financial statements. For stock options
granted to employees, the Company has adopted the disclosure provisions of SFAS
123 and recognizes compensation cost using the intrinsic value based method
described in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." For stock options granted to nonemployees, the
Company recognizes compensation costs in accordance with the requirements of
SFAS 123. Had compensation expense for stock options issued to employees been
determined based upon the fair value at the grant dates for awards issued under
that Plan in accordance with SFAS 123 for 1997 and 1998, net loss would have
been $592,473 and $9,783,326, respectively, and net loss per share would have
been $13.19 in 1998.
The fair value of the incentive stock options granted to employees at the
date of grant was estimated using the minimum value method. The following table
details the weighted-average assumptions used in the calculations of fair value
for incentive stock options:
<TABLE>
<CAPTION>
INCENTIVE
STOCK OPTIONS
-------------
<S> <C>
Expected volatility......................................... 0%
Risk-free interest rates.................................... 6.42%
Dividend rates.............................................. 0%
Expected life............................................... 8 years
</TABLE>
F-46
<PAGE> 181
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average grant date fair value for options granted during 1998
was $8.20.
Deferred compensation cost recognized in connection with the issuance of
stock options to non-employees was $2,456,793 for 1998 of which $808,306 was
amortized into expense. This compensation cost was calculated using the
Black-Scholes option pricing model and the following assumptions; expected
volatility of 70%, risk-free interest rate of 4.66%, zero dividend rate and a
contractual life of 10 years.
Restricted Stock
All restricted stock awards granted under the Plan are subject to terms and
conditions, as determined by the Board including the right of the Company to
repurchase any vested shares a stockholder desires to sell at fair market value.
In the event that employment is terminated, the Company may elect to repurchase
any unvested shares for the original purchase price.
During fiscal years 1997 and 1998, the Company issued 3,437,500 and
1,501,500 shares of restricted common stock, respectively, to various employees
and consultants. Prior to the inception of the Plan, 2,000,000 shares were
issued at a purchase price of $.001 per share. Pursuant to the Plan, 1,863,500
shares were issued at a purchase price of $.01 per share, 558,500 shares were
issued at a purchase price of $.10 per share and 517,000 shares were issued at a
purchase price of $.45 per share. These shares generally vest between four and
five years and are subject to accelerated vesting in the event of an
acquisition. At December 31, 1998, 359,467 shares of stock had vested.
During fiscal 1998, the Company recorded $7,349,675 in deferred
compensation related to restricted common stock and stock options issued to
employees of the Company at exercise prices lower than the estimated fair market
value. In addition, the Company recorded compensation expense of $541,774 for
fiscal 1998 related to the amortization of the deferred compensation balances.
8. EMPLOYEE BENEFIT PLAN:
The Company maintains the Redstone Communications, Inc. 401(k) Plan and
Trust (the "Plan") for all eligible employees which provides for matching
employer contributions determined annually by the Board of Directors. There have
been no matching employer contributions made to the Plan as of December 31,
1998.
9. COMMITMENTS AND CONTINGENCIES:
The Company has entered into an eighteen-month operating lease for its
office facility, which expires March 31, 1999. Under the office facility lease
agreement, the Company is also obligated to pay for utilities. The Company
intends to enter into a new lease for its current office facility. The Company
has also entered into three other leases for office equipment. Total rent
expense for the period ended December 31, 1997 and the year ended December 31,
1998 was approximately $38,600 and $177,992, respectively.
F-47
<PAGE> 182
REDSTONE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company has commitments under these long-term
leases requiring approximate annual payments as follows:
<TABLE>
<S> <C>
1999....................................................... $56,378
2000....................................................... 6,225
2001....................................................... 2,274
2002....................................................... 2,274
2003....................................................... 568
-------
Total minimum rental payments.............................. $67,719
=======
</TABLE>
10. LONG-TERM DEBT:
On January 6, 1998 the Company entered into a $1,000,000 commercial
equipment line of credit agreement with interest of one quarter of one (.25%)
percentage point in excess of the bank's prime rate (7.75% at December 31,
1998). On October 15, 1998, the Company entered into an interest rate swap with
a notional amount of $600,000, (the outstanding balance on the line of credit on
that date), which effectively established an interest rate collar between 7.5%
and 8.75% on the interest the Company pays on the outstanding line of credit.
The fair market value of the swap at December 31, 1998 was immaterial. At
December 31, 1998, $550,000 was outstanding. The outstanding balance on the line
is being repaid in equal monthly installments through October 2001. Maturities
of long-term debt are as follows: 1999 -- $194,118; 2000 -- $194,118; 2001-
$161,764.
11. SUBSEQUENT EVENT:
On March 14, 1999 the Company entered into an "Agreement and Plan of
Merger" with Siemens Corporation whereby all of the issued and outstanding
capital stock and the number of shares of capital stock that are issuable under
all options, warrants and similar rights to acquire shares of capital stock of
the Company shall be converted into the right to receive an amount per share in
cash.
F-48
<PAGE> 183
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Castle Networks, Inc.:
We have audited the accompanying balance sheet of Castle Networks, Inc. (a
development stage enterprise) as of April 20, 1999 and the related statements of
operations, stockholders' deficit, and cash flows for the period from January 1,
1999 to April 20, 1999 and for the cumulative period from inception (October 16,
1997) to April 20, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Castle Networks, Inc. as of
April 20, 1999, and the results of its operations and its cash flows for the
period from January 1, 1999 to April 20, 1999 and for the cumulative period from
inception (October 16, 1997) to April 20, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
June 28, 2000
Boston, Massachusetts
F-49
<PAGE> 184
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 20, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO APRIL 20, 1999
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO CUMULATIVE
APRIL 20, 1999 FROM INCEPTION
------------------ --------------
<S> <C> <C>
Operating expenses
Research and development.................................. $ 10,153,740 $ 16,227,411
Selling and marketing..................................... 10,072,285 11,859,324
General and administrative................................ 2,163,959 3,029,232
------------ ------------
Total operating expenses.......................... 22,389,984 31,115,967
------------ ------------
Other income (expense), net:
Interest income........................................... 131,880 452,857
Interest expense.......................................... (31,380) (75,967)
------------ ------------
Other income (expense), net....................... 100,500 376,890
------------ ------------
Net loss.......................................... $(22,289,484) $(30,739,077)
============ ============
Net loss per share -- basic and diluted..................... $ (18.09)
============
Weighted average shares outstanding -- basic and diluted.... 1,231,857
============
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 185
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
APRIL 20, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,219,412
Prepaid expenses and other current assets................. 216,719
------------
Total current assets.............................. 6,436,131
Property and equipment, net................................. 1,706,803
Other assets................................................ 105,892
------------
Total assets...................................... $ 8,248,826
============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... $ 621,208
Accrued expenses.......................................... 2,141,590
Current portion of capital lease obligation............... 13,472
------------
Total current liabilities......................... 2,776,270
Lease obligation, excluding current portion................. 5,945
------------
Total liabilities................................. 2,782,215
------------
Preferred stock, Series A, $0.001 par value; mandatorily
redeemable, convertible; authorized 6,925,000 shares;
issued and outstanding 6,925,000 shares; at liquidation
value..................................................... 6,925,000
Preferred stock, Series B, $0.001 par value; mandatorily
redeemable, convertible; authorized 4,084,967 shares;
issued and outstanding 4,084,967 shares; at liquidation
value..................................................... 11,249,999
Stockholders' deficit:
Common stock, $0.001 par value, 19,090,033 shares
authorized; issued and outstanding 5,991,250 shares.... 5,991
Additional paid-in capital................................ 18,029,748
Deficit accumulated during the development stage.......... (30,741,052)
Treasury stock, at cost, 105,000 shares................... (3,075)
------------
Total stockholders' deficit....................... (12,708,388)
------------
Total liabilities, redeemable preferred stock, and
stockholders' deficit............................. $ 8,248,826
============
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 186
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIODS FROM INCEPTION (OCTOBER 16, 1997) TO APRIL 20, 1999
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
COMMON STOCK COMMON STOCK PAID-IN DEVELOPMENT TREASURY
$.01 PAR VALUE $.001 PAR VALUE CAPITAL STAGE STOCK
---------------- ------------------ ----------- ------------ --------
SHARES AMOUNT SHARES AMOUNT
------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at $.01 per
share................................ 20,000 $ 200 -- $ -- $ -- $ -- $ --
Net loss............................... -- -- -- -- -- (63,202) --
------- ----- --------- ------ ----------- ------------ -------
Balance at December 31, 1997........... 20,000 200 -- -- -- (63,202) --
Conversion of $.01 par value common to
$.001 par value common............... (20,000) (200) 2,175,000 2,175 -- (1,975) --
Issuance of common stock............... -- -- 3,419,250 3,419 221,197 -- --
Purchase of common shares.............. -- -- -- -- -- -- (3,075)
Deferred compensation on employee
grants............................... -- -- -- -- 6,523,199 -- --
Amortization of deferred compensation
on employee grants................... -- -- -- -- -- -- --
Deferred compensation on non-employee
grants............................... -- -- -- -- 1,504,945 -- --
Amortization of deferred compensation
on non-employee grants............... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- (8,386,391) --
------- ----- --------- ------ ----------- ------------ -------
Balance at December 31, 1998........... -- -- 5,594,250 5,594 8,249,341 (8,451,568) (3,075)
Issuance of common stock............... -- -- 397,000 397 118,703 -- --
Deferred compensation on employee
grants............................... -- -- -- -- 7,718,710 -- --
Amortization of deferred compensation
on employee grants................... -- -- -- -- -- -- --
Deferred compensation on non-employee
grants............................... -- -- -- -- 1,942,994 -- --
Amortization of deferred compensation
on non-employee grants............... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- (22,289,484) --
------- ----- --------- ------ ----------- ------------ -------
Balance at April 20, 1999.............. -- $ -- 5,991,250 $5,991 $18,029,748 $(30,741,052) $(3,075)
======= ===== ========= ====== =========== ============ =======
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION DEFICIT
------------ -------------
<S> <C> <C>
Issuance of common stock at $.01 per
share................................ $ -- $ 200
Net loss............................... -- (63,202)
------------ ------------
Balance at December 31, 1997........... -- (63,002)
Conversion of $.01 par value common to
$.001 par value common............... -- --
Issuance of common stock............... -- 224,616
Purchase of common shares.............. -- (3,075)
Deferred compensation on employee
grants............................... (6,523,199) --
Amortization of deferred compensation
on employee grants................... 815,060 815,060
Deferred compensation on non-employee
grants............................... (1,504,945) --
Amortization of deferred compensation
on non-employee grants............... 906,770 906,770
Net loss............................... -- (8,386,391)
------------ ------------
Balance at December 31, 1998........... (6,306,314) (6,506,022)
Issuance of common stock............... -- 119,100
Deferred compensation on employee
grants............................... (7,718,710) --
Amortization of deferred compensation
on employee grants................... 13,426,849 13,426,849
Deferred compensation on non-employee
grants............................... (1,942,994) --
Amortization of deferred compensation
on non-employee grants............... 2,541,169 2,541,169
Net loss............................... -- (22,289,484)
------------ ------------
Balance at April 20, 1999.............. -- $(12,708,388)
============ ============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 187
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 20, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO APRIL 20, 1999
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO CUMULATIVE
APRIL 20, 1999 FROM INCEPTION
------------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(22,289,484) $(30,739,077)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 119,907 254,164
Amortization of deferred compensation on employee
grants............................................... 13,426,849 14,241,909
Amortization of deferred compensation on non-employee
grants............................................... 2,541,169 3,447,939
Loss on disposal of property and equipment............. -- 8,461
Proceeds from insurance claim.......................... -- 18,109
Changes in assets and liabilities:
Prepaid expenses and other current assets.............. (62,672) (216,719)
Other assets........................................... (92,168) (105,892)
Accounts payable....................................... 374,378 621,208
Accrued expenses....................................... 1,632,280 2,141,590
------------ ------------
Net cash used in operating activities............. (4,349,741) (10,328,308)
------------ ------------
Cash flows from investing activity:
Purchases of property and equipment....................... (512,364) (1,939,201)
------------ ------------
Net cash used in investing activity............... (512,364) (1,939,201)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock Series A........ -- 6,550,000
Proceeds from issuance of preferred stock Series B........ -- 11,249,999
Proceeds from issuance of common stock.................... 119,100 343,916
Purchase of treasury stock................................ -- (3,075)
Payments on capital lease obligation...................... (5,477) (28,919)
Net proceeds from (repayment of) line of credit........... (1,250,000) --
Proceeds from notes payable............................... -- 375,000
------------ ------------
Net cash provided by (used in) financing
activities...................................... (1,136,377) 18,486,921
------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... (5,998,482) 6,219,412
Cash and cash equivalents at beginning of period............ 12,217,894 --
------------ ------------
Cash and cash equivalents at end of period.................. $ 6,219,412 $ 6,219,412
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 31,380 $ 75,967
Supplemental disclosures of noncash investing and financing
activities:
Equipment acquired under capital leases................... -- 48,336
Conversion of notes payable to preferred stock............ -- 375,000
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 188
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1999 TO APRIL 20, 1999 AND FOR THE
CUMULATIVE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO APRIL 20, 1999
(1) NATURE OF BUSINESS
Castle Networks. Inc. (the "Company") was incorporated in The Commonwealth
of Massachusetts on October 16, 1997. The Company reincorporated in the state of
Delaware on February 19, 1998. The Company was organized to design, manufacture,
market, and sell voice and data convergence equipment for the telecommunications
market. The Company's principal market is in the United States.
Since its inception, the Company has devoted a substantial portion of its
efforts toward establishing its business, raising capital, developing hardware
and software, and marketing. No revenues have been derived from operations.
Accordingly, through the date of these financial statements, the Company is
considered to be a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises."
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flows to meet its obligations on a timely basis or
to obtain additional financing as may be required. The Company has yet to
generate any revenues from customers and has no assurance of future revenues. To
date the Company has been funded by private equity financing.
On March 7, 1999, the Company entered into an agreement and plan of merger
(the "Merger") by and among Siemens Corporation ("Siemens"), Mediator
Acquisition Corp. ("MAC"), a wholly-owned subsidiary of Siemens, and Castle
Networks, Inc., whereby MAC acquired all of the outstanding capital stock of the
Company for $300 million in cash (the "Consideration") and MAC merged with and
into the Company, with the Company becoming a wholly-owned subsidiary of
Siemens. In addition, the employees of the Company are entitled to receive an
additional $15 million based on certain project milestones and employee
retention criteria.
Upon consummation of the Merger on April 20, 1999, all shares of treasury
stock owned by the Company were canceled and retired and the vesting for all
unvested restricted common shares and outstanding common stock options were
accelerated by 50%. In addition, Siemens settled all remaining unvested stock
options. The consideration received by the common stockholders, preferred
stockholders and common stock option holders was equal to $17.21 per share.
The financial statements and notes to financial statements herein have been
prepared to reflect the financial position of the Company immediately prior to
the effective time of the Merger and do not include any adjustments for the
application of push-down accounting, except that the Company has expensed all of
the remaining unamortized deferred compensation related to the restricted common
shares and outstanding common stock options. See Note 9.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all short-term investments with original maturities
of three months or less at acquisition to be cash equivalents. Cash and cash
equivalents include cash held in banks and short-terns investments in money
market funds. Due to the short-term nature of these assets cost approximates
fair value.
F-54
<PAGE> 189
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments. The Company
maintains temporary cash investments with major financial institutions with high
credit standing.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives of three to five years.
The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost of assets disposed of and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is credited or charged to income.
Equipment under capital leases is recorded at the present value of the
minimum lease payments required during the lease period. Equipment under capital
leases is amortized over the shorter of the estimated useful lives or the term
of the lease.
(d) Research and Development and Software Development Costs
Research and development costs are expensed as incurred. Software
production costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. Software production
costs incurred subsequent to the establishment of technological feasibility are
capitalized until the product is available for general release to customers. As
of April 20, 1999, the Company's products have not established technological
feasibility and accordingly, no software development costs have been
capitalized.
(e) Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and the tax basis of assets and liabilities
using current statutory tax rates. A valuation reserve against deferred tax
assets is recorded if, based upon the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
(f) 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(g) Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure of SFAS No. 123 for employee awards.
F-55
<PAGE> 190
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
(h) Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, "Earnings per Share", and is calculated by dividing the net loss
for the period by the weighted average number of unrestricted common shares
outstanding during the period. As the Company incurred a net loss for the period
presented, potential dilutive common stock options of 533,950 and restricted
common shares of 4,402,003 were excluded from the diluted net loss per share
calculation as their effect would have been antidilutive. As a result, diluted
net loss per share is the same as basic net loss per share, and has not been
presented separately.
(i) Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Estimated
fair value is generally based on either appraised value or measured by
discounted estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows.
(j) Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
(k) Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for the period from inception to April 20,
1999. This statement requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. To date, comprehensive loss and net loss are the same.
(l) Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company is a development stage enterprise and has not generated
any revenue. The Company has determined it conducts its operations in one
business segment.
F-56
<PAGE> 191
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) PROPERTY AND EQUIPMENT
Property and equipment at April 20, 1999 consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 63,743
Office equipment............................................ 18,326
Data processing equipment................................... 449,590
Test equipment.............................................. 1,293,554
Leasehold improvements...................................... 17,488
Equipment under capital lease............................... 48,336
Construction in progress.................................... 69,930
----------
1,960,967
Less accumulated depreciation and amortization.............. 254,164
----------
Property and equipment, net................................. $1,706,803
==========
</TABLE>
At April 20, 1999, accumulated amortization amounted to $28,858 on
equipment under capital leases.
(4) ACCRUED EXPENSES
Accrued expenses consisted of the following at April 20, 1999:
<TABLE>
<S> <C>
Accrued legal and accounting fees........................... $ 536,320
Payroll and related benefits and taxes...................... 226,649
Consulting fees............................................. 1,000,000
Other accruals.............................................. 378,621
----------
Total accrued expenses...................................... $2,141,590
==========
</TABLE>
(5) INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. The actual tax
benefit for the period from January 1, 1999 to April 20, 1999 differed from the
expected tax benefit (computed by applying the U.S. federal income tax rate of
34% to loss before income taxes) as a result of the following:
<TABLE>
<S> <C>
Computed expected tax benefit............................... $(7,578,425)
Increase in deferred tax asset valuation allowance.......... 2,322,000
Nondeductible expenses, primarily deferred compensation..... 5,430,908
Increase in federal tax credits............................. (174,052)
Other....................................................... (431)
-----------
$ --
===========
</TABLE>
F-57
<PAGE> 192
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes were as follows:
<TABLE>
<S> <C>
Gross deferred tax assets:
Net operating losses and tax credit carryforwards......... $ 5,556,000
Start-up costs............................................ 15,000
Reserves and accruals..................................... 168,000
-----------
Total............................................. 5,739,000
Valuation allowance......................................... (5,669,000)
-----------
Net deferred tax asset............................ 70,000
-----------
Deferred tax assets:
Excess of tax over financial statement depreciation....... $ 66,000
Other..................................................... 4,000
-----------
Total............................................. 70,000
-----------
--
===========
</TABLE>
Management of the Company has evaluated the positive and negative evidence
impacting the realizability of its deferred tax assets, and has determined that
based on the weight of the available evidence, it is more likely than not that
all of the deferred tax assets will not be realized, accordingly, the net
deferred tax asset has been fully reserved. If the Company achieves
profitability, the net deferred tax asset would be available to offset future
income tax expense.
At April 20, 1999, the Company had federal and state net operating loss
carryforwards of approximately $12.7 million and $12.5 million, respectively,
which expire in 2017 through 2019 and 2002 through 2004. The use of net
operating loss carryforwards may be limited due to changes in ownership of the
Company's stock.
(6) LINE OF CREDIT
In March 1998, the Company obtained an equipment line of credit from a bank
which provides for maximum borrowings of $1,250,000 and bears interest at 0.5%
over the Bank's prime rate (8.25% at December 31, 1998). The line of credit is
collateralized by the Company's inventories (if any), accounts receivable (if
any), and equipment. In addition, the agreement places certain financial
restrictions on the Company, including limitations on the payment of dividends,
the acquisition of capital assets, and the incurrence of additional
indebtedness. During 1999, the Company repaid the entire $1,250,000 balance that
was outstanding at December 31, 1998.
(7) COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain office equipment under
noncancelable operating leases. Total rent expense under these operating leases
was approximately $59,000 for the period from January 1, 1999 to April 20, 1999.
At April 20, 1999, the Company has various capital leases for office
equipment expiring during calendar year 1999.
F-58
<PAGE> 193
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments at April 20, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
CALENDAR YEAR ENDING DECEMBER 31 LEASES LEASES
-------------------------------- ------- ----------
<S> <C> <C>
1999........................................................ $15,627 $ 324,539
2000........................................................ 6,000 711,468
2001........................................................ 543 605,828
2002........................................................ -- 553,008
2003........................................................ -- 553,008
Thereafter.................................................. -- 553,008
------- ----------
Total minimum lease payment................................. 22,170 $3,300,859
==========
Less amount representing interest........................... 2,753
-------
Present value of minimum lease payments..................... 19,417
Less current portion........................................ 13,472
-------
Obligations under capital lease, excluding current
portion................................................... $ 5,945
=======
</TABLE>
The Company, from time to time, is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
(8) REDEEMABLE PREFERRED STOCK
The Company's Board of Directors has authorized 6,925,000 shares of Series
A Convertible Preferred Stock ("Series A"), $.001 par value and 4,084,967 shares
of Series B Convertible Preferred Stock ("Series B"), $.001 par value. In
February 1998, the Company sold 6,550,000 shares of Series A at a price of $1.00
per share and received proceeds of $6,550,000. In connection with the sale of
Series A, the Company converted $375,000 of promissory notes and issued 375,000
shares of Series A preferred stock. In September 1998, the Company sold
4,084,967 shares of Series B at a price of $2.754 per share and received
proceeds of $11,249,999.
The terms of the Series A and Series B preferred stock are as follows:
Conversion
Each share of Series A and Series B may be converted into one share of
common stock at any time at the option of the holder, subject to adjustment for
certain events such as a stock split, stock dividend, or stock issuance. Upon
the closing of an initial public offering of the Company's common stock at a
price which equals or exceeds $5.00 per share and results in proceeds of a least
$10,000,000, all outstanding Series A automatically convert into shares of
common stock. Upon the closing of an initial public offering of the Company's
common stock at a price which equals or exceeds $11.00 per share and results in
proceeds of a least $20,000,000, all outstanding Series B automatically convert
into shares of common stock.
Dividend and Voting Rights
Commencing February 25, 2002, the holders of Series A and Series B are
entitled to fixed, preferential, cumulative dividends in the amount of 8% per
annum of the issue price per share of $1.00 and $2.754 for Series A and Series
B, respectively, When and if declared by the Company's Board of Directors,
dividends on Series A and Series B are payable in cash in preference and prior
to any payment
F-59
<PAGE> 194
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of any dividend on common shares. Any dividends that are not declared by the
Board of Directors shall accrue. The holders of Series A and Series B are
entitled to vote on all matters and are entitled to the number of votes equal to
the number of common share into which the Series A and Series B are convertible
as of the date of record.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B are entitled to receive, prior and in
preference to any payment or distribution of any assets or surplus funds of the
Company to holders of the common shares, an amount for each share of Series A
and Series B held, equal to $1.00 and $2.754, respectively, plus in each case,
any accrued and unpaid dividends on Series A and Series B that have been
declared. In addition, the Series A and Series B share on a pro rata basis with
common shareholders in the remaining assets of the Company up to a maximum of
$4.00 per share for Series A and $5.516 per share for Series B.
Redemption
If the holders of 65% of Series A or Series B, at any time after February
25, 2002, so demand, the Company will be required to redeem 25% of the shares of
Series A and Series B outstanding and an additional 25% of each on the three
succeeding anniversaries of such demand. The redemption price of each share of
Series A and Series B will be $1.00 and $2.754, respectively, plus all accrued
and unpaid dividends, if any, whether or not declared.
(9) STOCK-BASED COMPENSATION
In accordance with the Company's 1998 Stock Incentive Plan (the "Plan"),
incentive stock options (ISOs) and nonqualified stock options, restricted stock,
or other stock-based awards may be granted to qualified individuals by the
Company's Board of Directors. Options of the Plan are exercisable over periods
determined by the Board of Directors. The maximum number of shares authorized
for award under the Plan is 8,080,066.
Stock Options
ISOs are granted to employees of the Company at not less than the fair
market value of the shares on the date of grant, as determined by the Company's
Board of Directors. Nonqualified options may be granted to employees, officers,
directors, consultants and other advisors to the Company on terms set forth by
the Company's Board of Directors on an individual basis. Generally, one-fourth
of the original number of shares vest on the first anniversary of the grant date
and one-thirty-sixth of the original number of shares vest on each successive
full-month period following the first anniversary of the grant date. The options
expire ten years from the date of grant.
In the event of a sale, liquidation, merger or acquisition of the Company,
the then unexercised stock options will, as determined by the Board of
Directors, be substituted for equivalent options of the succeeding company or
alternatively such unexercised options will become exercisable in full. In the
event of a sale, merger or acquisition under the terms of which the holders of
common stock will receive a cash payment for each share held, all options shall
terminate and each option holder will receive a cash payment based on a formula
outlined in the Plan.
F-60
<PAGE> 195
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity for the period from
January 1, 1999 to April 20, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1998................... 183,000 $.22
Granted.................................................. 350,950 .43
-------
Options outstanding at April 20, 1999...................... 533,950 .36
=======
</TABLE>
The following table summarizes stock options outstanding and exercisable at
April 20, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING REMAINING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.10 78,000 9.02 $.10 58,583 $.10
.30 215,500 9.62 .30 109,110 .30
.50 240,450 9.86 .50 116,091 .50
------- -------
533,950 9.58 .36 283,784 .34
======= =======
</TABLE>
Restricted Stock
Restricted stock may be issued to employees, officers, directors,
consultants, and other advisors. The Plan states that the Company has the right
to repurchase the common stock at the issuance price (which shall be at least
equal to the par value per share for each share of common stock subject to such
award) or other stated or formula price in the event that conditions specified
by the Board of Directors in the award agreement are not satisfied prior to the
end of the applicable restriction period or periods established for such award.
The vesting period for employees is four years.
The following table summarizes restricted stock outstanding at April 20,
1999:
<TABLE>
<CAPTION>
PURCHASE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING PURCHASE PRICE
-------- ----------- ----------------
<S> <C> <C>
$ -- 2,175,000 $ --
.001 1,390,000 .001
.01 1,769,250 .01
.30 552,000 .30
---------
5,886,250 .058
=========
</TABLE>
At April 20, 1999, 1,484,247 shares of stock had vested.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants to employees of stock, stock options, and other
equity instruments based on fair value, or provide pro forma disclosure of net
income or loss in the notes to the financial statements. For stock-based awards
granted to employees, the Company has adopted the disclosure provisions of SFAS
123 and recognizes compensation cost using the intrinsic value based method
described in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." For stock-based awards granted to nonemployees,
the Company recognizes compensation costs in accordance with the requirements of
SFAS 123. Had compensation expense for stock-based awards issued to employees
been determined based upon the fair
F-61
<PAGE> 196
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value at the grant dates in accordance with SFAS 123 for the period from January
1, 1999 to April 20, 1999, net loss would have been $22,524,314 and net loss per
share would have been $18.28.
The fair value of stock options granted to employees at the date of grant
was estimated using a Black-Scholes option pricing model. The following table
details the weighted-average assumptions used in the calculations of fair value
for stock options for the period from January 1, 1999 to April 20, 1999:
<TABLE>
<S> <C>
Expected volatility......................................... 0%
Risk-free interest rate..................................... 6.5%
Dividend rate............................................... 0%
Expected life............................................... 7 years
</TABLE>
The weighted average grant date fair value for options granted during 1999
was $12.57.
Deferred compensation cost recognized in connection with the issuance of
stock options and restricted stock to non-employees was $1,942,994 for the
period from January 1, 1999 to April 20, 1999, and $2,541,169 was amortized into
expense. This compensation cost was calculated using the Black-Scholes option
pricing model and the following weighted average assumptions; expected
volatility of 70%, risk-free interest rate of 5%, zero dividend rate and a
contractual life of 10 years.
In connection with the Merger discussed in Note 1, the Company's common and
preferred stockholders and common stock option holders received consideration
equal to $17.21 per share. During the period from January 1, 1999 to April 20,
1999, the Company sold 397,000 shares of restricted common stock and granted
350,950 options to purchase common stock at amounts, in some cases, lower than
the estimated fair market value. Accordingly, the Company has estimated and
recorded deferred compensation related to the restricted common stock and common
stock options that were sold or issued at amounts less than estimated fair
market value.
During 1998 and for the period from January 1, 1999 to April 20, 1999, the
company recorded $6,523,199 and $7,718,710, respectively, in deferred
compensation related to restricted common stock and stock options issued to
employees of the Company. In addition, the Company recorded compensation expense
of $815,060 in 1998 and $13,426,849 for the period from January 1, 1999 to April
20, 1999 related to the amortization of the deferred compensation balance. The
amount amortized in the period from January 1, 1999 to April 20, 1999 included
the recognition of all remaining unamortized deferred compensation at April 20,
1999 as a result of the Merger discussed in Note 1.
(10) EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan covering substantially all
of its employees which is designed to be qualified under section 401(k) of the
Internal Revenue Code. Eligible employees are permitted to contribute to the
401(k) plan through payroll deductions within statutory and plan limits. The
Company has not contributed to the plan.
F-62
<PAGE> 197
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Networks, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Castle Networks, Inc. (a
development stage enterprise) (the "Company") at December 31, 1997 and 1998, and
the results of its operations and its cash flows for the period from inception
(October 16, 1997) to December 31, 1997, the year ended December 31, 1998, and
for the period from inception (October 16, 1997) to December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America 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
March 19, 1999
Boston, Massachusetts
F-63
<PAGE> 198
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO DECEMBER 31, 1997, THE YEAR
ENDED
DECEMBER 31, 1998, AND FOR THE CUMULATIVE PERIOD FROM INCEPTION (OCTOBER 16,
1997) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE FROM
FROM INCEPTION INCEPTION
(OCTOBER 16, 1997) (OCTOBER 16, 1997)
TO DECEMBER 31, 1997 1998 TO DECEMBER 31, 1998
-------------------- ----------- --------------------
<S> <C> <C> <C>
Operating expenses:
Research and development................ $ 22,450 $ 6,051,221 $ 6,073,671
Selling and marketing................... 2,339 1,784,700 1,787,039
General and administrative.............. 38,413 826,860 865,273
---------- ----------- -----------
Total operating expenses........ 63,202 8,662,781 8,725,983
---------- ----------- -----------
Interest income........................... -- (320,977) (320,977)
Interest expense.......................... -- 44,587 44,587
---------- ----------- -----------
Net loss.................................. $ (63,202) $(8,386,391) $(8,449,593)
========== =========== ===========
Net loss per share basic and diluted...... $ (14.99)
===========
Weighted average shares outstanding, basic
and diluted............................. 559,450
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE> 199
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $47,302 $12,217,894
Prepaid expenses and other current assets................. 6,348 154,047
------- -----------
Total current assets.............................. 53,650 12,371,941
Property and equipment, net................................. 754 1,314,346
Other assets................................................ 6,238 13,724
------- -----------
Total assets...................................... $60,642 $13,700,011
======= ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Accounts payable.......................................... 5,602 246,830
Accrued expenses.......................................... 10,000 509,310
Notes payable............................................. 108,042 --
Current portion of line of credit......................... -- 479,200
Current portion of capital lease obligations.............. -- 21,266
------- -----------
Total current liabilities......................... 123,644 1,256,606
Line of credit.............................................. -- 770,800
Capital lease obligations, excluding current portion........ -- 3,628
Commitments and contingencies (Note F)
Preferred stock, Class A, $.001 par value; mandatorily
redeemable, convertible; authorized 6,925,000 shares;
issued and outstanding 0 and 6,925,000 shares at December
31, 1997 and 1998, respectively; at liquidation value..... -- 6,925,000
Preferred stock, Class B. $.001 par value; mandatorily
redeemable, convertible; authorized 4,084,967 shares;
issued and outstanding 0 and 4,084,967 shares at December
31, 1997 and 1998, respectively; at liquidation value..... -- 11,249,999
Stockholders' deficit:
Common stock, $.01 par value, 200,000 shares authorized;
issued and outstanding 20,000 shares at December 31,
1997................................................... 200 --
Common stock, $.001 par value, 19,090,033 shares
authorized; issued 5,594,250 shares at December 31,
1998................................................... -- 5,594
Additional paid-in capital................................ -- 8,249,341
Deficit accumulated during the development stage.......... (63,202) (8,451,568)
Less treasury stock, at cost, 105,000 shares.............. -- (3,075)
Deferred compensation..................................... -- (6,306,314)
------- -----------
Total stockholders' deficit....................... (63,002) (6,506,022)
------- -----------
Total liabilities, redeemable preferred stock, and
stockholders' deficit........................... $60,642 $13,700,011
======= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE> 200
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO DECEMBER 31, 1997, THE YEAR
ENDED
DECEMBER 31, 1998, AND FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK COMMON STOCK ACCUMULATED
$.01 PAR VALUE $.001 PAR VALUE ADDITIONAL DURING THE
---------------- ------------------- PAID-IN DEVELOPMENT TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE STOCK AMOUNT
------- ------ --------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
October 16, 1997:
Issuance of common stock at $.01 per
share............................. 20,000 $ 200 -- -- -- -- --
October 16, 1997 through December 31,
1997: Net loss...................... -- -- -- -- -- $ (63,202) --
------- ----- --------- ------ ---------- ----------- -------
Balance at December 31, 1997.......... 20,000 200 -- -- -- (63,202) --
February 19, 1998:
Conversion of $.01 par value common
stock to $.001 par value common
stock............................. (20,000) (200) 2,175,000 $2,175 -- (1,975) --
February 20, 1998 - December 31, 1998:
Issuance of common stock to
employees and non-employees....... -- -- 3,419,250 3,419 $ 221,197 -- --
Purchase of 105,000 shares of
treasury stock, at cost........... -- -- -- -- -- -- $(3,075)
Deferred compensation on employee
grants.............................. -- -- -- -- 6,523,199 -- --
Amortization of deferred compensation
on employee grants.................. -- -- -- -- -- -- --
Deferred compensation on non-employee
grants.............................. -- -- -- -- 1,504,945 -- --
Amortization of deferred compensation
on non-employee grants.............. -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- (8,386,391) --
------- ----- --------- ------ ---------- ----------- -------
Balance at December 31, 1998 -- $ -- 5,594,250 $5,594 $8,249,341 $(8,451,568) $(3,075)
======= ===== ========= ====== ========== =========== =======
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION DEFICIT
------------ -------------
<S> <C> <C>
October 16, 1997:
Issuance of common stock at $.01 per
share............................. -- $ 200
October 16, 1997 through December 31,
1997: Net loss...................... -- (63,202)
----------- -----------
Balance at December 31, 1997.......... -- (63,002)
February 19, 1998:
Conversion of $.01 par value common
stock to $.001 par value common
stock............................. -- --
February 20, 1998 - December 31, 1998:
Issuance of common stock to
employees and non-employees....... -- 224,616
Purchase of 105,000 shares of
treasury stock, at cost........... -- (3,075)
Deferred compensation on employee
grants.............................. $(6,523,199) --
Amortization of deferred compensation
on employee grants.................. 815,060 815,060
Deferred compensation on non-employee
grants.............................. (1,504,945) --
Amortization of deferred compensation
on non-employee grants.............. 906,770 906,770
Net loss.............................. -- (8,386,391)
----------- -----------
Balance at December 31, 1998 $(6,306,314) $(6,506,022)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE> 201
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1997) TO DECEMBER 31, 1997, THE YEAR
ENDED
DECEMBER 31, 1998, AND FOR THE CUMULATIVE PERIOD FROM INCEPTION (OCTOBER 16,
1997) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE YEAR CUMULATIVE FROM
FROM INCEPTION ENDED INCEPTION
(OCTOBER 16, 1997) DECEMBER 31, (OCTOBER 16, 1997)
TO DECEMBER 31, 1997 1998 TO DECEMBER 31, 1998
-------------------- ------------ --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(63,202) $(8,386,391) $(8,449,593)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... -- 134,257 134,257
Loss on disposal of property and equipment........ -- 8,461 8,461
Proceeds from insurance claim..................... -- 18,109 18,109
Amortization of deferred compensation on employee
grants.......................................... -- 815,060 815,060
Amortization of deferred compensation on
non-employee grants............................. -- 906,770 906,770
Changes in assets and liabilities:
Prepaid expenses and other current assets......... (6,348) (147,699) (154,047)
Other assets...................................... (6,238) (7,486) (13,724)
Accounts payable.................................. 5,602 241,228 246,830
Accrued expenses.................................. 10,000 499,310 509,310
-------- ----------- -----------
Net cash used in operating activities........ (60,186) (5,918,381) (5,978,567)
Cash flows from investing activities:
Purchases of property and equipment.................. (754) (1,426,083) (1,426,837)
-------- ----------- -----------
Net cash used in investing activities........ (754) (1,426,083) (1,426,837)
Cash flows from financing activities:
Proceeds from issuance of common stock............... 200 224,616 224,816
Proceeds from issuance of preferred stock Series A... -- 6,550,000 6,550,000
Proceeds from issuance of preferred stock Series B... -- 11,249,999 11,249,999
Proceeds from line of credit......................... -- 1,250,000 1,250,000
Proceeds from notes payable.......................... 108,042 266,958 375,000
Purchase of treasury stock........................... -- (3,075) (3,075)
Payments on capital lease............................ -- (23,442) (23,442)
-------- ----------- -----------
Net cash provided by financing activities.... 108,242 19,515,056 19,623,298
-------- ----------- -----------
Net increase in cash and cash equivalents.............. 47,302 12,170,592 12,217,894
Cash and cash equivalents, beginning of period......... -- 47,302 --
-------- ----------- -----------
Cash and cash equivalents, end of period............... $ 47,302 $12,217,894 $12,217,894
======== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............. -- $ 44,587 $ 44,587
Supplemental disclosures of noncash investing and
financing activities:
Equipment acquired under capital leases.............. -- 48,336 48,336
Conversion of notes payable to preferred stock....... $108,042 $ 266,958 $ 375,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-67
<PAGE> 202
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
Castle Networks, Inc. (the "Company") began operations on October 16, 1997
and was incorporated in The Commonwealth of Massachusetts in November, 1997. The
Company reincorporated in the state of Delaware on February 19, 1998. The
Company was organized to design, manufacture, market, and sell voice and data
convergence equipment for the telecommunications market. The Company's principal
market is in the United States.
Since its inception, the Company has devoted a substantial portion of its
efforts toward establishing its business, raising capital, developing hardware
and software, and marketing. No revenues have been derived from operations.
Accordingly, through the date of these financial statements, the Company is
considered to be a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises."
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flows to meet its obligations on a timely basis or
to obtain additional financing as may be required. The Company has yet to
generate any revenues from customers and has no assurance of future revenues. To
date the Company has been funded by private equity financings. On March 7, 1999,
the Company signed a definitive plan of merger agreement to be acquired by
Siemens Corporation ("Siemens") for an estimated aggregate purchase price of
$300,000,000 based on the value of the shares to be exchanged on the date of
closing. Therefore, the Company expects to operate as a subsidiary of Siemens
and receive future funding from Siemens as its parent.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities
of three months or less at acquisition to be cash equivalents. Cash and cash
equivalents include cash held in banks and short-term investments in money
market funds. Due to the short-term nature of these assets cost approximates
fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments. The Company
maintains temporary cash investments with major financial institutions with high
credit standing.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives of three to five years.
The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost of assets disposed of and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is credited or charged to income.
Equipment under capital leases is recorded at the present value of the
minimum lease payments required during the lease period. Equipment under capital
leases is amortized over the shorter of the estimated useful lives or the term
of the lease.
F-68
<PAGE> 203
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development and Software Development Costs
Research and development costs are expensed as incurred. Software
production costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. Software production
costs incurred subsequent to the establishment of technological feasibility are
capitalized until the product is available for general release to customers. As
of December 31, 1998, the Company's products have not established technological
feasibility and accordingly, no software development costs have been
capitalized.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax basis carrying
amounts of assets and liabilities measured using current statutory rates in
effect for the year in which the differences are expected to reverse. At
December 31, 1998, the Company had a net deferred tax asset of $2,794,000
consisting principally of net operating loss carryforwards for federal income
tax purposes of approximately $2,638,000. The carryforwards begin to expire in
2013. The Company's net deferred tax asset at December 31, 1998 has been offset
in full by a valuation allowance as the realization of related tax benefits is
uncertain. The net operating loss carryforwards could be limited in future years
if there is a significant change in Company ownership.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of
stock-based awards on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25 and provide pro forma net earnings
disclosures as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure of SFAS No. 123 for employee awards.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per share is presented under the provisions of
SFAS No. 128, "Earnings per Share." As the Company incurred a net loss in 1998,
potential dilutive common stock options of 183,000 and restricted common shares
of 4,544,004 were excluded from the diluted net loss per share calculation at
December 31, 1998 as their effect would have been antidilutive. As a result,
diluted net loss per share is the same as basic net loss per share, and has not
been presented separately. No loss per share calculation is presented for 1997
because all of the common shares outstanding were restricted.
F-69
<PAGE> 204
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Numerator:
Net loss.................................................. $(8,386,391)
===========
Denominator
Weighted average unrestricted common shares outstanding... 559,450
===========
Basic and diluted net loss per share........................ $ (14.99)
===========
</TABLE>
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Estimated fair value
is generally based on either appraised value or measured by discounted estimated
future cash flows. Considerable management judgment is necessary to estimate
discounted future cash flows.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts payable and
accrued expenses approximate their fair values due to the short-term nature of
these instruments.
Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for the period from inception to December
31, 1998. This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. To date, comprehensive loss and net loss are the same.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. The Company is a development stage enterprise and has not generated
any revenue. The Company has determined it conducts its operations in one
business segment.
F-70
<PAGE> 205
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1997 1998
---- ----------
<S> <C> <C>
Furniture and fixtures...................................... $154 $ 51,047
Office equipment............................................ 600 16,966
Data processing equipment................................... -- 347,773
Test equipment.............................................. -- 966,993
Leasehold improvements...................................... -- 17,488
Equipment under capital lease............................... -- 48,336
---- ----------
754 1,448,603
---- ----------
Less accumulated depreciation and amortization.............. -- (134,257)
---- ----------
Property and equipment, net................................. $754 $1,314,346
==== ==========
</TABLE>
At December 31, 1997 and 1998, accumulated amortization amounted to $0 and
$12,746, respectively, on equipment under capital leases. Depreciation and
amortization expense for the years ended December 31, 1997 and 1998 was $0 and
$134,257, respectively.
D. RELATED PARTY:
In 1998, the Company purchased $109,260 of computer equipment and furniture
and fixtures from a related party.
E. LINE OF CREDIT:
In March 1998, the Company obtained an equipment line of credit from a bank
which provides for maximum borrowings of $1,250,000 and bears interest at 0.5%
over the Bank's prime rate (8.25% at December 31, 1998). During 1998, the
Company borrowed $1,250,000 under this line. Beginning January 1, 1999, the
outstanding principal balance will be repaid monthly in 36 equal installments
for hardware purchases and 24 equal installments for software purchases. The
line of credit is collateralized by the Company's inventories (if any), accounts
receivable (if any), and equipment. In addition, the agreement places certain
financial restrictions on the Company, including limitations on the payment of
dividends, the acquisition of capital assets, and the incurrence of additional
indebtedness. Beginning on March 31, 1999, the Company will be required to
maintain a minimum tangible capital base (defined as stockholder's equity plus
subordinated debt less intangible assets) not less than the greater of (i)
$500,000 or (ii) 75% of outstanding borrowings on the facility.
F. COMMITMENTS:
The Company leases its office space and certain office equipment under
noncancelable operating leases. Total rent expense under these operating leases
was approximately $12,162 and $137,626 for the years ended December 31, 1997 and
1998, respectively.
At December 31, 1998 the Company has two 36 month capital equipment leases
expiring on November 30, 2000 and December 31, 2000, respectively, and a 24
month capital equipment lease ending on November 30, 1999.
F-71
<PAGE> 206
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- -------
<S> <C> <C>
1999........................................................ $192,973 $21,266
2000........................................................ 192,973 3,628
2001........................................................ 63,443 --
2002........................................................ -- --
2003........................................................ -- --
Thereafter............................................. -- --
-------- -------
$449,389 24,894
========
Less: long-term portion..................................... (3,628)
-------
$21,266
=======
</TABLE>
The Company has entered into an operating lease for new office space which
commences on April 10, 1999 and terminates on December 31, 2004. Annual rent
expenses under this operating lease, not included above, will be $218,899 for
the year ended December 31, 1999 and $553,008 per year for each year ended
December 31, 2000 to 2004.
G. REDEEMABLE PREFERRED STOCK:
The Company's Board of Directors has authorized 6,925,000 shares of Series
A Convertible Preferred Stock ("Series A"), $.001 par value and 4,084,967 shares
of Series B Convertible Preferred Stock ("Series B"), $.001 par value. In
February 1998, the Company sold 6,550,000 shares of Series A at a price of $1
per share and received proceeds of $6,550,000. In connection with the sale of
Series A, the Company converted $375,000 of promissory notes and issued 375,000
shares of Series A preferred stock. In September 1998, the Company sold
4,084,967 shares of Series B at price of $2.754 per share and received proceeds
of $11,249,999.
The terms of the Series A and Series B preferred stock are as follows:
Conversion
Each share of Series A and Series B may be converted into one share of
common stock at any time at the option of the holder, subject to adjustment for
certain events such as a stock split, stock dividend, or stock issuance. Upon
the closing of an initial public offering of the Company's common stock at a
price which equals or exceeds $5 per share and results in proceeds of a least
$10,000,000, all outstanding Series A automatically convert into shares of
common stock. Upon the closing of an initial public offering of the Company's
common stock at a price which equals or exceeds $11 per share and results in
proceeds of a least $20,000,000, all outstanding Series B automatically convert
into shares of common stock.
Dividend and Voting Rights
Commencing February 25, 2002, the holders of Series A and Series B are
entitled to fixed, preferential, cumulative dividends in the amount of 8% per
annum of the issue price per share of $1 and $2.754 for Series A and Series B,
respectively. When and if declared by the Company's Board of Directors,
dividends on Series A and Series B are payable in cash in preference and prior
to any payment of any dividend on common shares. Any dividends that are not
declared by the Board of Directors shall accrue. The holders of Series A and
Series B are entitled to vote on all matters and are entitled to the
F-72
<PAGE> 207
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
number of votes equal to the number of common shares into which the Series A and
Series B are convertible as of the date of record.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B are entitled to receive, prior and in
preference to any payment or distribution of any assets or surplus funds of the
Company to holders of the common shares, an amount for each share of Series A
and Series B held, equal to $1 and $2.754, respectively, plus in each case, any
accrued and unpaid dividends on Series A and Series B that have been declared.
In addition, the Series A and Series B share on a pro rata basis with common
shareholders in the remaining assets of the Company up to a maximum of $4 per
share for Series A and $5.516 per share for Series B.
Redemption
If the holders of 65% of Series A or Series B, at any time after February
25, 2002, so demand, the Company will be required to redeem 25% of the shares of
Series A and Series B outstanding and an additional 25% of each on the three
succeeding anniversaries of such demand. The redemption price of each share of
Series A and Series B will be $1 and $2.754, respectively, plus all accrued and
unpaid dividends, if any, whether or not declared.
H. STOCK-BASED COMPENSATION:
In accordance with the Company's 1998 Stock Incentive Plan (the "Plan"),
incentive stock options (ISOs) and nonqualified stock options, restricted stock,
or other stock based awards may be granted to qualified individuals by the
Company's Board of Directors. Options of the Plan are exercisable over periods
determined by the Board of Directors. The maximum number of shares authorized
for award under the Plan is 8,080,066.
Stock Options
ISOs are granted to employees of the Company at not less than the fair
market value of the shares on the date of grant, as determined by the Company's
Board of Directors. Nonqualified options may be granted to employees, officers,
directors, consultants and other advisors to the Company on terms set forth by
the Company's Board of Directors on an individual basis. Generally, one-fourth
of the original number of shares vest on the first anniversary of the grant date
and one-thirty-sixth of the original number of shares vest on each successive
full-month period following the first anniversary of the grant date. The options
expire ten years from the date of grant.
In the event of a sale, liquidation, merger or acquisition of the Company,
the then unexercised stock options will, as determined by the Board of
Directors, be substituted for equivalent options of the succeeding company or
alternatively such unexercised options will become exercisable in full. In the
event of a sale, merger or acquisition under the terms of which the holders of
common stock will receive a cash payment for each share held, all options shall
terminate and each option holder will receive a cash payment based on a formula
outlined in the Plan.
Restricted Stock
Restricted stock may be issued to employees, officers, directors,
consultants, and other advisors. The Plan states that the Company has the right
to repurchase the common stock at the issuance price (which shall be at least
equal to the par value per share for each share of common stock subject to such
award)
F-73
<PAGE> 208
CASTLE NETWORKS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or other stated or formula price in the event that conditions specified by the
Board of Directors in the award agreement are not satisfied prior to the end of
the applicable restriction period or periods established for such award. The
vesting period for employees is four years. The number of restricted stock
shares outstanding at December 31, 1997 and 1998 was 0 and 5,489,250,
respectively.
A summary of the Company's stock option activity for 1998 is presented
below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Options outstanding at January 1, 1998:
Granted................................................... 195,000 $0.23
Exercised................................................. -- --
Cancelled................................................. 12,000 0.30
------- -----
Options outstanding at December 31, 1998.................... 183,000 $0.22
======= =====
</TABLE>
At December 31, 1998, no options were exercisable. The weighted-average
grant-date fair value of options granted during 1998 was $6.84. The weighted
average remaining contractual life for options outstanding at December 31, 1998
is nine years. No options were granted prior to 1998.
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board (APB) Opinion No. 25, "Accounting or Stock
Issued to Employees." Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), the Company's net loss for the year
ended December 31, 1998 would have been $8,253,068 and net loss per share would
have been $14.75.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts and additional awards in future years are
anticipated.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: an expected life of 7 years, no dividends, no volatility, and a
risk-free rate of 4.95% for the year ended December 31, 1998.
During 1998, the Company recorded $6,523,199 in deferred compensation
related to restricted common stock and stock options issued to employees of the
Company at exercise prices lower than the estimated fair market value. In
addition, the Company recorded $815,060 in compensation expense related to the
amortization of the deferred compensation balance.
Deferred compensation cost recognized in connection with the issuance of
stock options and restricted stock to non-employees was $1,504,945 for the year
ended December 31, 1998, of which $906,770 was amortized into expense. This
compensation cost was calculated using the Black-Scholes option pricing model
and the following weighted average assumptions; expected volatility of 70%,
risk-free interest rate of 5.5%, zero dividend rate and a contractual life of 10
years.
I. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution plan covering substantially all
of its employees which is designed to be qualified under section 401(k) of the
Internal Revenue Code. Eligible employees are permitted to contribute to the
401(k) plan through payroll deductions within statutory and plan limits. The
Company has not contributed to the plan.
F-74
<PAGE> 209
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Argon Networks, Inc.:
We have audited the accompanying balance sheets of Argon Networks, Inc. (a
Delaware corporation in the development stage) as of March 31, 1998 and March
12, 1999 and the related statements of operations, redeemable convertible
preferred stock and stockholders' deficit, and cash flows for the year ended
March 31, 1998, the period from April 1, 1998 to March 12, 1999 and the period
from inception (March 13, 1997) to March 12, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Argon Networks, Inc. as of
March 31, 1998 and March 12, 1999 and the results of its operations and its cash
flows for the year ended March 31, 1998, the period from April 1, 1998 to March
12, 1999 and for the period from inception (March 13, 1997) to March 12, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 30, 1999
F-75
<PAGE> 210
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE PERIOD
YEAR ENDED APRIL 1, 1998 FROM INCEPTION
MARCH 31, TO MARCH 12, (MARCH 13, 1997)
1998 1999 TO MARCH 12, 1999
----------- ------------- -----------------
<S> <C> <C> <C>
Operating Expenses:
Research and development...................... $ 3,821,567 $ 17,350,574 $ 21,172,141
Selling, general and administrative........... 1,044,678 5,027,246 6,071,924
----------- ------------ ------------
Total operating expenses.............. 4,866,245 22,377,820 27,244,065
Interest Income................................. 330,710 1,280,236 1,610,946
Interest Expense................................ (27,019) (114,767) (141,786)
----------- ------------ ------------
Net loss................................... $(4,562,554) $(21,212,351) $(25,774,905)
=========== ============ ============
Basic and Diluted Net Loss per Share............ $ (105.97) $ (16.97)
=========== ============
Basic and Diluted Weighted Average Shares
Outstanding................................... 43,056 1,249,794
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 211
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
MARCH 31, 1998 AND MARCH 12, 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $20,484,105 $ 6,811,905
Short-term investments.................................... 9,874,350 10,064,191
Prepaid expenses and other current assets................. -- 32,460
----------- ------------
Total current assets.............................. 30,358,455 16,908,556
----------- ------------
Property and Equipment, at cost:
Software and computer equipment........................... 956,421 2,501,142
Research and development test equipment................... -- 684,731
Furniture and fixtures.................................... 70,422 122,623
Leasehold improvements.................................... -- 29,183
----------- ------------
1,026,843 3,337,679
Less -- Accumulated depreciation.......................... 213,577 974,614
----------- ------------
813,266 2,363,065
----------- ------------
Other Assets................................................ 38,000 38,375
----------- ------------
$31,209,721 $ 19,309,996
=========== ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt (Note 4)................ $ 186,825 $ 622,619
Accounts payable.......................................... 215,410 958,592
Accrued expenses.......................................... 364,470 1,792,961
----------- ------------
Total current liabilities......................... 766,705 3,374,172
----------- ------------
Long-term Debt, less current portion (Note 4)............... 745,476 1,444,330
----------- ------------
Commitments (Note 5)
Series A Redeemable Convertible Preferred Stock, $0.01 par
value -- Authorized, issued and outstanding -- 5,704,063
shares, at redemption value............................... 7,779,778 7,779,778
----------- ------------
Series B Redeemable Convertible Preferred Stock, $0.01 par
value -- Authorized, issued and outstanding -- 7,154,469
shares at March 31, 1998 and March 12, 1999, at redemption
value..................................................... 26,399,991 26,399,991
----------- ------------
Stockholders' Deficit:
Common stock, $0.01 par value --
Authorized -- 20,000,000 shares
Issued -- 3,545,000 and 3,955,625 shares, at March 31,
1998 and March 12, 1999, respectively
Outstanding -- 3,545,000 and 3,688,125 shares at March
31, 1998 and March 12, 1999, respectively............ 35,450 39,556
Additional paid-in capital................................ 96,000 6,136,425
Deficit accumulated during the development stage.......... (4,613,679) (25,826,030)
Treasury stock, at cost -- No shares at March 31, 1998 and
267,500 shares at March 12, 1999....................... -- (38,226)
----------- ------------
Total stockholders' deficit....................... (4,482,229) (19,688,275)
----------- ------------
$31,209,721 $ 19,309,996
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 212
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 13, 1997) TO MARCH 12, 1999
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE DEFICIT
PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------------ --------------------- ADDITIONAL DURING THE
NUMBER OF REDEMPTION NUMBER OF $.01 PAID-IN DEFERRED DEVELOPMENT
SHARES VALUE SHARES PAR VALUE CAPITAL COMPENSATION STAGE
---------- ----------- --------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception (March 13, 1997)........ -- $ -- 2,000,000 $20,000 $ -- $ -- $ --
Sale of restricted common
stock.......................... -- -- 1,545,000 15,450 96,000 -- --
Sale of Series A redeemable
convertible preferred stock,
net of issuance costs of
$24,011........................ 5,704,063 7,779,778 -- -- -- -- (24,011)
Sale of Series B redeemable
convertible preferred stock,
net of issuance costs of
$27,114........................ 7,154,469 26,399,991 -- -- -- -- (27,114)
Net loss......................... -- -- -- -- -- -- (4,562,554)
---------- ----------- --------- ------- ---------- ----------- ------------
Balance, March 31, 1998........... 12,858,532 34,179,769 3,545,000 35,450 96,000 -- (4,613,679)
Sale of restricted common stock
and exercise of common stock
options........................ -- -- 410,625 4,106 118,875 -- --
Repurchase of restricted common
stock.......................... -- -- -- -- -- -- --
Deferred compensation related to
the issuance of restricted
common stock and stock options
to employees................... -- -- -- -- 5,267,250 (5,267,250) --
Amortization of deferred
compensation related to the
issuance of restricted common
stock and stock options to
employees...................... -- -- -- -- -- 5,267,250 --
Compensation expense related to
the issuance of restricted
common stock and stock options
to nonemployees................ -- -- -- -- 654,300 -- --
Net loss......................... -- -- -- -- -- (21,212,351)
---------- ----------- --------- ------- ---------- ----------- ------------
Balance, March 12, 1999........... 12,858,532 $34,179,769 3,955,625 $39,556 $6,136,425 $ -- $(25,826,030)
========== =========== ========= ======= ========== =========== ============
<CAPTION>
TREASURY STOCK
--------------------- TOTAL
NUMBER OF STOCKHOLDERS'
SHARES COST DEFICIT
---------- -------- -------------
<S> <C> <C> <C>
Inception (March 13, 1997)........ -- $ -- $ 20,000
Sale of restricted common
stock.......................... -- -- 111,450
Sale of Series A redeemable
convertible preferred stock,
net of issuance costs of
$24,011........................ -- -- (24,011)
Sale of Series B redeemable
convertible preferred stock,
net of issuance costs of
$27,114........................ -- -- (27,114)
Net loss......................... -- -- (4,562,554)
---------- -------- ------------
Balance, March 31, 1998........... -- -- (4,482,229)
Sale of restricted common stock
and exercise of common stock
options........................ -- -- 122,981
Repurchase of restricted common
stock.......................... 267,500 (38,226) (38,226)
Deferred compensation related to
the issuance of restricted
common stock and stock options
to employees................... -- -- --
Amortization of deferred
compensation related to the
issuance of restricted common
stock and stock options to
employees...................... -- -- 5,267,250
Compensation expense related to
the issuance of restricted
common stock and stock options
to nonemployees................ -- -- 654,300
Net loss......................... -- -- (21,212,351)
---------- -------- ------------
Balance, March 12, 1999........... 267,500 $(38,226) $(19,688,275)
========== ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE> 213
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
PERIOD FROM INCEPTION
YEAR ENDED APRIL 1, 1998 TO (MARCH 13, 1997)
MARCH 31, 1998 MARCH 12, 1999 TO MARCH 12, 1999
-------------- ---------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss..................................... $(4,562,554) $(21,212,351) $(25,774,905)
Adjustments to reconcile net loss to net cash
used in operating activities --
Compensation expense related to the
issuance of restricted common stock and
stock options to employees and
nonemployees............................ -- 5,921,550 5,921,550
Depreciation and amortization............. 213,577 761,037 974,614
Changes in assets and liabilities --
Prepaid expenses and other current
assets............................... -- (32,460) (32,460)
Increase in other assets................ (38,000) (375) (38,375)
Accounts payable........................ 214,410 743,182 958,592
Accrued expenses........................ 364,470 1,428,491 1,792,961
----------- ------------ ------------
Net cash used in operating
activities......................... (3,808,097) (12,390,926) (16,198,023)
----------- ------------ ------------
Cash Flows from Investing Activities:
Sale of short-term investments............... 2,200,000 26,997,000 29,197,000
Purchase of short-term investments........... (12,074,350) (27,186,841) (39,261,191)
Purchase of property and equipment, net...... (1,026,843) (2,159,261) (3,186,104)
----------- ------------ ------------
Net cash used in investing
activities......................... (10,901,193) (2,349,102) (13,250,295)
----------- ------------ ------------
Cash Flows from Financing Activities:
Net proceeds from sale of Series A redeemable
convertible preferred stock............... 7,755,767 -- 7,755,767
Net proceeds from sale of Series B redeemable
convertible preferred stock............... 26,372,877 -- 26,372,877
Proceeds from sale of restricted common stock
and exercise of common stock options...... 111,450 122,981 254,431
Repurchase of restricted common stock........ -- (38,226) (38,226)
Proceeds from officer (stockholder)
promissory note payable................... 100,000 -- 100,000
Payments on officer (stockholder) promissory
note payable.............................. (100,000) -- (100,000)
Payments under equipment line of credit and
note payable.............................. (7,083) (383,509) (390,592)
Borrowings under equipment line of credit and
note payable.............................. 939,384 1,366,582 2,305,966
----------- ------------ ------------
Net cash provided by financing
activities......................... 35,172,395 1,067,828 36,260,223
----------- ------------ ------------
Net (Decrease) Increase in Cash and Cash
Equivalents.................................. 20,463,105 (13,672,200) 6,811,905
----------- ------------ ------------
Cash and Cash Equivalents, beginning of
period....................................... 21,000 20,484,105 --
----------- ------------ ------------
Cash and Cash Equivalents, end of period....... $20,484,105 $ 6,811,905 $ 6,811,905
=========== ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid for --
Interest..................................... $ 27,019 $ 114,767 $ 141,786
=========== ============ ============
Supplemental Disclosure of Noncash Financing
Activities:
Equipment acquired under capital lease....... $ -- $ 151,575 $ 151,575
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE> 214
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 12, 1999
(1) OPERATIONS AND MERGER
Argon Networks, Inc. (the Company) was incorporated as a Delaware
corporation on March 13, 1997 and is engaged in the development of data
communications hardware and software. The Company commenced operations in April
1997.
On February 4, 1999, the Company entered into an agreement and plan of
merger (the Merger) by and among Siemens Corporation (Siemens), Arthur
Acquisition Corp. (AAC), a wholly owned subsidiary of Siemens, and Argon
Networks, Inc. whereby Siemens and AAC acquired all of the outstanding capital
stock of the Company for $200 million in cash (the Consideration) and AAC merged
with and into the Company, with the Company becoming a wholly owned subsidiary
of Siemens. In addition, the employees of the Company are entitled to receive an
additional $32.1 million based on certain project milestones and employee
retention criteria, as defined.
Upon consummation of the Merger on March 12, 1999, all shares of treasury
stock owned by the Company were canceled and retired. All nondissenting shares
of common stock converted into the right to receive 21.52% of the Consideration
divided by the number of common shares outstanding immediately prior to the
effective date of the transaction. All nondissenting shares of preferred stock
converted into the right to receive 71.45% of the Consideration divided by the
number of preferred shares outstanding immediately prior to the effective date
of the transaction. Additionally, the vesting of all outstanding common stock
options accelerated and were canceled and converted into the right to receive
7.03% of the Consideration divided by the number of common shares issuable
pursuant to the outstanding stock options immediately prior to the effective
date of the transaction. The consideration received by the common stockholders,
preferred stockholders and common stock optionholders was equal to $11.44,
$11.11 and $11.46 per share, respectively.
At the effective time of the Merger, Siemens distributed $180 million in
cash and entered into an escrow agreement, whereby $20 million was deposited
into an escrow account. The escrow account will be released 18 months after the
effective date of the transaction.
The financial statements and notes to financial statements herein have been
prepared to reflect the financial position of the Company immediately prior to
the effective time of the Merger and do not include any adjustments for the
application of push-down accounting. The financial statements reflect the
amortization of deferred compensation, resulting from the acceleration of
vesting that occurred at the time of the merger, related to shares of restricted
common stock and stock options issued to employees. (See Note 8(b)).
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development. The Company is subject
to a number of risks similar to those of other development stage companies,
including dependence on key individuals, competition from established companies,
the development of commercially viable products and the continued financial
support of Siemens, necessary to fund product development.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-80
<PAGE> 215
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents.
(c) Short-Term Investments
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. As of March 12, 1999, all of the Company's investments
are classified and accounted for as held-to-maturity and reported at amortized
cost. As of March 31, 1998 and March 12, 1999, the amortized cost of the
Company's short-term investments, which approximates fair market value, consists
of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
U.S. government agencies................................... $4,939,278 $ 5,399,842
Commercial paper........................................... 4,935,072 4,664,349
---------- -----------
$9,874,350 $10,064,191
========== ===========
</TABLE>
The average maturity of the Company's short-term investments at March 31,
1998 and March 12, 1999 is 104 and 125 days, respectively. Realized gains and
losses from the sale of investment securities are recorded on the trade date by
specific identification of the security sold. Realized gains and losses were not
material during the period from April 1, 1998 to March 12, 1999 and the year
ended March 31, 1998.
(d) Depreciation and Amortization
The Company provides for depreciation by charges to operations on a
straight-line basis in amounts estimated to allocate the cost of the assets over
their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Software and computer equipment............................. 2-3 years
Research and development test equipment..................... 5 years
Furniture and fixtures...................................... 2-5 years
Leasehold improvements...................................... Life of lease
</TABLE>
(e) Software Development Costs
All of the Company's research and development expenses have been charged to
operations as incurred. In accordance with SFAS No. 86, Accounting for the Costs
of Computer Software To Be Sold, Leased or Otherwise Marketed, the Company will
capitalize material software development costs incurred after the technological
feasibility of software development projects has been established. For the year
ended March 31, 1998 and the period from April 1, 1998 to March 12, 1999, no
software development costs met the criteria for capitalization.
(f) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in
F-81
<PAGE> 216
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Comprehensive net loss is the
same as net loss for all periods presented.
(g) Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of unrestricted common shares
outstanding during the period. Basic and diluted net loss per share are the
same, as the effect of the inclusion of shares of common stock issuable upon the
conversion of redeemable convertible preferred stock, as well as stock options
and restricted common stock, would be antidilutive. In accordance with
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 98,
Earnings Per Share in an Initial Public Offering, the Company has determined
that there were no nominal issuances of common stock or potential common stock.
The following weighted average total of securities were excluded from the
calculation of dilutive weighted average shares outstanding, as their effect
would be antidilutive:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 1, 1998
MARCH 31, 1998 TO MARCH 12, 1999
-------------- -----------------
<S> <C> <C>
Redeemable convertible preferred stock................ 4,962,942 12,858,532
Common stock options.................................. 122,441 1,011,421
Restricted common stock............................... 3,000,713 2,419,437
--------- ----------
Total....................................... 8,086,096 16,289,390
========= ==========
</TABLE>
(h) New Accounting Standards
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-up Activities, was issued
in April 1998. SOP 98-5 requires that all nongovernmental entities expense the
costs of start-up activities, including organizational costs, as those costs are
incurred. The Company has recorded all start-up costs as expense when incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133, as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. This new standard is not anticipated to have a significant impact on
the Company's financial statements.
(3) INCOME TAXES
The Company accounts for federal and state income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under the liability method specified
by SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates assumed to be in effect when
these differences reverse. As of March 12, 1999, the Company had net operating
loss and tax credit carryforwards that could result in future potential tax
benefits.
As of March 12, 1999, the Company had federal and state net operating loss
carryforwards and research and development credit carryforwards available to
offset future taxable income, if any, of approximately $14,502,000, $14,021,000
and $625,000, respectively. These carryforwards expire beginning in 2012 and are
subject to review and possible adjustment by the Internal Revenue Service. In
addition,
F-82
<PAGE> 217
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the occurrence of certain events, including significant changes in ownership
interests (see Note 1), may limit the amount of the net operating loss
carryforward available to be used in any given year.
The components of the Company's net deferred tax assets at March 31, 1998
and March 12, 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss and credit carryforwards............... $ 1,604,000 $ 6,706,000
Other temporary differences............................... 420,000 1,803,000
Valuation allowance....................................... (2,024,000) (8,509,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has recorded a full valuation allowance against its net
deferred tax asset as of March 31, 1998 and March 12, 1999, because the future
realizability of such asset is uncertain.
(4) LONG-TERM DEBT
(a) Equipment Line of Credit and Note Payable
The Company has entered into three equipment lines of credit with a bank
totaling $2,500,000, $1,600,000 and $30,000, respectively. All outstanding
borrowings bear interest at the prime rate (7.75% at March 12, 1999) and are
collateralized by substantially all assets of the Company. In addition, the
Company is required to comply with certain restrictive covenants regarding
minimum levels of tangible net worth and liquidity. As of March 12, 1999, the
Company was in compliance with all covenants.
All advances that are outstanding under the $2,500,000 line of credit as of
December 11, 1999 convert into a promissory note that is payable in 36 equal
monthly installments of principal plus interest beginning January 11, 2000. As
of March 12, 1999, $676,106 was outstanding under this facility. The $1,600,000
line of credit converted to a promissory note on August 28, 1998 and is payable
in 36 equal monthly installments of principal plus interest through August 28,
2001. The $30,000 line of credit converted to a promissory note on July 28, 1997
and is payable in 36 equal monthly installments of principal plus interest
through July 28, 2000.
(b) Capital Lease
During fiscal 1999, the Company entered into a capital lease with a
financing institution with the principal amount totaling $151,575. The capital
lease bears interest at 13.5% and is payable in 12 equal monthly installments of
principal and interest of $13,423 through July 1999.
(c) Officer/Stockholder Promissory Note Payable
On May 30, 1997, the Company entered into a $100,000 promissory note
payable (the Note) with an officer/stockholder of the Company. The Note was
repaid, including interest of $611, with the proceeds from the sale of the
Series A redeemable convertible preferred stock (Series A Preferred Stock) (see
Note 6) during June 1997.
F-83
<PAGE> 218
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(d) Future Minimum Payments
The following table summarizes future principal payments required on these
facilities:
<TABLE>
<CAPTION>
FISCAL YEAR-
------------
<S> <C>
2000........................................................ $ 622,619
2001........................................................ 763,914
2002........................................................ 492,754
2003........................................................ 187,662
----------
$2,066,949
==========
</TABLE>
(5) COMMITMENTS
The Company conducts its operations in a leased facility and is obligated
to pay monthly rent through 2004. In addition, the Company leases certain office
equipment under operating lease agreements. The minimum future rental payments
under these operating lease agreements are approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR-
------------
<S> <C>
2000........................................................ $ 240,000
2001........................................................ 240,000
2002........................................................ 240,000
2003........................................................ 257,000
2004........................................................ 46,000
----------
$1,023,000
==========
</TABLE>
Rent expense for the year ended March 31, 1998 and the period ended March
12, 1999 was approximately $94,000 and $174,000, respectively.
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 12,858,532 shares of redeemable convertible
preferred stock, of which 5,704,063 and 7,154,469 have been designated as Series
A Preferred Stock and Series B redeemable convertible preferred stock (Series B
Preferred Stock), respectively. In April 1997, the Company sold 131,970 shares
of Series A Preferred Stock at $1.3639 per share for net proceeds of $180,000 to
the two cofounders of the Company. In June, 1997, the Company sold to various
investors 5,572,093 shares of Series A Preferred Stock at $1.3639 per share for
net proceeds of $7,575,767. On March 10, 1998, the Company sold 7,154,469 shares
of Series B Preferred Stock at $3.69 per share for net proceeds of $26,372,877.
The rights, preferences and privileges of the Series A and Series B
Preferred Stock are listed below.
Dividends
The Company shall not declare or pay any dividends on shares of common
stock unless the holders of the Series A and Series B Preferred Stock then
outstanding receive an amount equal to the dividends declared or paid on common
stock.
F-84
<PAGE> 219
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Conversion
Each share of Series A and Series B Preferred Stock is convertible at the
option of the holder into one share of common stock, adjusted for certain
dilutive events, as defined. In addition, all shares of the Series A and Series
B Preferred Stock shall be automatically converted into shares of common stock
upon the closing of an initial public offering at a per share price of at least
$11.00 and resulting in net proceeds to the Company of at least $15,000,000.
Mandatory Redemption
The Company will be required to redeem, subject to certain conditions, on
March 10, 2003, March 10, 2004 and March 10, 2005, each a Mandatory Redemption
Date, the percentage of Series A and Series B Preferred Stock, as listed in the
following table, at a rate of $1.3639 per share in the case of the Series A
Preferred Stock and $3.69 per share in the case of the Series B Preferred Stock.
<TABLE>
<CAPTION>
PORTION OF SHARES OF SERIES A
AND SERIES B PREFERRED STOCK
MANDATORY REDEMPTION DATE TO BE REDEEMED
------------------------- -----------------------------
<S> <C>
March 10, 2003 33.33%
March 10, 2004 50.00%
March 10, 2005 All shares then held
</TABLE>
Voting Rights
The Series A and Series B preferred stockholders are entitled to vote on
all matters with the common stockholders as if they were one class of stock. The
Series A and Series B preferred stockholders are entitled to the number of votes
equal to the number of shares of common stock into which each share of the
Series A and Series B Preferred Stock is then convertible.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, as defined, the holders of the Series A and Series B
Preferred Stock then outstanding will be entitled to be paid an amount equal to
$1.3639 per share and $3.69 per share, respectively, plus any dividends declared
but unpaid on such shares prior to any payment to common stockholders. Amounts
remaining after payment to the Series A and Series B preferred stockholders, if
any, will be shared among all stockholders on a proportional basis depending on
the number of shares of common stock into which the shares are convertible.
(7) STOCKHOLDERS' EQUITY
(a) Merger
As discussed in Note 1, on February 4, 1999, the Company entered into an
Agreement and Plan of Merger, whereby all of the outstanding capital stock of
the Company was acquired. All shares of treasury stock owned by the Company were
cancelled and retired. All nondissenting shares of common and preferred stock
converted into the right to receive 21.52% and 71.45%, respectively, of the
Consideration divided by the number of shares outstanding immediately prior to
the effective date of the transaction. Additionally, the vesting of all
outstanding common stock options were accelerated and were canceled and
converted into the right to receive 7.03% of the Adjusted Merger Consideration
divided by the number of common shares issuable pursuant to the outstanding
stock options immediately prior to the effective date of the transaction.
F-85
<PAGE> 220
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Reverse Stock Split
On June 17, 1997, the Company effected a reverse stock split of .26394 per
share of Series A Preferred Stock. All share and per share amounts have been
retroactively restated.
(c) Common Stock
The Company has 20,000,000 authorized shares of common stock, of which a
total of 3,955,625 shares have been issued as of March 12, 1999. The Company has
reserved a total of 5,704,063 and 7,154,469 shares of common stock for the
conversion of the Series A and Series B Preferred Stock, respectively.
(d) Founders Shares
On March 13, 1997, the Company sold 2,000,000 shares of common stock to its
co-founders at $.01 per share, which represented the fair value of the common
stock as determined by the Board of Directors. In conjunction with the sale, the
Company entered into a stock restriction agreement with its cofounders under
which 500,000 shares became vested on March 1, 1998. In the event that the
cofounders are no longer employed by the Company, the Company has the right to
repurchase at the original price, through March 1, 2001, the total number of
shares that have not vested. This repurchase right on the remaining 1,500,000
shares will lapse at a rate of 125,000 shares at the end of each three-month
period beginning on March 1, 1998. As of March 12, 1999 a total of 1,000,000
shares remain unvested and upon consummation of the Merger all such unvested
shares vested in full.
(8) THE 1997 STOCK PLAN
In April 1997, the Company's Board of Directors approved the 1997 Stock
Plan (the 1997 Plan), which provides for the granting of Incentive Stock Options
(ISOs) and Nonqualified Stock Options, awards of common stock and the sale of
common stock to key employees, directors and consultants of the Company.
(a) Restricted Common Stock
Under the 1997 Plan, the Board of Directors may authorize the sale of
common stock to employees, directors and consultants of the Company. The
purchase price for the common stock shall be determined by the Board of
Directors, but shall not be less than the fair market value on the date of the
grant. In addition, for each grant, the Board of Directors will determine the
terms under which the Company may repurchase such shares.
During fiscal 1998 and 1999, the Company sold 1,545,000 and 365,000 shares,
respectively, of common stock to various employees, directors and consultants.
The Company has also entered into stock repurchase agreements with the common
stockholders, which provides that in the event the stockholder is no longer
employed or affiliated with the Company, the Company has the right initially to
repurchase all shares at a price per share equal to the original purchase price.
For those stockholders that terminate their employment or affiliation after
their first anniversary date but prior to the fourth anniversary date, the
Company generally has the right to repurchase 75% of the shares less 6.25% of
the shares per quarter beginning on the anniversary date. During fiscal 1999,
the Company repurchased 267,500 shares of common stock; no shares of common
stock were repurchased in fiscal 1998.
F-86
<PAGE> 221
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(b) Stock Options
Under the 1997 Plan, the Board of Directors may grant ISOs and nonqualified
stock options to key employees, directors and consultants of the Company. ISOs
may be granted only to employees, with the exercise price not less that 100% of
the fair market value on the date of grant, or in the case of 10% or greater
shareholders, not less that 110% of the fair market value. Nonqualified stock
options may be granted to key employees, directors or consultants of the
Company. The exercise price of each nonqualified stock option shall be
determined by the Board of Directors, but shall not be less than the par value
of the common stock on the date of grant. In general the vesting period for
common stock options is four years. All stock options issued under the 1997 Plan
expire within 10 years, or in the case of 10% or greater stockholders, within
five years.
Activity under the 1997 Plan is summarized as follows:
<TABLE>
<CAPTION>
OPTION PLAN
-------------------------------------------
WEIGHTED AVERAGE EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- ---------------- ----------
<S> <C> <C> <C>
Outstanding, March 31, 1997................. -- $ -- $ --
Granted................................... 390,000 0.23 0.13-0.37
--------- ----- ----------
Outstanding, March 31, 1998................. 390,000 0.23 0.13-0.37
Granted................................... 1,013,000 0.63 0.25-1.50
Exercised................................. (45,625) 0.21 0.13-0.25
Cancelled................................. (57,500) 0.31 0.25-0.37
--------- ----- ----------
Outstanding, March 12, 1999................. 1,299,875 $0.54 $0.13-1.50
========= ===== ==========
Exercisable, March 12, 1999................. 131,877 $0.27 $0.13-0.37
========= ===== ==========
Exercisable, March 31, 1998................. -- $ -- $ --
========= ===== ==========
</TABLE>
Information regarding stock options as of March 12, 1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------------- EXERCISABLE
RANGE OF WEIGHTED AVERAGE ------------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.13 154,375 8.53 $0.13 43,125 0.13
$0.25-$0.37 907,500 9.23 0.36 88,752 0.34
$1.50 238,000 9.58 1.50 -- --
--------- ----- ------- -----
1,299,875 $0.54 131,877 $0.27
========= ===== ======= =====
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to the financial statements.
The Company has determined that it will account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. Options granted during the
period ended March 12, 1999 and the year ended March 31, 1998 have been valued
for disclosure purposes using the Black-Scholes option pricing model prescribed
by SFAS No. 123.
F-87
<PAGE> 222
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average assumptions used for the year ended March 31, 1998 and
the period from April 1, 1998 to March 12, 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Risk-free interest rate.................................... 5.40-6.19% 4.18-5.50%
Expected dividend yield.................................... 0.00% 0.00%
Expected lives............................................. 5 years 1 year
Expected volatility........................................ 0.00% 0.00%
Weighted average grant date fair value..................... $0.05 $0.03
Weighted average remaining contractual life................ 9.75 years 9.32 years
</TABLE>
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, the Company's net loss would have resulted in the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net loss --
As reported.............................................. $(4,562,554) $(21,212,351)
Pro forma.............................................. $(4,564,635) $(21,221,644)
Basic and diluted net loss per share --
As reported............................................ $ (105.97) $ (16.97)
Pro forma.............................................. $ (106.02) $ (16.98)
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
In connection with the Merger discussed in Note 1, the Company's common and
preferred stockholders and common stock option holders received consideration
equal to $11.44, $11.11 and $11.46 per share, respectively. During the period
from April 1, 1998 to March 12 ,1999, the Company sold 365,000 shares of
restricted common stock and granted 1,013,000 options to purchase common stock,
at amounts that were, in some cases, lower than the deemed fair market value.
Accordingly, the Company has estimated and recorded deferred compensation
related to the restricted common stock and common stock options that were sold
or issued at amounts less than the deemed fair market value.
During the period from April 1, 1998 to March 12, 1999, the Company
recorded $5,267,250 in deferred compensation related to restricted common stock
and stock options issued to employees of the Company. In addition, the Company
recorded compensation expense of $5,267,250 and $654,300 related to the vesting
of restricted common stock and stock options issued to employees and
nonemployees, respectively.
F-88
<PAGE> 223
ARGON NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) 401(k) PROFIT SHARING PLAN
In September 1997, the Board of Directors adopted the Argon Networks, Inc.
401(k) Profit Sharing Plan (the Plan). All employees who are 21 years of age and
have completed one year of service, with the exception of the initial plan year,
are eligible to contribute 1% to 12% of their annual compensation, subject to
IRS limitations. The Company may elect to make discretionary contributions to
the Plan. There have been no discretionary contributions made by the Company to
date.
(10) ACCRUED EXPENSES
Accrued expenses at March 31, 1998 and March 12, 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued payroll and benefits................................ $251,373 $ 770,608
Accrued professional fees................................... 48,267 196,491
Accrued other............................................... 64,830 825,862
-------- ----------
$364,470 $1,792,961
======== ==========
</TABLE>
F-89
<PAGE> 224
BROADSOFT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
Report of Independent Public Accountants.................... S-2
Balance Sheets as of December 31, 1998 and 1999 and
September 30, 2000........................................ S-3
Statements of Operations for the period from inception
(November 17, 1998) to December 31, 1998, for the year
ended December 31, 1999, for the nine months ended
September 30, 1999 (unaudited), for the nine months ended
September 30, 2000 and for the period from inception
(November 17, 1998) to September 30, 2000................. S-4
Statements of changes in Stockholders' Equity (Deficit) for
the period from inception (November 17, 1998) to December
31, 1998, for the year ended December 31, 1999 and for the
nine months ended September 30, 2000...................... S-5
Statements of Cash Flows for the period from inception
(November 17, 1998) to December 31, 1998, for the year
ended December 31, 1999, for the nine months ended
September 30, 1999 (unaudited), for the nine months ended
September 30, 2000 and the period from inception (November
17, 1998) to September 30, 2000........................... S-6
Notes to Financial Statements............................... S-7
</TABLE>
S-1
<PAGE> 225
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BroadSoft, Inc.:
We have audited the accompanying balance sheets of BroadSoft, Inc. (a
Delaware corporation in the development stage), as of December 31, 1998 and
1999, and September 30, 2000, and the related statements of operations, changes
in stockholders' equity (deficit), and cash flows for the period from inception
(November 17, 1998) to December 31, 1998, for the year ended December 31, 1999,
for the nine months ended September 30, 2000, and for the period from inception
(November 17, 1998) to September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BroadSoft, Inc., as of
December 31, 1998 and 1999, and September 30, 2000, and the results of its
operations and its cash flows for the period from inception (November 17, 1998)
to December 31, 1998, for the year ended December 31, 1999, for the nine months
ended September 30, 2000, and for the period from inception (November 17, 1998)
to September 30, 2000, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
November 15, 2000
S-2
<PAGE> 226
BROADSOFT, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1998 1999 2000
-------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $500,410 $ 2,134,246 $ 13,388,125
Due from lessor...................................... -- -- 960,000
Prepaid expenses and other current assets............ -- 83,288 175,793
-------- ----------- ------------
Total current assets......................... 500,410 2,217,534 14,523,918
Property and equipment, net............................ -- 228,991 2,825,942
Other assets........................................... -- 33,470 34,270
-------- ----------- ------------
Total assets................................. $500,410 $ 2,479,995 $ 17,384,130
======== =========== ============
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable..................................... $ -- $ 26,370 $ 935,856
Accrued expenses..................................... -- 61,088 277,995
Credit facility...................................... -- 450,000 --
Current portion of equipment facility................ -- 83,408 234,220
Current portion of term loans........................ -- -- 826,940
Notes payable........................................ 500,000 -- --
-------- ----------- ------------
Total current liabilities.................... 500,000 620,866 2,275,011
Deferred rent........................................ -- -- 989,773
Equipment facility, net of current portion........... -- 183,868 334,999
Term loans, net of current portion................... -- -- 1,782,478
-------- ----------- ------------
Total liabilities............................ 500,000 804,734 5,382,261
Commitments and contingencies (Note 6)
Series A Redeemable Preferred Stock, $.01 par value; no
shares authorized or issued in 1998; 9,000,000 shares
authorized, issued, and outstanding as of December
31, 1999, and September 30, 2000, liquidation value
$.48................................................. -- 4,320,000 4,320,000
Series B Redeemable Convertible Preferred Stock, $.01
par value; no shares authorized or issued in 1998 or
1999; 4,015,004 shares authorized, 3,850,000 shares
issued and outstanding as of September 30, 2000,
liquidation value $4.54.............................. -- -- 17,499,983
Stockholders' equity (deficit):
Common stock, $.005 par value; 0, 42,000,000, and
50,000,000 shares authorized; 0, 29,799,826, and
30,340,826 shares issued and outstanding.......... -- 148,999 151,704
Additional paid-in capital........................... -- 202,551 8,448,102
Deferred compensation................................ -- (22,000) (6,222,072)
Other accumulated comprehensive income............... -- -- 3,966
Earnings (deficit) accumulated during development
stage............................................. 410 (2,974,289) (12,199,814)
-------- ----------- ------------
Total stockholders' equity (deficit)......... 410 (2,644,739) (9,818,114)
-------- ----------- ------------
Total liabilities, redeemable stock, and
stockholders' equity (deficit)............. $500,410 $ 2,479,995 $ 17,384,130
======== =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
S-3
<PAGE> 227
BROADSOFT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION NINE MONTHS INCEPTION
(NOVEMBER 17, ENDED NINE MONTHS (NOVEMBER 17,
1998) TO YEAR ENDED SEPTEMBER 30, ENDED 1998) TO
DECEMBER 31, DECEMBER 31, 1999 SEPTEMBER 30, SEPTEMBER 30,
1998 1999 (UNAUDITED) 2000 2000
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Sales and
marketing......... $ -- $ 561,053 $ 333,162 $ 1,895,189 $ 2,456,242
Research and
development....... -- 1,706,895 1,066,329 4,375,989 6,082,884
General and
administrative.... -- 770,521 551,018 3,173,180 3,943,701
------ ----------- ----------- ----------- ------------
Loss from operations... -- (3,038,469) (1,950,509) (9,444,358) (12,482,827)
Loss on foreign
currency
translation.......... -- -- -- (5,187) (5,187)
Interest income........ 410 82,106 51,325 413,193 495,709
Interest expense....... -- (18,336) (14,585) (189,173) (207,509)
------ ----------- ----------- ----------- ------------
Net income (loss)...... $ 410 $(2,974,699) $(1,913,769) $(9,225,525) $(12,199,814)
====== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
S-4
<PAGE> 228
BROADSOFT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE EQUITY SECURITIES STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------ ---------------------------------------
SERIES B
SERIES A REDEEMABLE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ----------------------- --------------------- ADDITIONAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL
--------- ---------- --------- ----------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 17, 1998
(Inception)......................... -- $ -- -- $ -- -- $ -- $ --
Net income.......................... -- -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- -------- ----------
Balance, December 31, 1998........... -- -- -- -- -- -- --
Total, December 31, 1998.............
Issuance of common stock, April
1999, $.01 per share.............. -- -- -- -- 24,412,244 122,061 122,061
Issuance of Series A Redeemable
Preferred Stock, April 1999, $.48
per share......................... 8,150,000 3,912,000 -- -- -- -- --
Issuance of common stock, June 1999,
$.01 per share.................... -- -- -- -- 1,700,000 8,500 8,500
Issuance of Series A Redeemable
Preferred Stock, June 1999, $.48
per share......................... 850,000 408,000 -- -- -- -- --
Issuance of common stock, August --
October 1999, $.01 per share...... -- -- -- -- 2,350,832 11,754 24,639
Issuance of common stock, October --
December 1999, $.025 per share.... -- -- -- -- 1,336,750 6,684 47,351
Amortization of deferred
compensation...................... -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- -------- ----------
Balance, December 31, 1999........... 9,000,000 4,320,000 -- -- 29,799,826 148,999 202,551
Total, December 31, 1999.............
Issuance of common stock, January
2000, $.025 per share............. -- -- -- -- 48,000 240 67,860
Issuance of common stock, February,
March, and August 2000, $.10 per
share............................. -- -- -- -- 57,000 285 130,165
Issuance of common stock, March and
April 2000, $.25 per share........ -- -- -- -- 340,000 1,700 576,300
Issuance of common stock, May 2000,
$.27 per share.................... -- -- -- -- 6,000 30 11,520
Issuance of common stock, September
2000, $.425 per share............. -- -- -- -- 10,000 50 35,950
Exercise of options March -- May
2000, $.250 -- $.305 per share.... -- -- -- -- 80,000 400 136,600
Issuance of Series B Redeemable
Convertible Preferred Stock,
April -- August 2000, $4.54 per
share............................. -- -- 3,850,000 17,499,983 -- -- --
Deferred compensation............... -- -- -- -- -- -- 7,081,156
Amortization of deferred
compensation...................... -- -- -- -- -- -- --
Issuance of warrants................ -- -- -- -- -- -- 206,000
Foreign currency translation
adjustment........................ -- -- -- -- -- -- --
Net loss............................ -- -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- -------- ----------
Balance, September 30, 2000.......... 9,000,000 $4,320,000 3,850,000 $17,499,983 30,340,826 $151,704 $8,448,102
========= ========== ========= =========== ========== ======== ==========
Total, September 30, 2000............
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------
EARNINGS
OTHER (DEFICIT)
ACCUMULATED ACCUMULATED
DEFERRED COMPREHENSIVE DURING COMPREHENSIVE
COMPENSATION INCOME DEVELOPMENT STAGE TOTAL INCOME (LOSS)
------------ ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, November 17, 1998
(Inception)......................... $ -- $ -- $ -- $ -- $ --
Net income.......................... -- -- 410 410 410
----------- ------ ------------ ----------- -----------
Balance, December 31, 1998........... -- -- 410 410
Total, December 31, 1998............. 410
Issuance of common stock, April
1999, $.01 per share.............. -- -- -- 244,122 --
Issuance of Series A Redeemable
Preferred Stock, April 1999, $.48
per share......................... -- -- -- -- --
Issuance of common stock, June 1999,
$.01 per share.................... -- -- -- 17,000 --
Issuance of Series A Redeemable
Preferred Stock, June 1999, $.48
per share......................... -- -- -- -- --
Issuance of common stock, August --
October 1999, $.01 per share...... (12,885) -- -- 23,508 --
Issuance of common stock, October --
December 1999, $.025 per share.... (20,615) -- -- 33,420 --
Amortization of deferred
compensation...................... 11,500 -- -- 11,500 --
Net loss............................ -- -- (2,974,699) (2,974,699) (2,974,699)
----------- ------ ------------ ----------- -----------
Balance, December 31, 1999........... (22,000) -- (2,974,289) (2,644,739)
Total, December 31, 1999............. (2,974,699)
Issuance of common stock, January
2000, $.025 per share............. (66,900) -- -- 1,200 --
Issuance of common stock, February,
March, and August 2000, $.10 per
share............................. (124,750) -- -- 5,700 --
Issuance of common stock, March and
April 2000, $.25 per share........ (493,000) -- -- 85,000 --
Issuance of common stock, May 2000,
$.27 per share.................... (9,930) -- -- 1,620 --
Issuance of common stock, September
2000, $.425 per share............. (31,750) -- -- 4,250 --
Exercise of options March -- May
2000, $.250 -- $.305 per share.... (115,700) -- -- 21,300 --
Issuance of Series B Redeemable
Convertible Preferred Stock,
April -- August 2000, $4.54 per
share............................. -- -- -- -- --
Deferred compensation............... (7,081,156) -- -- -- --
Amortization of deferred
compensation...................... 1,723,114 -- -- 1,723,114 --
Issuance of warrants................ -- -- -- 206,000 --
Foreign currency translation
adjustment........................ -- 3,966 -- 3,966 3,966
Net loss............................ -- -- (9,225,525) (9,225,525) (9,225,525)
----------- ------ ------------ ----------- -----------
Balance, September 30, 2000.......... $(6,222,072) $3,966 $(12,199,814) $(9,818,114)
=========== ====== ============ ===========
Total, September 30, 2000............ $(9,221,559)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
S-5
<PAGE> 229
BROADSOFT, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION NINE MONTHS INCEPTION
(NOVEMBER 17, ENDED NINE MONTHS (NOVEMBER 17,
1998) TO YEAR ENDED SEPTEMBER 30, ENDED 1998) TO
DECEMBER 31, DECEMBER 31, 1999 SEPTEMBER 30, SEPTEMBER 30,
1998 1999 (UNAUDITED) 2000 2000
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in)
operating activities:
Net income (loss).................. $ 410 $(2,974,699) $(1,913,769) $(9,225,525) $(12,199,814)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... -- 51,663 28,573 307,942 359,605
Stock compensation............... -- 68,132 56,632 1,723,114 1,791,246
Changes in operating assets and
liabilities:
Prepaid expenses and other
assets...................... -- (116,758) (83,363) (93,314) (210,072)
Accounts payable and accrued
expenses.................... -- 87,458 103,907 1,126,833 1,214,291
Deferred rent.................. -- -- -- 29,773 29,773
-------- ----------- ----------- ----------- ------------
Net cash provided by (used
in) operating
activities................ 410 (2,884,204) (1,808,020) (6,131,177) (9,014,971)
-------- ----------- ----------- ----------- ------------
Cash flows used in investing
activities:
Purchases of property and
equipment........................ -- (280,654) (234,959) (2,881,893) (3,162,547)
-------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Borrowings under credit and
equipment facilities............. -- 717,276 -- 438,834 1,156,110
Repayments under credit and
equipment facilities............. -- -- -- (586,891) (586,891)
Proceeds from term loans........... -- -- -- 3,000,000 3,000,000
Repayments of term loans........... (207,582) (207,582)
Proceeds from notes payable........ 500,000 -- -- -- 500,000
Proceeds from issuance of Series A
Preferred Stock.................. -- 3,820,000 3,820,000 -- 3,820,000
Proceeds from issuance of Series B
Preferred Stock.................. -- -- -- 17,499,983 17,499,983
Proceeds from issuance of common
stock............................ -- 261,418 225,108 119,070 380,488
-------- ----------- ----------- ----------- ------------
Net cash provided by
financing activities...... 500,000 4,798,694 4,045,108 20,263,414 25,562,108
-------- ----------- ----------- ----------- ------------
Net increase in cash and cash
equivalents........................ 500,410 1,633,836 2,002,129 11,250,344 13,384,590
Effect of exchange rate on cash and
cash equivalents................... -- -- -- 3,535 3,535
-------- ----------- ----------- ----------- ------------
Cash and cash equivalents, beginning
of period.......................... -- 500,410 500,410 2,134,246 --
-------- ----------- ----------- ----------- ------------
Cash and cash equivalents, end of
period............................. $500,410 $ 2,134,246 2,502,539 $13,388,125 $ 13,388,125
======== =========== =========== =========== ============
Supplementary information:
Cash paid for interest............. $ -- $ 14,585 $ 14,585 $ 166,173 $ 180,758
======== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
S-6
<PAGE> 230
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
BroadSoft, Inc. (BroadSoft or the Company), was incorporated under the name
iKNOW, Inc., on November 17, 1998 (Inception) under the laws of the state of
Delaware. The Company changed its name to BroadSoft, Inc., in January 1999.
BroadSoft is based in Gaithersburg, Maryland, and has an office in Montreal,
Canada.
BroadSoft provides software service delivery and creation systems that
support business telephony applications such as call waiting, voicemail and
conferencing for use on the internet. BroadSoft's products are designed to
enable rapid and economical design and deployment of enhanced services to
business and residential customers on an open, hardware-independent software
platform.
The Company is in the development stage, has limited operating history, and
has not recognized revenues to date. Since its inception, the Company's
operations have consisted of raising capital and developing and marketing its
products. The Company's operations are subject to certain risks and
uncertainties including, among others, current and potential competitors with
greater resources and longer operating histories, rapidly changing technology,
and dependence on key management personnel. The Company will require additional
capital to fund its operations in 2001. The Company plans to obtain the
necessary capital through its pending merger with Unisphere Networks, Inc., as
described below. Should the merger not be consummated, there can be no assurance
that the Company will be able to obtain additional financing when needed, if at
all, or on terms acceptable to the Company.
On October 20, 2000, the Company entered into a definitive agreement to be
acquired by Unisphere Networks, Inc. (Unisphere), in a stock-for-stock merger.
Under the terms of the agreement, each share of BroadSoft common stock will be
converted into shares of Unisphere common stock, and all outstanding options to
acquire BroadSoft common stock will be exchanged for options to purchase
Unisphere common stock. The total amount of shares of Unisphere common stock
that will be issued to the BroadSoft common stockholders and option holders will
be between 5,710,000 and 7,460,000 shares and options, including 750,000 options
that are designated for certain BroadSoft employees. The actual number of shares
will depend upon the trading price of the Unisphere common stock in the public
market during a specified period as defined in the merger agreement.
The closing of the transaction is subject to the completion of Unisphere's
initial public offering, the effectiveness of the registration statement that
Unisphere will file with the Securities and Exchange Commission registering the
shares of Unisphere common stock that will be issued to BroadSoft stockholders
and option holders, and a variety of other customary conditions.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
S-7
<PAGE> 231
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Due From Lessor
In April 2000, the Company entered into an agreement to lease additional
office space. In conjunction with this lease, the Company incurred leasehold
improvement costs related to preparing the space for occupancy. The provisions
of the lease agreement require the lessor to reimburse the Company for these
costs.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment consisted of the following as of
December 31, 1999, and September 30, 2000:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Equipment and computer software............................ $212,188 $1,592,100
Furniture and fixtures..................................... 57,912 418,450
Leasehold improvements..................................... 10,554 1,151,997
Less -- Accumulated depreciation and amortization.......... (51,663) (336,605)
-------- ----------
Property and equipment, net................................ $228,991 $2,825,942
======== ==========
</TABLE>
Depreciation expense is computed using the straight-line method over
estimated useful lives of three years for equipment and five years for furniture
and fixtures. Leasehold improvements, including those for which the Company
received reimbursement from the lessor, are amortized over the lesser of the
estimated useful life of the asset or the remaining lease term.
In accordance with the American Institute of Certified Public Accountants
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," the Company capitalizes costs related
to software and implementation in connection with its internal use software
systems. Such costs are amortized principally over one to two years.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews its long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment is measured by comparing the carrying value
to the estimated undiscounted future cash flows expected to result from the use
of the assets and their disposition. Since Inception, the Company has not
recorded a provision for the possible impairment of long-lived assets.
Research and Development and Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Costs of Software to Be
Sold, Leased, or Otherwise Marketed," software development costs incurred prior
to the establishment of technological feasibility are charged to expense.
Software development costs incurred subsequent to the establishment of
technological feasibility are capitalized until the product is available for
general release to customers. The Company has not capitalized such development
costs under SFAS No. 86.
S-8
<PAGE> 232
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Rent
The Company recognizes rent expense on a straight-line basis over the life
of the lease. In conjunction with its operating leases for office space, the
Company has recorded deferred rent of approximately $36,000. The Company also
recorded leasehold improvements and deferred rent of $960,000 related to the
reimbursement due from the Company's lessor for the leasehold improvements
purchased by the Company. During the nine-month period ended September 30, 2000,
approximately $7,000 was amortized as a reduction of rent expense. The remaining
deferred rent will be amortized to reduce rent expense over the remaining term
of the lease.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. SFAS No. 109 requires that the net deferred tax asset be reduced by a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some portion or all of the net deferred tax asset will not
be realized.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, amounts due from lessor, accounts payable, credit facilities, term
loans, and notes payable. In management's opinion, the carrying amounts of these
financial instruments approximate their fair values at December 31, 1998 and
1999, and September 30, 2000.
Stock-Based Compensation
The Company accounts for stock-based employee issuances using the intrinsic
value method in accordance with provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is generally recognized based
on the difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the stock.
Foreign Currency
The functional currency of the Company's branch in Montreal is the Canadian
dollar. The financial statements of this branch are translated to U.S. dollars
using period-end rates of exchange for assets and liabilities and average rates
of exchange during the period for expenses. Translation gains and losses are
accumulated as a component of other comprehensive income in stockholders' equity
(deficit).
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires the reporting of comprehensive income (loss) in addition
to net income (loss) from operations. Comprehensive income (loss) is a more
inclusive reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income (loss). The Company's only component of other accumulated comprehensive
income is the foreign currency translation adjustment recognized in the nine
months ended September 30, 2000.
S-9
<PAGE> 233
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000, and
management believes that this standard will not have a significant impact on its
results of operations, financial position, or cash flows.
Segment Reporting
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires a business
enterprise, based upon a management approach, to disclose financial and
descriptive information about its operating segments. SFAS No. 131 also
establishes standards for disclosures about products and services, geographic
areas, and major customers. Operating segments are components of an enterprise
about which separate financial information is available and regularly evaluated
by the chief operating decision maker(s) of an enterprise. Under this
definition, the Company operated as a single segment for all years and periods
presented. In addition, the operations of the Company's foreign branch have not
been significant.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
Interim Financial Information
The financial information for the nine months ended September 30, 1999, is
unaudited but includes all adjustments, consisting only of normal recurring
adjustments, that BroadSoft's management considers necessary for a fair
presentation of BroadSoft's operating results and cash flows for the period.
3. TERM LOANS, CREDIT FACILITIES AND NOTES PAYABLE:
Term Loans
In June 2000, the Company entered into a subordinated debt agreement that
provides for two term loans (the Term Loans) of $3 million each. The Term Loans
are collateralized by substantially all of the Company's assets. The maturity
date of the Term Loans is 36 months from the date the funds are borrowed by the
Company. The Term Loans bear interest at 12.5 percent, and payments of principal
and interest are due monthly. As of September 30, 2000, $2,792,418 was
outstanding under the Term Loans. This amount is shown in the accompanying
financial statements net of a discount of $183,000 related to warrants that were
issued to the lender concurrent with the borrowings under the Term Loans (see
Note 4). The debt discount will be amortized to interest expense using the
effective interest method over the period the Term Loans are outstanding.
Amortization of approximately $23,000 has been recorded as interest expense for
the nine months ended September 30, 2000.
Credit Facilities
In July 1999, the Company entered into a senior credit agreement with a
commercial lender (the Credit Agreement), which is collateralized by
substantially all of the Company's assets. The Credit Agreement provided for a
line of credit (the Line of Credit) and a $750,000 equipment facility (the
Equipment Facility). The Company borrowed $450,000 under the Line of Credit
during 1999. This amount was repaid at the closing of the Series B Redeemable
Convertible Preferred Stock (see Note 4).
S-10
<PAGE> 234
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts borrowed under the Line of Credit carry an interest rate of prime plus
1.5 percent (10 percent as of December 31, 1999) and are repayable in monthly
installments of interest only. As of September 30, 2000, no amounts are
outstanding under the Line of Credit, and the Company has available borrowings
of $1.0 million.
The Equipment Facility was issued to finance equipment and software
purchases. Interest accrues at the 36-month treasury rate plus 3.5 percent, with
a minimum interest rate of 7.25 percent, and is based on the date the funds are
borrowed. The interest rate on the borrowings under the Equipment Facility was
9.56 percent as of December 31, 1999. The borrowings outstanding under the
Equipment Facility as of September 30, 2000, bore interest at rates ranging from
9.56 to 10.16 percent. Amounts borrowed under the Equipment Facility are due 36
months from the date of borrowing and are repayable in monthly installments of
principal and interest. The future minimum principal payments of the Term Loans
and the Equipment Facility are as follows:
<TABLE>
<S> <C>
For the three months ended December 31, 2000................ $ 207,164
For the year ended December 31:
2001...................................................... 1,156,560
2002...................................................... 1,294,217
2003...................................................... 703,696
----------
Total............................................. $3,361,637
==========
</TABLE>
Notes Payable
In December 1998, the Company issued three notes to parties that
subsequently became holders of Series A Redeemable Preferred Stock. One note was
for $250,000, and two notes were for $125,000 each. The notes bore interest at 8
percent and were due on demand. In April 1999, when the Series A Redeemable
Preferred Stock was issued (see Note 4), the outstanding principal balance on
the notes was exchanged as partial consideration for the Series A Redeemable
Preferred Stock. The accrued interest accumulated under the notes was paid in
cash.
4. CAPITAL STOCK:
Common Stock Split
In August 2000, a two for one stock split of the Company's common stock was
effected. All share and per share amounts, including stock option information,
have been restated in the accompanying financial statements and the notes
thereto to reflect this stock split.
Series A Redeemable Preferred Stock
In April 1999, the Company completed a financing transaction (the Financing
Transaction) in which it issued 9,000,000 shares of Series A Redeemable
Preferred Stock (the Series A Preferred) and 20,448,980 shares of the Company's
common stock. The Series A Preferred was issued for $4,320,000 or $.48 per
share, and the Company's common stock was issued for $204,490 or $.01 per share.
The Series A Preferred is redeemable upon the earlier of (i) the date 20 days
subsequent to an initial public offering yielding aggregate net proceeds to the
Company of at least $15 million, (ii) a change in control of the Company, as
defined, or (iii) equally each year beginning in the fifth year and ending in
the seventh year from the original issuance date. The redemption price for the
Series A Preferred is equivalent to the original issue price plus any declared
or accrued but unpaid dividends.
S-11
<PAGE> 235
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Founders' Stock
Concurrent with the Financing Transaction, 5,663,264 shares of the
Company's common stock (the Founder Shares) were issued to the Company's
founders as partial compensation for services rendered. The Company recorded
stock compensation expense of $56,632 related to the Founder Shares. The Founder
Shares are subject to stock restriction agreements and vest over a period from
the date of issuance to April 22, 2003. Vesting can be accelerated upon certain
change of control events.
Series B Redeemable Convertible Preferred Stock
In 2000, the Company authorized the issuance and sale of up to 4,015,004
shares of its Series B Redeemable Convertible Preferred Stock (the Series B
Preferred), which has a par value of $.01 per share. The Company sold 3,850,000
shares of the Series B Preferred in private placement offerings yielding
proceeds to the Company of approximately $17,500,000 or $4.54 per share. Each
share of the Series B Preferred is convertible at any time at the option of the
holder into shares of the Company's common stock at a specified conversion rate
that is subject to adjustment. As of September 30, 2000, the conversion rate was
one for two. Unless otherwise determined by the Company's Board of Directors,
the Series B Preferred will automatically convert into shares of common stock
immediately upon the closing of an initial public offering in which the
aggregate proceeds to the Company exceed $30 million and the offering price
meets certain thresholds or upon a change of control in the Company, as defined.
The Series B Preferred is redeemable at the same time and according to the same
provisions as the Series A Preferred. The redemption price for the Series B
Preferred is equivalent to the original issue price plus any declared or accrued
but unpaid dividends.
Warrants
In connection with the borrowings under the first of the Term Loans, the
Company issued to the lender warrants to purchase 66,000 shares of the Company's
Series B Preferred for approximately $4.54 per share. The warrants expire upon
the earlier of (i) seven years, (ii) three years from the effective date of a
qualified initial public offering, as defined, or (iii) on the effective date of
a change in control in the Company, as defined. The fair value of these warrants
of $206,000 was recorded in the accompanying financial statements as a discount
offsetting the amount recorded under the Term Loans and as additional paid-in
capital. In addition and in connection with the Credit Agreement (see Note 3),
the Company issued warrants to purchase 100,000 shares of the Company's common
stock for $.25 per share. The warrants expire in November 2006.
5. 1999 STOCK INCENTIVE PLAN:
In October 1999, the Company adopted the 1999 Stock Incentive Plan (the
1999 Plan). The 1999 Plan provides for the grant of incentive stock options,
nonqualified stock options, stock appreciation rights, and common stock awards.
During 2000 and under the 1999 Plan, the Company issued options to purchase
shares of common stock to its employees. The options granted are accounted for
under APB No. 25. The Company recorded deferred compensation of approximately
$5,918,000 related to these issuances. Of this amount, approximately $245,000,
$58,000, and $44,000 is reflected as compensation expense and is included as
research and development, general and administrative, and sales and marketing,
respectively, in the accompanying statements of operations and approximately
$5,571,000 is included as deferred compensation in the accompanying balance
sheets. Had compensation cost been determined based on the estimated fair value
of the options at the grant dates consistent with SFAS No. 123, pro forma net
loss would have been approximately $9,260,906. The weighted-average fair value
of the options granted by
S-12
<PAGE> 236
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company during 2000 is estimated to be $4.54 per option assuming the
following: no dividend yield, risk free interest rate of 6 percent, an expected
term of ten years, and an expected volatility of 65 percent.
The following summarizes option activity during 2000:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Granted in 2000............................................. 2,915,200 $ .38
Exercised in 2000........................................... 80,000 .32
--------- --------------
Options outstanding, September 30, 2000; exercise prices
ranging from $.25 to $1.14................................ 2,835,200 $ .37
========= ==============
Options exercisable, September 30, 2000..................... 20,000 $ .31
========= ==============
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
CURRENTLY WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING REMAINING LIFE
-------------- ----------------- ----------------
<S> <C> <C>
$ .25............................................... 290,000 9.44
.27............................................... 360,000 9.57
.31............................................... 882,000 9.69
.38............................................... 454,500 9.82
.43............................................... 748,700 9.89
1.14............................................... 100,000 9.92
--------- ----
2,835,200 9.73
========= ====
</TABLE>
During 1999 and 2000, the Company issued 3,025,332 and 340,000 shares,
respectively, of restricted common stock to its employees. Of these, 1,962,832
were issued for $.01 per share, 1,062,500 were issued for $.025 per share, and
340,000 were issued for $.25 per share. In addition, during 2000, 70,000
unvested employee stock options were exercised for shares of restricted common
stock. The vesting of the restricted common stock begins one year following the
date of issuance. The Company recorded deferred compensation of approximately
$493,000 related to issuances in 2000. Of this amount, approximately $66,000 is
reflected as compensation expense and is included in sales and marketing in the
accompanying statements of operations and approximately $427,000 is included as
deferred compensation in the accompanying balance sheets.
During 1999 and 2000, the Company also issued 662,250 and 121,000 shares,
respectively, of common stock and 0 and 20,000 options, respectively, to
purchase common stock to certain consultants and other nonemployees as
consideration for services. The Company valued these amounts using a fair value
model. The Company recognized deferred compensation expense of $33,500 and
amortized $11,500 related to these issuances during 1999. For the nine months
ended September 30, 2000, the Company recognized deferred compensation of
approximately $1,512,000. Of this amount, approximately $1,310,000 is reflected
as compensation expense and is included in general and administrative in the
accompanying statements of operations and approximately $202,000 is included as
deferred compensation in the accompanying balance sheets.
S-13
<PAGE> 237
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Stockholders Agreements
In connection with the sale of the Series A Preferred and the Series B
Preferred, certain common and preferred stockholders and the Company entered
into a Common Stock and Series A Preferred Stock Purchase Agreement, a
Registration Rights Agreement, and a Stockholders Agreement (together, the
Stockholders Agreements). The Stockholders Agreements, among other things, (i)
prescribe certain limitations on the transfer of stock, (ii) grant the Company
and certain stockholders certain rights with respect to sales of stock, and
(iii) grant certain investors antidilution rights and rights of first refusal
with respect to additional securities that may be offered for sale by the
Company. The Stockholders Agreements terminate upon the liquidation of the
Company, upon the written agreement of a majority of the stockholders, or upon
consummation of a qualified initial public offering or sale transaction, as
defined.
Leases
The Company leases office space under operating lease agreements that
expire in February 2001 and April 2010. The Company incurred approximately
$122,000 in rent expense for 1999 and approximately $176,000 for the nine months
ended September 30, 2000. The remaining future minimum lease payments are as
follows:
<TABLE>
<S> <C>
For the three months ended December 31, 2000................ $ 96,252
For the year ended December 31:
2001...................................................... 510,307
2002...................................................... 526,862
2003...................................................... 492,221
2004...................................................... 496,699
Thereafter................................................ 3,201,214
----------
Total............................................. $5,323,555
==========
</TABLE>
The lease that expires in 2010 requires the Company to maintain a $700,000
letter of credit with a financial institution.
Software Licensing Agreement
During 1999, the Company entered into a database software licensing
agreement with a third party. The licensed database software product will be
used in certain BroadSoft applications. The agreement requires the Company to
pay royalties ranging from $4,000 to 15 percent of the selling price of the
Company's database server when the licensed product is used. In addition to the
royalties, the Company is obligated to pay the third party a software
maintenance fee equal to 15 percent of the total royalties. Should the Company
decide to use an alternate database software product, no obligations would be
incurred under the license agreement. As no revenues have been recognized to
date, there are no obligations and no amounts have been paid related to the
license agreement.
Litigation
The Company is subject to lawsuits, investigations, and claims arising out
of the ordinary course of business. In the opinion of management, resolution of
these matters will not have a material effect on the financial statements or
results of operations of the Company if disposed of unfavorably.
S-14
<PAGE> 238
BROADSOFT, INC.
A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
For the period from inception to December 31, 1998, for the year ended
December 31, 1999, for the nine months ended September 30, 2000, and for the
period from Inception (November 17, 1998) to September 30, 2000, no income tax
provision or benefit was recorded as the deferred tax benefit related to the
Company's operating loss was offset in its entirety by a valuation allowance.
The actual tax benefits for the year ended December 31, 1999, and for the
nine-month period ended September 30, 2000, differed from the expected tax
benefit as a result of the following:
<TABLE>
<CAPTION>
INCEPTION
(NOVEMBER 17)
DECEMBER 31, SEPTEMBER 30, TO SEPTEMBER 30,
1999 2000 2000
------------ ------------- ----------------
<S> <C> <C> <C>
Computed expected tax benefit............. $(1,041,144) $(3,212,039) $(4,253,183)
Increase in deferred tax valuation
allowance............................... 1,038,000 2,569,000 3,607,000
Nondeductible expenses.................... 3,144 643,039 646,183
----------- ----------- -----------
Net deferred tax asset.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 583,000 $ 1,283,000
Organization costs...................................... 419,000 2,211,000
Accrued expenses........................................ 18,000 35,000
Other................................................... 18,000 78,000
----------- -----------
Total........................................... 1,038,000 3,607,000
Valuation allowance..................................... (1,038,000) (3,607,000)
----------- -----------
Net deferred tax asset.......................... $ -- $ --
=========== ===========
</TABLE>
The Company has determined that its net deferred tax assets, composed
primarily of net operating loss carryforwards and organization costs, did not
satisfy the recognition criteria set forth in SFAS No. 109 and, accordingly,
established a full valuation allowance for the net deferred tax assets. As of
December 31, 1999, and September 30, 2000, the Company had net operating loss
carryforwards of approximately $1.7 million and $3.6 million, respectively, to
offset future taxable income, which begin to expire in 2019. The ability to
utilize net operating loss carryforwards in the future may be limited in the
event that the Company experiences a change in control as defined by tax laws
and regulations.
8. RETIREMENT PLAN:
On January 1, 2000, the Company implemented a 401(k) retirement plan for
the benefit of all eligible employees. Participants may contribute up to 15
percent of their annual compensation to the retirement plan, subject to
statutory limits. Employee contributions are fully vested. The Company's
contribution is discretionary and is determined by the Board of Directors. All
employer contributions, if any, vest after three years of service by the
employee. During the nine months ended September 30, 2000, the Company did not
contribute to the plan.
S-15
<PAGE> 239
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
UNISPHERE NETWORKS, INC.,
PITCHER ACQUISITION CORP.,
AND
BROADSOFT, INC.
DATED AS OF OCTOBER 20, 2000
<PAGE> 240
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER........................................ A-1
1.1 The Merger........................................... A-1
1.2 The Closing.......................................... A-1
1.3 Actions at the Closing............................... A-1
1.4 Additional Action.................................... A-2
1.5 Conversion of Shares................................. A-2
1.6 Dissenting Shares.................................... A-4
1.7 Exchange of Shares................................... A-4
1.8 Fractional Shares.................................... A-5
1.9 Options and Warrants................................. A-5
1.10 Escrow............................................... A-7
1.11 Certificate of Incorporation and By-laws............. A-7
1.12 No Further Rights.................................... A-7
1.13 Closing of Transfer Books............................ A-7
1.14 Tax Consequences..................................... A-8
1.15 Accounting Treatment................................. A-8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.... A-8
2.1 Organization, Qualification and Corporate Power...... A-8
2.2 Capitalization....................................... A-8
2.3 Authorization of Transaction......................... A-9
2.4 Noncontravention..................................... A-9
2.5 Subsidiaries......................................... A-10
2.6 Financial Statements................................. A-10
2.7 Absence of Certain Changes........................... A-10
2.8 Undisclosed Liabilities.............................. A-10
2.9 Tax Matters.......................................... A-10
2.10 Assets............................................... A-12
2.11 Owned Real Property.................................. A-12
2.12 Real Property Leases................................. A-12
2.13 Intellectual Property................................ A-12
2.14 Contracts............................................ A-14
2.15 Powers of Attorney................................... A-15
2.16 Insurance............................................ A-15
2.17 Litigation........................................... A-15
2.18 Warranties........................................... A-15
2.19 Employees............................................ A-16
2.20 Employee Benefits.................................... A-16
2.21 Environmental Matters................................ A-18
2.22 Legal Compliance..................................... A-19
2.23 Customers and Suppliers.............................. A-19
</TABLE>
i
<PAGE> 241
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.24 Permits.............................................. A-19
2.25 Certain Business Relationships With Affiliates....... A-19
2.26 Brokers' Fees........................................ A-19
2.27 Books and Records.................................... A-19
2.28 Disclosure........................................... A-19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER AND
THE TRANSITORY SUBSIDIARY................................... A-20
3.1 Organization, Qualification and Corporate Power...... A-20
3.2 Capitalization....................................... A-20
3.3 Authorization of Transaction......................... A-20
3.4 Noncontravention..................................... A-20
3.5 Reports and Financial Statements..................... A-21
3.6 Absence of Material Adverse Change................... A-21
3.7 Litigation........................................... A-21
3.8 Interim Operations of the Transitory Subsidiary...... A-22
3.9 Brokers' Fees........................................ A-22
3.10 Disclosure........................................... A-22
3.11 Other Transactions................................... A-22
ARTICLE IV COVENANTS........................................ A-22
4.1 Closing Efforts...................................... A-22
4.2 Governmental and Third-Party Notices and Consents.... A-22
4.3 Special Meeting, Prospectus/Proxy Statement and
Registration Statement................................. A-23
4.4 Operation of Business................................ A-24
4.5 Access to Information................................ A-26
4.6 Notice of Breaches................................... A-26
4.7 Exclusivity.......................................... A-26
4.8 Expenses............................................. A-27
4.9 Agreements from Certain Affiliates of the Company.... A-27
4.10 Listing of Merger Shares............................. A-27
4.11 Loan................................................. A-27
4.12 Directors and Officers Insurance..................... A-27
4.13 Employee Benefit and Related Matters................. A-28
4.14 Certain Tax Matters.................................. A-28
ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER.............. A-29
5.1 Conditions to Each Party's Obligations............... A-29
5.2 Conditions to Obligations of the Buyer and the
Transitory Subsidiary.................................. A-29
5.3 Conditions to Obligations of the Company............. A-31
</TABLE>
ii
<PAGE> 242
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VI INDEMNIFICATION.................................. A-32
6.1 Indemnification by the Company Stockholders.......... A-32
6.2 Indemnification by the Buyer......................... A-32
6.3 Indemnification Claims............................... A-32
6.4 Survival of Representations and Warranties........... A-35
6.5 Limitations.......................................... A-35
ARTICLE VII TERMINATION..................................... A-36
7.1 Termination of Agreement............................. A-36
7.2 Effect of Termination................................ A-37
ARTICLE VIII DEFINITIONS.................................... A-37
ARTICLE IX MISCELLANEOUS.................................... A-40
9.1 Press Releases and Announcements..................... A-40
9.2 No Third Party Beneficiaries......................... A-40
9.3 Entire Agreement..................................... A-40
9.4 Succession and Assignment............................ A-40
9.5 Counterparts and Facsimile Signature................. A-41
9.6 Headings............................................. A-41
9.7 Notices.............................................. A-41
9.8 Governing Law........................................ A-42
9.9 Amendments and Waivers............................... A-42
9.10 Severability......................................... A-42
9.11 Submission to Jurisdiction........................... A-43
9.12 Construction......................................... A-43
</TABLE>
<TABLE>
<S> <C> <C>
Exhibit A -- Escrow Agreement
Exhibit B -- Stockholder Voting Agreement
Exhibit C -- Affiliate Agreement
Exhibit D -- Loan and Security Agreement
Exhibit E -- Opinion of Counsel to the Company
Exhibit F -- Noncompetition and Nonsolicitation Agreement
Exhibit G-1 -- Lock-Up Agreement (Employee)
Exhibit G-2 -- Lock-Up Agreement (Non-Employee)
Exhibit H -- Opinion of Counsel to the Buyer and the Transitory
Subsidiary
</TABLE>
iii
<PAGE> 243
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of October 20, 2000 by and among Unisphere
Networks, Inc., a Delaware corporation (the "Buyer"), Pitcher Acquisition Corp.,
a Delaware corporation and a wholly-owned subsidiary of the Buyer (the
"Transitory Subsidiary"), and BroadSoft, Inc., a Delaware corporation (the
"Company"). The Buyer, the Transitory Subsidiary and the Company are referred to
collectively herein as the "Parties."
This Agreement contemplates a merger of the Transitory Subsidiary into the
Company. In such merger, the stockholders of the Company will receive common
stock of the Buyer in exchange for their capital stock of the Company. It is
intended that the merger would qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The
parties further intend for the merger to be accounted for, for financial
accounting purposes, as a purchase transaction.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary shall merge with and into the Company (with
such merger referred to herein as the "Merger") at the Effective Time (as
defined below). From and after the Effective Time, the separate corporate
existence of the Transitory Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Company and
the Transitory Subsidiary file a certificate of merger or other appropriate
documents prepared and executed in accordance with Section 251(c) of the
Delaware General Corporation Law (the "Certificate of Merger") with the
Secretary of State of the State of Delaware. The Merger shall have the effects
set forth in Section 259 of the Delaware General Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr LLP
in Reston, Virginia, commencing at 9:00 a.m. local time on such mutually
agreeable date as soon as practicable (and in any event not later than three
business days) after the satisfaction or waiver of all conditions (excluding the
delivery of any documents to be delivered at the Closing by any of the Parties)
set forth in Article V hereof (the "Closing Date").
1.3 Actions at the Closing. At the Closing:
(a) the Company shall deliver to the Buyer and the Transitory
Subsidiary the various certificates, instruments and documents referred to
in Section 5.2;
(b) the Buyer and the Transitory Subsidiary shall deliver to the
Company the various certificates, instruments and documents referred to in
Section 5.3;
(c) the Company and the Transitory Subsidiary shall file with the
Secretary of State of the State of Delaware the Certificate of Merger;
(d) the Buyer shall deliver certificates for the Initial Shares (as
defined below) to a bank trust company or other entity reasonably
satisfactory to the Company appointed by the Buyer to act as the exchange
agent (the "Exchange Agent") in accordance with Section 1.7; and
(e) the Buyer, Michael Tessler and Robert Goodman (the
"Indemnification Representatives") and an independent escrow agent mutually
agreeable to the parties (the "Escrow Agent") shall execute and deliver the
Escrow Agreement attached hereto as Exhibit A (the "Escrow Agreement") and
the Buyer shall deliver to the Escrow Agent a certificate for the Escrow
Shares (as defined below) being placed in escrow on the Closing Date
pursuant to Section 1.10.
A-1
<PAGE> 244
1.4 Additional Action. The Surviving Corporation may, at any time after
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of common stock, $.01 par value per share, of the
Company ("Common Shares") issued and outstanding immediately prior to the
Effective Time (other than Common Shares owned beneficially by the Buyer or
the Transitory Subsidiary, Dissenting Shares (as defined below) and Common
Shares held in the Company's treasury) shall be converted into and
represent the right to receive (subject to the provisions of Section 1.10)
(i) such number of shares of common stock, $.01 par value per share, of the
Buyer ("Buyer Common Stock") as is equal to the Common Conversion Ratio (as
defined below) plus (ii) any Additional Shares pursuant to Section 1.5(d)
below.
(b) The "Common Conversion Ratio" shall be the result obtained by
dividing (i) 4,960,000 by (ii) the sum of (A) number of outstanding Common
Shares immediately prior to the Effective Time (the "Actual Closing
Shares") (after giving effect to the exercise of all Warrants (as defined
below) outstanding immediately prior to the Effective Time and the
conversion of all shares of Series B Convertible Preferred Stock, $.01 par
value per share (the "Series B Preferred Shares") into Common Shares (as
contemplated by Section 5.2(m)), and (B) the number of Common Shares
issuable upon the exercise of all Options (as defined below) outstanding
immediately prior to the Effective Time, other than any Options issued as
contemplated by Section 4.4(a) (such sum being referred to as the
"Fully-Diluted Closing Shares").
(c) Of the shares of Buyer Common Stock into which the Common Shares
were converted pursuant to this Section 1.5, 496,000 shares of Buyer Common
Stock (the "Escrow Shares") shall be deposited into escrow pursuant to
Section 1.10 and shall be held and disposed of in accordance with the terms
of the Escrow Agreement. Stockholders of record of the Company immediately
prior to the Effective Time ("Company Stockholders") shall be entitled to
receive initially in the aggregate the number of shares of Buyer Common
Stock into which their Common Shares were converted pursuant to this
Section 1.5 (and cash in lieu of any fractional share of Buyer Common
Stock, provided that such cash shall be paid following the end of the
Measurement Period, as contemplated in Section 1.8 below), less the number
of Escrow Shares (the "Initial Shares"). The Initial Shares shall be
allocated among the Company Stockholders pro rata in accordance with the
number of Common Shares held by each, with any fractions being rounded down
to the nearest whole number. The Initial Shares and the Escrow Shares are
referred to as the "Total Closing Shares."
(d) Promptly following the expiration of the Measurement Period (as
defined below) (but in any event within 15 days thereafter), the Buyer
shall issue, without deduction, reduction or setoff, that number of
additional shares of Buyer Common Stock (the "Additional Shares"), if any,
equal to the Total Merger Shares (as defined below) less the Total Closing
Shares. Of such Additional Shares, that number of shares equal to the
product of (i) the Total Merger Consideration (as defined below) less
4,960,000 shares, multiplied by (ii) 10%, shall be considered Escrow Shares
and deposited into escrow pursuant to Section 1.10. The Company
Stockholders shall be entitled to receive initially the number of
Additional Shares not deposited into escrow pursuant to the preceding
sentence, which shall be allocated among the Company Stockholders pro rata
in accordance with the number of Initial Shares received by each in respect
of its Common Shares, with any fractions being rounded down to the nearest
whole number and cash being paid in lieu of any fractional share following
the end of the Measurement Period as contemplated by Section 1.8 below. The
Initial Shares, the Additional Shares and the Escrow Shares are referred to
as the "Merger Shares."
(e) The number of "Total Merger Shares" shall equal the product of (A)
the Total Merger Consideration multiplied by (B) a fraction, the numerator
of which is the number of Actual Closing
A-2
<PAGE> 245
Shares and the denominator of which is the number of Fully-Diluted Closing
Shares. The "Total Merger Consideration" shall be calculated as follows:
(i) if the Buyer Average Stock Price is less than or equal to
Threshold A, then the Total Merger Consideration shall be 6,710,000
shares of Buyer Common Stock;
(ii) if the Buyer Average Stock Price is greater than Threshold A
and less than Threshold B, then the Total Merger Consideration shall be
the number of shares of Buyer Common Stock equal to the quotient of (x)
Threshold B multiplied by 5,460,000, (y) divided by the Buyer Average
Stock Price;
(iii) if the Buyer Average Stock Price is equal to or greater than
Threshold B and less than or equal to Threshold C, then the Total Merger
Consideration shall be 5,460,000 shares of Buyer Common Stock;
(iv) if the Buyer Average Stock Price is greater than Threshold C
and less than Threshold D, then the Total Merger Consideration shall be
the number of shares of Buyer Common Stock equal to the quotient of (x)
Threshold C multiplied by 5,460,000, (y) divided by the Buyer Average
Stock Price; and
(v) if the Buyer Average Stock Price is equal to or greater than
Threshold D, then the Total Merger Consideration shall be 4,960,000
shares of Buyer Common Stock; where
(vi) "Threshold A" shall mean the quotient of (A) Threshold B
multiplied by 5,460,000, (B) divided by 6,710,000. "Threshold B" shall
mean a fraction, the numerator of which is $10,000,000,000 plus the
amount of the Gross IPO Proceeds (as defined below), and the denominator
of which is the number of Post-IPO Shares. "Threshold "C" shall mean a
fraction, the numerator of which is $14,000,000,000 plus the amount of
the Gross IPO Proceeds, and the denominator of which is the number of
Post-IPO Shares. "Threshold D" shall mean the quotient of (A) Threshold
C multiplied by 5,460,000, (B) divided by 4,960,000. "Gross IPO
Proceeds" shall mean the price per share to the public, as set forth on
the cover of the final prospectus for the IPO (as defined below),
multiplied by the number of shares sold to the public in the IPO, after
giving effect to the exercise by the underwriters of their
over-allotment option, if applicable. "Post-IPO Shares" means the number
of shares of Buyer Common Stock outstanding immediately after the
closing of the IPO, plus the number of shares of Buyer Common Stock
issuable upon the exercise of options and warrants to purchase Buyer
Common Stock then outstanding, plus the number of shares issued upon the
exercise of the underwriters' over-allotment option, if applicable.
"IPO" shall mean the first public underwritten offering of equity
securities made by the Buyer pursuant to an effective registration
statement on Form S-1 under the Securities Act (as defined below). The
"Buyer Average Stock Price" shall be equal to the average of the last
reported sale price per share for the Buyer Common Stock on the Nasdaq
National Market for the 20 consecutive trading days (the "Measurement
Period") beginning with the first complete trading day following the
later to occur of (x) the public announcement of Buyer's quarterly
financial results for the Buyer's first fiscal quarter ending after the
IPO and (y) the 30th day following the Closing Date.
(f) Each Company Share (as defined below) held in the Company's
treasury immediately prior to the Effective Time shall be cancelled and
retired without payment of any consideration therefor.
(g) Each share of common stock, $.01 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted into and thereafter evidence one share of
common stock, $.01 par value per share, of the Surviving Corporation.
(h) In the event of any change in Buyer Common Stock between the date
of this Agreement and the later of the date 10 days following the
Measurement Period or the date all Additional Shares are issued pursuant to
Section 1.5(d) by reason of stock split, stock dividend, subdivision,
reclassification, recapitalization, combination, exchange of shares or the
like, the number and class of
A-3
<PAGE> 246
shares of Buyer Common Stock to be issued and delivered in the Merger as
provided in this Agreement shall be appropriately adjusted.
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by a Company Stockholder who has not voted
such Company Shares in favor of the adoption of this Agreement and the Merger
and with respect to which appraisal shall have been duly demanded and perfected
in accordance with Section 262 of the Delaware General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time. Dissenting
Shares shall not be converted into or represent the right to receive Merger
Shares, unless such Company Stockholder shall have forfeited his, her or its
right to appraisal under the Delaware General Corporation Law or properly
withdrawn, his, her or its demand for appraisal. If such Company Stockholder has
so forfeited or withdrawn his, her or its right to appraisal of Dissenting
Shares, then (i) as of the occurrence of such event, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Shares issuable in respect of such
Company Shares pursuant to Section 1.5, and (ii) promptly following the
occurrence of such event, the Buyer shall deliver to the Exchange Agent a
certificate representing 90% of the Merger Shares to which such holder is
entitled pursuant to Section 1.5 (which shares shall be considered Initial
Shares for all purposes of this Agreement) and shall deliver to the Escrow Agent
a certificate representing the remaining 10% of the Merger Shares to which such
holder is entitled pursuant to Section 1.5 (which shares shall be considered
Escrow Shares for all purposes of this Agreement).
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands, and
any other instruments that relate to such demands received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the Delaware General Corporation Law; provided that,
prior to the Closing, the Company shall have the opportunity to participate in
all such negotiations and proceedings. The Company shall not, except with the
prior written consent of the Buyer, make any payment with respect to any demands
for appraisal of Company Shares or offer to settle or settle any such demands,
unless required to do so by a court of competent jurisdiction. Prior to the
Closing, the Buyer shall consult with the Company prior to entering into any
agreement to settle any such demands.
1.7 Exchange of Shares.
(a) Prior to the Effective Time, the Buyer shall appoint the Exchange Agent
to effect the exchange for the Initial Shares and the Additional Shares of
certificates that, immediately prior to the Effective Time, represented Common
Shares converted into Merger Shares pursuant to Section 1.5 (including any
Common Shares referred to in the last sentence of Section 1.6(a))
("Certificates"). On the Closing Date, the Buyer shall deliver to the Exchange
Agent, in trust for the benefit of holders of Certificates, stock certificates
(issued in the name of the Company Stockholders) representing the Initial
Shares, as described in Section 1.5. As soon as practicable after the Effective
Time, the Buyer shall cause the Exchange Agent to send a notice and a
transmittal form to each holder of a Certificate advising such holder of the
effectiveness of the Merger and the procedure for surrendering to the Exchange
Agent such Certificate in exchange for the Initial Shares issuable pursuant to
Section 1.5. Each holder of a Certificate, upon proper surrender thereof to the
Exchange Agent in accordance with the instructions in such notice, shall be
entitled to receive in exchange therefor (subject to any taxes required to be
withheld) the Initial Shares issuable pursuant to Section 1.5. Following
determination of the Total Merger Consideration, the Buyer shall deliver to the
Exchange Agent stock certificates representing the Additional Shares and each
holder of a Certificate, upon proper surrender thereto, shall be entitled to
receive the Additional Shares issuable pursuant to Section 1.5. Until properly
surrendered, each such Certificate shall be deemed for all purposes to evidence
only the right to receive a certificate for the Initial Shares or Additional
Shares, if any, issuable pursuant to Section 1.5 (and cash in lieu of any
fractional share of Buyer Common Stock, provided that such cash shall be paid
following the end of the Measurement Period, as contemplated in Section 1.8
below). Holders of Certificates shall not be entitled to receive certificates
for the Initial Shares
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or Additional Shares, if any, to which they would otherwise be entitled until
such Certificates are properly surrendered.
(b) If any Initial Shares or Additional Shares, if any, are to be issued in
the name of a person other than the person in whose name the Certificate
surrendered in exchange therefor is registered, it shall be a condition to the
issuance of such Initial Shares or Additional Shares, if any, that (i) the
Certificate so surrendered shall be transferable, and shall be properly
assigned, endorsed or accompanied by appropriate stock powers, (ii) such
transfer shall otherwise be proper and (iii) the person requesting such transfer
shall pay to the Exchange Agent any transfer or other taxes payable by reason of
the foregoing or establish to the satisfaction of the Exchange Agent that such
taxes have been paid or are not required to be paid. Notwithstanding the
foregoing, neither the Exchange Agent nor any Party shall be liable to a holder
of Common Shares for any Initial Shares or Additional Shares, if any, issuable
to such holder pursuant to Section 1.5 that are delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed, the Buyer shall issue in exchange
for such lost, stolen or destroyed Certificate the Initial Shares issuable in
exchange therefor pursuant to Section 1.5. The Board of Directors of the Buyer
may, in its reasonable discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to give
the Buyer an appropriate affidavit and/or a bond in such sum as it may direct as
indemnity against any claim that may be made against the Buyer with respect to
the Certificate alleged to have been lost, stolen or destroyed.
(d) No dividends or other distributions that are payable to the holders of
record of Buyer Common Stock as of a date on or after the Closing Date shall be
paid to former Company Stockholders entitled by reason of the Merger to receive
Initial Shares or Additional Shares, if any, until such holders surrender their
Certificates for certificates representing the Merger Shares. Upon such
surrender, the Buyer shall pay or deliver to the persons in whose name the
certificates representing such Initial Shares or Additional Shares, if any, are
issued any dividends or other distributions that are payable to the holders of
record of Buyer Common Stock as of a date on or after the Closing Date and which
were paid or delivered between the Effective Time and the time of such
surrender; provided that no such person shall be entitled to receive any
interest on such dividends or other distributions.
(e) Certificates representing the Merger Shares may be legended to reflect
the lock-up agreements contemplated by Section 5.2(j).
1.8 Fractional Shares. No certificates or scrip representing fractional
Initial Shares shall be issued to former Company Stockholders upon the surrender
for exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Initial Shares or Additional Shares, if any, that would have otherwise been
issued to such former Company Stockholders. In lieu of such fractional shares,
promptly following the Measurement Period (but in any event within 10 days
thereafter), any holder of Common Shares who would otherwise be entitled to a
fraction of a share of Buyer Common Stock (after aggregating all fractional
shares of Buyer Common Stock issuable to such holder) shall (provided that such
holder shall have surrendered its Certificate(s)), be paid in cash the dollar
amount (rounded to the nearest whole cent), without interest, determined by
multiplying such fraction by the Buyer Average Stock Price.
1.9 Options and Warrants.
(a) As of the Effective Time, all options to purchase Common Shares issued
by the Company pursuant to its stock option plans or otherwise ("Options"),
whether vested or unvested, and the Company's stock option plan(s) under which
Options have been granted shall be assumed by the Buyer. Immediately after the
Effective Time, each Option outstanding immediately prior to the Effective Time
shall be deemed to constitute an option to acquire Buyer Common Stock on the
same terms and
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conditions as were applicable under such Option at the Effective Time, subject
to the adjustments contemplated by this Section 1.9(a). For all assumed Options,
other than any Options issued as contemplated by Section 4.4(a) (referred to as
the "Permitted Options"), each Option shall become an option to acquire a number
of shares of Buyer Common Stock equal to the number of Common Shares subject to
the unexercised portion of such Option multiplied by the Common Conversion Ratio
(with any fraction resulting from such multiplication to be rounded down to the
nearest whole number). The exercise price per share of each such assumed Option,
other than Permitted Options, shall be equal to the exercise price of such
Option immediately prior to the Effective Time, divided by the Common Conversion
Ratio (with any fraction resulting from such division to be rounded up to the
nearest whole cent). The number of shares purchasable under, and the exercise
price of, each assumed Permitted Option shall not be adjusted in connection with
the Merger and shall remain the same after the Effective Time. Following the
Measurement Period, with respect to any Options assumed by Buyer pursuant to
this Section 1.9(a) and still unexercised, other than Permitted Options, the
holder of such assumed Option shall receive additional options, on the same
terms and conditions and at the same exercise price per share in effect
immediately prior to such issuance, to purchase a number of shares of Buyer
Common Stock equal to the difference between (i) the number of shares of Buyer
Common Stock subject to such assumed Option immediately prior thereto multiplied
by a fraction, (A) the numerator of which is the Total Merger Consideration and
(B) the denominator of which is 4,960,000 (with any fraction resulting from such
multiplication to be rounded down to the nearest whole number), and (ii) the
number of shares of Buyer Common Stock subject to such assumed Option
immediately prior thereto. The exercise price in effect immediately prior to
such adjustment shall not be adjusted. The term, exercisability, vesting
schedule, status as an "incentive stock option" under Section 422 of the
Internal Revenue Code of 1986 (as amended, the "Code"), if applicable, and all
of the other terms of the Options shall otherwise remain unchanged. In the event
the Buyer receives a request to exercise any Option assumed by it following the
Effective Time and prior to the expiration of the Measurement Period, Buyer
shall notify the optionholder of the consequence of such exercise with respect
to potential additional options contemplated by this Section 1.9(a).
(b) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth the number of shares of Buyer Common Stock subject to such
assumed Option, the exercise price per share, and such holders' rights pursuant
to such Options, as amended by this Section 1.9, and the agreements evidencing
such Options shall continue in effect on the same terms and conditions (subject
to the amendments provided for in this Section 1.9 and such notice). The Buyer
or the Surviving Corporation shall deliver to the holders of Options an
appropriate notice after the expiration of the Measurement Period, describing
any additional options issued pursuant to this Section 1.9.
(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery upon
exercise of the Options assumed in accordance with this Section 1.9. Within 10
days after the Effective Time, the Buyer shall file a Registration Statement on
Form S-8 (or any successor form) under the Securities Act of 1933 (as amended,
the "Securities Act") with respect to all shares of Buyer Common Stock subject
to such Options that may be registered on a Form S-8, and within 10 days after
the expiration of the Measurement Period, Buyer shall amend such Registration
Statement on Form S-8, if necessary, to take into account any additional options
issued with respect to the Options pursuant to this Section 1.9. Buyer shall use
its best efforts to maintain the effectiveness of such Registration Statement
for so long as such Options remain outstanding.
(d) The Company shall cause the termination, as of the Effective Time, of
the Second Amended and Restated Replacement Warrant to Purchase Stock, dated
November 4, 1999, by the Company in favor of Silicon Valley Bank and the Warrant
Agreement by and between the Company and Comdisco, Inc. dated as of June 5, 2000
(the "Warrants") to the extent that either Warrant remains unexercised as of the
Effective Time.
(e) The Company shall obtain, prior to the Closing, the consent from each
holder of an Option or a Warrant to the amendment (in the case of Options) or
termination (in the case of Warrants) of such
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Option or Warrant pursuant to this Section 1.9 (unless such consent is not
required under the terms of the applicable agreement, instrument or plan).
(f) Section 2.2 of the Disclosure Schedule sets forth (i) all Common
Shares, Series A Preferred Shares (as defined below) and Series B Preferred
Shares (collectively, the "Company Shares") outstanding immediately prior to the
Effective Time that are unvested or are subject to a repurchase option, risk of
forfeiture or other conditions under any applicable restricted stock purchase
agreement or other agreement with the Company (the "Restricted Shares") and (ii)
all elections made under Section 83(b) of the Code with respect thereto. Any
shares of Buyer Common Stock (including Additional Shares) issued in exchange
for the Restricted Shares will also be unvested and subject to the same
repurchase option, risk of forfeiture or other condition (provided, however,
that the vesting schedule of such shares shall accelerate in accordance with the
terms of the applicable restricted stock purchase or other agreement upon the
Effective Time, and further provided that the repurchase price in effect
immediately prior to the Effective Time, if any, shall be appropriately adjusted
by dividing it by the Common Conversion Ratio, and further provided that after
expiration of the Measurement Period, such repurchase price shall not be further
adjusted to reflect the issuance of any Additional Shares), and the certificates
representing such shares of Buyer Common Stock shall accordingly be marked with
appropriate legends.
1.10 Escrow.
(a) On the Closing Date and following the determination of the Total Merger
Consideration (if applicable), the Buyer shall deliver to the Escrow Agent a
certificate (issued in the name of the Escrow Agent or its nominee) representing
the Escrow Shares, as described in Section 1.5, for the purpose of securing the
indemnification obligations of the Indemnifying Stockholders (as defined in
Section 6.1) set forth in this Agreement. The Escrow Shares shall be held by the
Escrow Agent under the Escrow Agreement pursuant to the terms thereof. The
Escrow Shares shall be held as a trust fund and shall not be subject to any
lien, attachment, trustee process or any other judicial process of any creditor
of any party, and shall be held and disbursed solely for the purposes and in
accordance with the terms of the Escrow Agreement.
(b) The adoption of this Agreement and the approval of the Merger by the
Company Stockholders shall constitute approval of the Escrow Agreement and of
all of the arrangements relating thereto, including without limitation the
placement of the Escrow Shares in escrow and the appointment of the
Indemnification Representatives.
1.11 Certificate of Incorporation and By-laws.
(a) The Certificate of Incorporation of the Surviving Corporation
immediately following the Effective Time shall be the same as the Certificate of
Incorporation of the Transitory Subsidiary immediately prior to the Effective
Time, except that (1) the name of the corporation set forth therein shall be
changed to the name of the Company and (2) the identity of the incorporator
shall be deleted.
(b) The By-laws of the Surviving Corporation immediately following the
Effective Time shall be the same as the By-laws of the Transitory Subsidiary
immediately prior to the Effective Time, except that the name of the corporation
set forth therein shall be changed to the name of the Company.
1.12 No Further Rights. From and after the Effective Time, no Company
Shares shall be deemed to be outstanding, and holders of Certificates shall
cease to have any rights with respect thereto, except as provided herein or by
law.
1.13 Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Buyer, the Surviving Corporation or the Exchange Agent, they shall be
cancelled and exchanged for Initial Shares and, if applicable, Additional Shares
in accordance with Section 1.5, subject to Section 1.10 and to applicable law in
the case of Dissenting Shares.
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1.14 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.15 Accounting Treatment. For accounting purposes, the Merger is intended
to be accounted for as a purchase.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule provided by the Company to the Buyer on the date hereof and
accepted in writing by the Buyer (the "Disclosure Schedule"). The Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article II, and the disclosures in any
paragraph of the Disclosure Schedule shall qualify only the corresponding
paragraph in this Article II; provided, however, that the Company may insert
appropriate cross-references in a paragraph of the Disclosure Schedule to
another paragraph of the Disclosure Schedule, and such other paragraph in this
Article II shall be deemed to be so qualified as well. For purposes of this
Article II, the phrase "to the knowledge of the Company" or any phrase of
similar import shall be deemed to refer to the actual knowledge of those
employees and directors identified in the introduction to the Disclosure
Schedule.
2.1 Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of Delaware. The Company is duly qualified
to conduct business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification, except where the failure
to be so qualified or in good standing, individually or in the aggregate, has
not had and would not be reasonably likely to have a Company Material Adverse
Effect (as defined below). The Company has all requisite corporate power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Company has furnished to the Buyer
complete and accurate copies of its Certificate of Incorporation and By-laws.
The Company is not in default under or in violation of any provision of its
Certificate of Incorporation or By-laws. For purposes of this Agreement,
"Company Material Adverse Effect" means a material adverse effect on the assets,
business, condition (financial or otherwise), operations or results of
operations of the Company.
2.2 Capitalization. The authorized capital stock of the Company consists
of (a) 50,000,000 Common Shares, of which, as of the date of this Agreement,
30,345,826 shares were issued and outstanding and 30,000 shares were held in the
treasury of the Company and (b) 13,015,004 shares of preferred stock, of which
(i) 9,000,000 shares have been designated as Series A Preferred Stock, $.01 par
value per share (the "Series A Preferred Shares"), of which, as of the date of
this Agreement, 9,000,000 shares were issued and outstanding and (ii) 4,015,004
shares have been designated as Series B Preferred Shares, of which, as of the
date of this Agreement, 3,850,000 shares were issued and outstanding, 66,000
shares were reserved for issuance upon exercise of outstanding Warrants and
99,000 were reserved for possible issuance upon exercise of Warrants that may be
required to be issued upon the occurrence of certain events described in Section
2.2 of the Disclosure Schedule. Section 2.2 of the Disclosure Schedule sets
forth a complete and accurate list, as of the date of this Agreement, of (i) all
stockholders of the Company, indicating the number and class or series of
Company Shares held by each stockholder and (for Company Shares other than
Common Shares) the number of Common Shares (if any) into which such Company
Shares are convertible, (ii) all outstanding Options and Warrants, indicating
(A) the holder thereof, (B) the number and class or series of Company Shares
subject to each Option and Warrant and (for Company Shares other than Common
Shares) the number of Common Shares (if any) into which such Company Shares are
convertible, (C) the exercise price, date of grant, vesting schedule and
expiration date for each Option or Warrant, and (D) any terms regarding the
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acceleration of vesting, and (iii) all stock option plans and other stock or
equity-related plans of the Company. All of the issued and outstanding Company
Shares are, and all Company Shares that may be issued upon exercise of Options
or Warrants will be (upon issuance in accordance with their terms), duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. As of the date of this Agreement, other than the Options and Warrants
listed in Section 2.2 of the Disclosure Schedule and, with respect to redemption
rights, other than pursuant to the Company Charter, there are no outstanding or
authorized options, warrants, rights, agreements or commitments to which the
Company is a party or which are binding upon the Company providing for the
issuance or redemption of any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock or similar rights with respect to
the Company. Except as set forth in Section 2.2 of the Disclosure Schedule, and
except for the Company's Second Amended and Restated Stockholders' Agreement,
dated May 23, 2000 (the "Stockholders Agreement"), and the Company's Amended and
Restated Registration Rights Agreement, dated April 25, 2000 (the "Registration
Rights Agreement"), there are no agreements to which the Company is a party or
by which it is bound with respect to the voting (including without limitation
voting trusts or proxies), registration under the Securities Act, or sale or
transfer (including without limitation agreements relating to pre-emptive
rights, rights of first refusal, co-sale rights or "drag-along" rights) of any
securities of the Company. To the knowledge of the Company, there are no
agreements among other parties, to which the Company is not a party and by which
it is not bound, with respect to the voting (including without limitation voting
trusts or proxies) or sale or transfer (including without limitation agreements
relating to rights of first refusal, co-sale rights or "drag-along" rights) of
any securities of the Company. All of the issued and outstanding Company Shares
were issued in compliance with applicable federal and state securities laws.
2.3 Authorization of Transaction. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery by the Company of this Agreement and,
subject to the adoption of this Agreement and the approval of the Merger by a
majority of the votes represented by the outstanding Common Shares (including
the Series B Preferred Shares, voting on an as-converted basis, voting together
with the Common Shares as a single class) and a majority of the Company's Series
A Preferred Shares and Series B Preferred Shares, voting as a single class (with
each Series A Preferred Share having one vote and each Series B Preferred Share
having that number of votes as is equal to the number of Common Shares into
which it is then convertible) (collectively, the "Requisite Stockholder
Approval"), the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. Without limiting the generality of the foregoing,
the Board of Directors of the Company, at a meeting duly called and held, by the
unanimous vote of all directors (i) determined that the Merger is fair and in
the best interests of the Company and its stockholders, (ii) adopted this
Agreement in accordance with the provisions of the Delaware General Corporation
Law, and (iii) directed that this Agreement and the Merger be submitted to the
stockholders of the Company for their adoption and approval and resolved to
recommend that the stockholders of Company vote in favor of the adoption of this
Agreement and the approval of the Merger. This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
2.4 Noncontravention. Subject to compliance with the applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act"), if any, obtaining the Requisite
Stockholder Approval and filing of the Certificate of Merger as required by the
Delaware General Corporation Law, except as set forth on Section 2.4 of the
Disclosure Schedule, neither the execution and delivery by the Company of this
Agreement, nor the consummation by the Company of the transactions contemplated
hereby, will (a) conflict with or violate any provision of the Certificate of
Incorporation or By-laws of the Company, (b) require on the part of the Company
any filing with, or any permit, authorization, consent or approval of, any
court, arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"), (c)
conflict with, result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of
obligations under, create in any party the right to terminate,
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modify or cancel, or require any notice, consent or waiver under, any contract
or instrument to which the Company is a party or by which the Company is bound
or to which any of their assets is subject, (d) result in the imposition of any
Security Interest (as defined below) upon any assets of the Company or (e)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its properties or assets subject, in the
cases of Section 2.4(c) and (e), to any conflicts, breaches, defaults,
accelerations, terminations, modifications, cancellations, consents, notices,
waivers or violations which, individually or in the aggregate, has not had and
would not be reasonably likely to have a Company Material Adverse Effect. For
purposes of this Agreement: "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law), other than (i) mechanic's, materialmen's,
landlord's and similar liens, (ii) liens arising under worker's compensation,
unemployment insurance, social security, retirement, and similar legislation,
(iii) liens on goods in transit incurred pursuant to documentary letters of
credit, in each case arising in the Ordinary Course of Business (as defined
below) of the Company and not material to the Company and (iv) liens for current
Taxes not yet due and payable; and "Ordinary Course of Business" means the
ordinary course of the Company's business, consistent with past custom and
practice (including with respect to frequency and amount).
2.5 Subsidiaries. The Company does not control directly or indirectly or
have any direct or indirect equity participation or similar interest in any
corporation, partnership, limited liability company, joint venture, trust or
other business association.
2.6 Financial Statements. The Company has provided to the Buyer (a) the
audited consolidated balance sheets and statements of operations and cash flows
of the Company as of and for the period from inception through December 31, 1999
and the year ended December 31, 1999 and the audited statement of changes in
stockholders' equity for the year ended December 31, 1999; and (b) the unaudited
consolidated balance sheet and statements of operations, changes in
stockholders' equity and cash flows as of and for the eight months ended as of
August 31, 2000 (the "Most Recent Balance Sheet Date"). Such financial
statements (collectively, the "Financial Statements") have been prepared in
accordance with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods covered thereby, fairly
present the financial condition, results of operations and cash flows of the
Company as of the respective dates thereof and for the periods referred to
therein and are consistent with the books and records of the Company; provided,
however, that the Financial Statements referred to in clause (b) above are
subject to normal recurring year-end adjustments (which will not be material)
and do not include footnotes.
2.7 Absence of Certain Changes. Since the Most Recent Balance Sheet Date,
(a) there has occurred no event or development which has had, or would
reasonably be expected to have in the future, a Company Material Adverse Effect,
and (b) except as set forth on Section 2.7 of the Disclosure Schedule, neither
the Company nor any Subsidiary has taken any of the actions set forth in
paragraphs (a) through (n) of Section 4.4.
2.8 Undisclosed Liabilities. Except as set forth on Section 2.8 of the
Disclosure Schedule, the Company has no liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated and whether
due or to become due) of the type required to be reflected in a balance sheet
prepared in accordance with GAAP, except for (a) liabilities shown on the
balance sheet referred to in clause (b) of Section 2.6 (the "Most Recent Balance
Sheet"), and (b) liabilities which have arisen since the Most Recent Balance
Sheet Date in the Ordinary Course of Business and which are similar in nature
and amount to the liabilities which arose during the comparable period of time
in the immediately preceding fiscal period.
2.9 Tax Matters.
(a) For purposes of this Agreement, the following terms shall have the
following meanings:
(i) "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross
receipts, ad valorem, premium, value-added, excise, real
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property, personal property, sales, use, transfer, withholding, employment,
unemployment insurance, social security, business license, business
organization, environmental, workers compensation, payroll, profits,
license, lease, service, service use, severance, stamp, occupation,
windfall profits, customs, duties, franchise and other taxes imposed by the
United States of America or any state, local or foreign government, or any
agency thereof, or other political subdivision of the United States or any
such government, and any interest, fines, penalties, assessments or
additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof.
(ii) "Tax Returns" means all reports, returns, declarations,
statements or other information required to be supplied to a taxing
authority in connection with Taxes.
(b) The Company has filed on a timely basis all Tax Returns that it was
required to file, and all such Tax Returns were complete and accurate in all
material respects, and the Company has paid on a timely basis all Taxes whether
or not shown on such Tax Returns to be due and payable. The Company is not nor
has ever been a member of a group of corporations with which it has filed (or
been required to file) consolidated, combined or unitary Tax Returns. The unpaid
Taxes of the Company for tax periods through the Most Recent Balance Sheet Date
do not exceed the accruals and reserves for Taxes (excluding accruals and
reserves for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the Most Recent Balance Sheet. The Company
does not have any actual or potential liability for any Tax obligation of any
taxpayer (including without limitation any affiliated group of corporations or
other entities that included the Company during a prior period) other than the
Company. All Taxes that the Company is or was required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Entity.
(c) The Company has delivered to the Buyer complete and accurate copies of
all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company since its inception.
None of the federal income Tax Returns of the Company have been audited by the
Internal Revenue Service. The Company has delivered or made available to the
Buyer complete and accurate copies of all other Tax Returns of the Company
together with all related examination reports and statements of deficiency for
all periods from and after the Company's inception. No examination or audit of
any Tax Return of the Company by any Governmental Entity is currently in
progress or, to the knowledge of the Company, threatened or contemplated. The
Company has not been informed by any jurisdiction that the jurisdiction believes
that the Company was required to file any Tax Return that was not filed. The
Company has not waived any statute of limitations with respect to Taxes or
agreed to an extension of time with respect to a Tax assessment or deficiency.
(d) The Company: (i) is not a "consenting corporation" within the meaning
of Section 341(f) of the Code, and none of the assets of the Company are subject
to an election under Section 341(f) of the Code; (ii) has not been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(l)(A)(ii)
of the Code; (iii) except as set forth in Section 2.9(d) of the Disclosure
Schedule, has not made any payments, is not obligated to make any payments, or
is not a party to any agreement that could obligate it to make any payments that
may be treated as an "excess parachute payment" under Section 280G of the Code;
(iv) does not have any actual or potential liability for any Taxes of any person
(other than the Company and its Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any similar provision of federal, state, local, or foreign law), or
as a transferee or successor, by contract, or otherwise; or (v) is not or has
not been required to make a basis reduction pursuant to Treasury Regulation
Section 1.1502-20(b) or Treasury Regulation Section 1.337(d)-2(b).
(e) The Company has not undergone a change in its method of accounting
resulting in an adjustment to its taxable income pursuant to Section 481 of the
Code.
(f) Except as set forth in Section 2.9(f) of the Disclosure Schedule, no
state or federal "net operating loss" of the Company determined as of the
Closing Date is subject to limitation on its use pursuant to Section 382 of the
Code or comparable provisions of state law as a result of any "ownership
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change" within the meaning of Section 382(g) of the Code or comparable
provisions of any state law occurring prior to the Closing Date.
2.10 Assets. The Company owns or leases all tangible assets necessary for
the conduct of its businesses as presently conducted and as presently proposed
to be conducted. Such tangible assets, taken in the aggregate, are in good
operating condition and repair (subject to normal wear and tear) and are
suitable for the purposes for which they presently are used. Except as set forth
in Section 2.10 of the Disclosure Schedule, no asset of the Company (tangible or
intangible) is subject to any Security Interest.
2.11 Owned Real Property. The Company does not own any real property.
2.12 Real Property Leases. Section 2.12 of the Disclosure Schedule lists,
as of the date of this Agreement, all real property leased or subleased to or by
the Company and lists the term of such lease, any extension and expansion
options, and the rent payable thereunder. The Company has delivered to the Buyer
complete and accurate copies of the leases and subleases (as amended to date)
listed in Section 2.12 of the Disclosure Schedule. With respect to each lease
and sublease listed in Section 2.12 of the Disclosure Schedule, except as set
forth in Section 2.12 of the Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, in full force and
effect and is enforceable by the Company in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency,
the relief of debtors and rules of law governing injunctive relief and
other equitable remedies;
(b) subject to the giving of notices and receipt of consents set forth
on Section 2.4 of the Disclosure Schedule, the lease or sublease will
continue to be legal, valid, binding, enforceable and in full force and
effect immediately following the Closing in accordance with the terms
thereof as in effect immediately prior to the Closing, unless the lease or
sublease would, by its express terms, expire prior to the Closing;
(c) the Company is not, nor to the knowledge of the Company, is any
other party, in breach or violation of, or default under, any such lease or
sublease, and no event has occurred, is pending or, to the knowledge of the
Company, is threatened, which, after the giving of notice, with lapse of
time, or otherwise, would constitute a breach or default by the Company or,
to the knowledge of the Company, any other party under such lease or
sublease; and
(d) the Company has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or
subleasehold.
2.13 Intellectual Property.
(a) Except as set forth in Section 2.13(a) of the Disclosure Schedule, the
Company owns or has the right to use all Intellectual Property (as defined
below) necessary (i) to use, manufacture, market and distribute the products
manufactured, marketed, sold or licensed, and to provide the services provided,
by the Company to other parties (together, the "Customer Deliverables") or (ii)
to operate the Company's internal systems that are material to the business or
operations of the Company, including, without limitation, computer hardware
systems, software applications and embedded systems (the "Internal Systems"; the
Intellectual Property owned by or licensed to the Company and incorporated in or
underlying the Customer Deliverables or the Internal Systems is referred to
herein as the "Company Intellectual Property"). Each item of Company
Intellectual Property will be owned or available for use by the Surviving
Corporation immediately following the Closing on substantially identical terms
and conditions as it was immediately prior to the Closing. The Company has taken
the measures to protect the proprietary nature of each item of Company
Intellectual Property as are specified in Section 2.13 of the Disclosure
Schedule. To the knowledge of the Company, other than with respect to
commercially available, off-the-shelf software embedded in or otherwise part of
the Internal Systems, (a) no other person or entity has any rights to any of the
Company Intellectual Property owned by the Company (except pursuant to
agreements or licenses specified in Section 2.13(c) of the Disclosure Schedule),
and (b) no other person or entity is infringing, violating or misappropriating
any of the Company Intellectual
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Property. For purposes of this Agreement, "Intellectual Property" means all (i)
patents and patent applications, (ii) copyrights and registrations thereof,
(iii) mask works and registrations and applications for registration thereof,
(iv) computer software, data and documentation, (v) trade secrets and
confidential business information, whether patentable or unpatentable and
whether or not reduced to practice, know-how, manufacturing and production
processes and techniques, research and development information, copyrightable
works, financial, marketing and business data, pricing and cost information,
business and marketing plans and customer and supplier lists and information,
(vi) trademarks, service marks, trade names, domain names and applications and
registrations therefor and (vii) other proprietary rights relating to any of the
foregoing. Section 2.13(a) of the Disclosure Schedule lists each patent, patent
application, copyright registration or application therefor, mask work
registration or application therefor, and trademark, service mark and domain
name registration or application therefor of the Company or any Subsidiary, and
the measures taken by the Company to protect the proprietary nature of each item
of Company Intellectual Property.
(b) Except as set forth in Section 2.13(b) of the Disclosure Schedule, none
of the Customer Deliverables, or the marketing, distribution, provision or use
thereof, infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any person or entity. None of the Internal
Systems, or the use thereof, infringes or violates, or constitutes a
misappropriation of, any Intellectual Property rights of any person or entity.
Section 2.13(b) of the Disclosure Schedule lists any complaint, claim or notice,
or written threat thereof, received by the Company alleging any such
infringement, violation or misappropriation; and the Company has provided to the
Buyer complete and accurate copies of all written documentation in the
possession of the Company relating to any such complaint, claim, notice or
threat. The Company has provided to the Buyer complete and accurate copies of
all written documentation in the Company's possession relating to claims or
disputes known to the Company concerning any Company Intellectual Property.
(c) Section 2.13(c) of the Disclosure Schedule identifies each license or
other agreement (or type of license or other agreement) (written or oral)
pursuant to which the Company has licensed, distributed or otherwise granted any
rights to any third party with respect to, any Company Intellectual Property.
(d) Section 2.13(d) of the Disclosure Schedule identifies each item of
Company Intellectual Property that is owned by a party other than the Company,
and the license or agreement pursuant to which the Company uses it (excluding
off-the-shelf software programs licensed by the Company pursuant to "shrink
wrap" licenses).
(e) The Company has not disclosed the source code for any of the software
owned by the Company (the "Software") or other confidential information
constituting, embodied in or pertaining to the Software to any person or entity,
and has not entered into any escrow arrangement with respect to the Software,
each except pursuant to the agreements listed in Section 2.13(e) of the
Disclosure Schedule, and the Company has taken reasonable measure to prevent
disclosure of such source code.
(f) All of the copyrightable materials (including Software) incorporated in
or bundled with the Customer Deliverables have been created by employees of the
Company within the scope of their employment by the Company or by independent
contractors of the Company who have executed agreements expressly assigning all
right, title and interest in such copyrightable materials to the Company. No
portion of such copyrightable materials was jointly developed with any third
party.
(g) To the knowledge of the Company, the Customer Deliverables and the
Internal Systems are free from significant defects or programming errors and
conform in all material respects to the written documentation and specifications
therefor.
(h) All of the Customer Deliverables currently being marketed, distributed
or licensed by the Company or which were marketed, distributed or licensed by
the Company since its inception, and all Internal Systems, are Year 2000
Compliant. The Company is not aware of any failure to be Year 2000 Compliant of
any third-party system that is material to the business or operations of the
Company,
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including without limitation any system belonging to any of the Company's
suppliers, service providers or customers.
(i) For purposes of this Agreement, "Year 2000 Compliant" means that the
applicable system or item:
(i) will accurately receive, record, store, provide, recognize and
process all date and time data from, during, into and between the twentieth
and twenty-first centuries, the years 1999 and 2000 and all leap years;
(ii) will accurately perform all date-dependent calculations and
operations (including, without limitation, mathematical operations,
sorting, comparing and reporting) from, during, into and between the
twentieth and twenty-first centuries, the years 1999 and 2000 and all leap
years; and
(iii) will not malfunction, cease to function or provide invalid or
incorrect results as a result of (x) the change of years from 1999 to 2000,
(y) date data, including date data which represents or references different
centuries, different dates during 1999 and 2000, or more than one century
or (z) the occurrence of any particular date;
in each case without human intervention, other than original data entry.
2.14 Contracts.
(a) Section 2.14 of the Disclosure Schedule lists the following agreements
(written or oral) to which the Company is a party as of the date of this
Agreement:
(i) any agreement (or group of related agreements) for the lease of
personal property from or to third parties providing for lease payments in
excess of $10,000 per annum or having a remaining term longer than 12
months;
(ii) any agreement (or group of related agreements) for the purchase
or sale of products or for the furnishing or receipt of services (A) which
calls for performance over a period of more than one year, (B) which
involves more than the sum of $10,000, or (C) in which the Company or any
Subsidiary has granted manufacturing rights, "most favored nation" pricing
provisions or exclusive marketing or distribution rights relating to any
products or territory or has agreed to purchase a minimum quantity of goods
or services or has agreed to purchase goods or services exclusively from a
certain party;
(iii) any agreement establishing a partnership or joint venture, or
any business arrangement for the distribution or development of products;
(iv) any agreement (or group of related agreements) under which it has
created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) indebtedness (including capitalized lease obligations) involving
more than $10,000 or under which it has imposed (or may impose) a Security
Interest on any of its assets, tangible or intangible;
(v) any agreement concerning confidentiality or noncompetition,
excluding the Company's standard form of Nondisclosure and Noncompete
Agreement entered into with each employee and consultant of the Company and
provided to the Buyer pursuant to Section 2.19 hereof;
(vi) any employment or consulting agreement, excluding the Company's
standard form of Nondisclosure and Noncompete Agreement entered into with
each employee and consultant of the Company and provided to the Buyer
pursuant to Section 2.19 hereof;
(vii) any agreement involving any officer, director or stockholder of
the Company or any affiliate (an "Affiliate"), as defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
thereof;
(viii) any agreement under which the consequences of a default or
termination would reasonably be expected to have a Company Material Adverse
Effect;
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(ix) any agreement which contains any provisions requiring the Company
to indemnify any other party thereto (excluding indemnities contained in
agreements for the purchase, sale or license of products entered into in
the Ordinary Course of Business); and
(x) any other agreement (or group of related agreements) either
involving more than $10,000 or not entered into in the Ordinary Course of
Business.
(b) The Company has delivered to the Buyer a complete and accurate copy of
each agreement listed in Section 2.13 or Section 2.14 of the Disclosure
Schedule. With respect to each agreement so listed: (i) the agreement is legal,
valid, binding, in full force and effect and enforceable by the Company in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency, the relief of debtors and rules of law governing
injunctive relief and other equitable remedies; (ii) subject to the giving of
notices and receipt of consents set forth in Section 2.4 of the Disclosure
Schedule, the agreement will continue to be legal, valid, binding and
enforceable and in full force and effect immediately following the Closing in
accordance with the terms thereof as in effect immediately prior to the Closing
(unless the agreement would, by its express terms, expire prior to the Closing)
and the consummation of the transactions contemplated hereby will not cause a
default under or result in the acceleration of the obligations under the
agreement; and (iii) the Company is not, nor, to the knowledge of the Company,
is any other party, in breach or violation of, or default under, any such
agreement, and no event has occurred, is pending or, to the knowledge of the
Company, is threatened, which, after the giving of notice, with lapse of time,
or otherwise, would constitute a breach or default by the Company or, to the
knowledge of the Company, any other party under such contract, subject to any
conflicts, breaches, violations or defaults which, individually or in the
aggregate, has not had and would not be reasonably likely to have a Company
Material Adverse Effect.
2.15 Powers of Attorney. Except as set forth in Section 2.15 of the
Disclosure Schedule, there are no outstanding powers of attorney executed on
behalf of the Company.
2.16 Insurance. Section 2.16 of the Disclosure Schedule lists each
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, directors' and officers', environmental,
product liability and automobile insurance policies and bond and surety
arrangements) to which the Company is a party. Such insurance policies are of
the type and in amounts customarily carried by organizations conducting
businesses or owning assets similar to those of the Company. There is no
material claim pending under any such policy as to which coverage has been
questioned, denied or disputed by the underwriter of such policy. All premiums
due and payable under all such policies have been paid, the Company has no
liability for retroactive premiums or similar payments, and the Company is
otherwise in compliance in all material respects with the terms of such
policies. The Company has no knowledge of any threatened termination of, or
material premium increase with respect to, any such policy. Each such policy
will continue to be enforceable and in full force and effect immediately
following the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing.
2.17 Litigation. Except as set forth in Section 2.17 of the Disclosure
Schedule, there is no action, suit, proceeding, claim, arbitration, mediation or
investigation before any Governmental Entity or before any arbitrator (a "Legal
Proceeding") which is pending or, to the Company's knowledge, has been
threatened against the Company which (a) seeks either damages in excess of
$25,000 or equitable relief or (b) in any manner challenges or seeks to prevent,
enjoin, alter or delay the transactions contemplated by this Agreement.
2.18 Warranties. No product or service manufactured, sold, leased,
licensed or delivered by the Company is subject to any guaranty, warranty, right
of return, right of credit or other indemnity other than (i) the applicable
standard terms and conditions of sale or lease of the Company, which are set
forth in Section 2.18 of the Disclosure Schedule and (ii) manufacturers'
warranties for which the Company does not have any liability. Section 2.18 of
the Disclosure Schedule sets forth the aggregate expenses incurred by the
Company in fulfilling its obligations under the guaranty, warranty, right of
return and indemnity provisions during each of the fiscal years and the interim
period covered by the Financial Statements; and
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the Company does not know of any reason why such expenses should significantly
increase as a percentage of sales in the future.
2.19 Employees.
(a) Section 2.19 of the Disclosure Schedule contains a list of all
employees of the Company, along with the position and the authority to work in
the United States (whether by U.S. citizenship or otherwise) of each such
person. The Company has previously provided to the Buyer the annual rate of
compensation of each current employee of the Company, which information is true
and complete as of the date hereof. The Company has not extended loans to any of
its employees which remain, as of the date hereof, unpaid. Each employee of the
Company has entered into a Nondisclosure and Noncompete Agreement with the
Company on the Company's standard form, a copy of which standard form has
previously been delivered to the Buyer. To the knowledge of the Company, no key
employee or group of employees has any plans to terminate employment with the
Company.
(b) The Company is not a party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances, claims of
unfair labor practices or other collective bargaining disputes. The Company has
no knowledge of any organizational effort made or threatened, either currently
or within the past two years, by or on behalf of any labor union with respect to
employees of the Company.
2.20 Employee Benefits.
(a) For purposes of this Agreement, the following terms shall have the
following meanings:
(i) "Employee Benefit Plan" means any "employee pension benefit plan"
(as defined in Section 3(2) of ERISA), any "employee welfare benefit plan"
(as defined in Section 3(1) of ERISA), and any other written or oral plan,
agreement or arrangement involving direct or indirect compensation,
including without limitation insurance coverage, severance benefits,
disability benefits, deferred compensation, bonuses, stock options, stock
purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
(iii) "ERISA Affiliate" means any entity which is, or at any
applicable time was, a member of (1) a controlled group of corporations (as
defined in Section 414(b) of the Code), (2) a group of trades or businesses
under common control (as defined in Section 414(c) of the Code), or (3) an
affiliated service group (as defined under Section 414(m) of the Code or
the regulations under Section 414(o) of the Code), any of which includes or
included the Company or a Subsidiary.
(b) Section 2.20(b) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans maintained, or contributed to, by
the Company or any ERISA Affiliate. Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, (iii) all related trust
agreements, insurance contracts and summary plan descriptions, and (iv) all
annual reports filed on IRS Form 5500, 5500C or 5500R and (for all funded plans)
all plan financial statements for each Employee Benefit Plan, if such reports
and statements have been required, have been delivered to the Buyer. Each
Employee Benefit Plan has been administered in all material respects in
accordance with its terms and each of the Company and the ERISA Affiliates has
in all material respects met its obligations with respect to such Employee
Benefit Plan and has made all required contributions thereto. The Company, each
ERISA Affiliate and each Employee Benefit Plan are in compliance in all material
respects with the currently applicable provisions of ERISA and the Code and the
regulations thereunder (including without limitation Section 4980 B of the Code,
Subtitle K, Chapter 100 of the Code and Sections 601 through 608 and Section 701
et seq. of ERISA). All filings and reports as to each Employee Benefit Plan
required to have been submitted to the Internal Revenue Service or to the United
States Department of Labor have been duly submitted.
(c) There are no Legal Proceedings (except claims for benefits payable in
the normal operation of the Employee Benefit Plans and proceedings with respect
to qualified domestic relations orders) against or
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involving any Employee Benefit Plan or asserting any rights or claims to
benefits under any Employee Benefit Plan that could give rise to any material
liability.
(d) All the Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the Internal
Revenue Service to the effect that such Employee Benefit Plans are qualified and
the plans and the trusts related thereto are exempt from federal income taxes
under Sections 401(a) and 501(a), respectively, of the Code, no such
determination letter has been revoked and revocation has not been threatened,
and no such Employee Benefit Plan has been amended or operated since the date of
its most recent determination letter or application therefor in any respect, and
no act or omission has occurred, that would adversely affect its qualification
or materially increase its cost. Each Employee Benefit Plan which is required to
satisfy Section 401(k)(3) or Section 401(m)(2) of the Code has been tested for
compliance with, and satisfies the requirements of, Section 401(k)(3) and
Section 401(m)(2) of the Code for each plan year ending prior to the Closing
Date.
(e) Neither the Company nor any ERISA Affiliate has ever maintained an
Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.
(f) At no time has the Company or any ERISA Affiliate been obligated to
contribute to any "multiemployer plan" (as defined in Section 4001(a)(3) of
ERISA).
(g) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company (or to any beneficiary of any such employee), including but not limited
to retiree health coverage and deferred compensation, but excluding continuation
of health coverage required to be continued under Section 4980B of the Code or
other applicable law and insurance conversion privileges under state law. The
assets of each Employee Benefit Plan which is funded are reported at their fair
market value on the books and records of such Employee Benefit Plan.
(h) No act or omission has occurred and no condition exists with respect to
any Employee Benefit Plan maintained by the Company, or any ERISA Affiliate that
would subject the Company or any ERISA Affiliate to (i) any material fine,
penalty, tax or liability of any kind imposed under ERISA or the Code or (ii)
any contractual indemnification or contribution obligation protecting any
fiduciary, insurer or service provider with respect to any Employee Benefit
Plan.
(i) No Employee Benefit Plan is funded by, associated with or related to a
"voluntary employee's beneficiary association" within the meaning of Section
501(c)(9) of the Code.
(j) Each Employee Benefit Plan (other than the Company's 1999 Stock
Incentive Plan) is amendable and terminable unilaterally by the Company at any
time without liability to the Company as a result thereof and no Employee
Benefit Plan, plan documentation or agreement, summary plan description or other
written communication distributed generally to employees by its terms prohibits
the Company from amending or terminating any such Employee Benefit Plan.
(k) Section 2.20(k) of the Disclosure Schedule discloses each: (i)
agreement with any stockholder, director, executive officer or other key
employee of the Company (A) the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of a transaction involving
the Company of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee or (C)
providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the Company
that may be subject to the tax imposed by Section 4999 of the Code or included
in the determination of such person's "parachute payment" under Section 280G of
the Code; and (iii) agreement or plan binding the Company, including without
limitation any stock option plan, stock appreciation right plan, restricted
stock plan, stock purchase plan, severance benefit plan or Employee Benefit
Plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions
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contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement.
(l) Section 2.20(l) of the Disclosure Schedule sets forth the policy of the
Company and any Subsidiary with respect to accrued vacation, accrued sick time,
compensatory time and earned time-off and the amount of such liabilities as of
September 30, 2000.
2.21 Environmental Matters.
(a) The Company has complied with all applicable Environmental Laws (as
defined below), except for violations of Environmental Laws that, individually
or in the aggregate, have not had and would not reasonably be expected to have a
Company Material Adverse Effect. There is no pending or, to the knowledge of the
Company, threatened civil or criminal litigation, written notice of violation,
formal administrative proceeding, or investigation, inquiry or information
request by any Governmental Entity, relating to any Environmental Law involving
the Company or any Subsidiary. For purposes of this Agreement, "Environmental
Law" means any federal, state or local law, statute, rule or regulation or the
common law relating to the environment or occupational health and safety,
including without limitation any statute, regulation, administrative decision or
order pertaining to (i) treatment, storage, disposal, generation and
transportation of industrial, toxic or hazardous materials or substances or
solid or hazardous waste; (ii) air, water and noise pollution; (iii) groundwater
and soil contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous materials or substances, or solid
or hazardous waste, including without limitation emissions, discharges,
injections, spills, escapes or dumping of pollutants, contaminants or chemicals;
(v) the protection of wild life, marine life and wetlands, including without
limitation all endangered and threatened species; (vi) storage tanks, vessels,
containers, abandoned or discarded barrels, and other closed receptacles; (vii)
health and safety of employees and other persons; and (viii) manufacturing,
processing, using, distributing, treating, storing, disposing, transporting or
handling of materials regulated under any law as pollutants, contaminants, toxic
or hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms "release" and "environment" shall have
the meaning set forth in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA").
(b) There have been no releases of any Materials of Environmental Concern
(as defined below) into the environment by the Company or, to the knowledge of
the Company, by any other party, at any parcel of real property or any facility
formerly or currently owned, operated or controlled by the Company. With respect
to any such releases of Materials of Environmental Concern by the Company, the
Company has given all required notices to Governmental Entities (copies of which
have been provided to the Buyer). The Company is not aware of any releases of
Materials of Environmental Concern at parcels of real property or facilities
other than those owned, operated or controlled by the Company that could
reasonably be expected to have an impact on the real property or facilities
owned, operated or controlled by the Company. For purposes of this Agreement,
"Materials of Environmental Concern" means any chemicals, pollutants or
contaminants, hazardous substances (as such term is defined under CERCLA), solid
wastes and hazardous wastes (as such terms are defined under the Resource
Conservation and Recovery Act), toxic materials, oil or petroleum and petroleum
products or any other material subject to regulation under any Environmental
Law.
(c) Set forth in Section 2.21(c) of the Disclosure Schedule is a list of
all documents (whether in hard copy or electronic form) that contain any
environmental reports, investigations and audits relating to premises currently
or previously owned or operated by the Company (whether conducted by or on
behalf of the Company or a third party, and whether done at the initiative of
the Company or directed by a Governmental Entity or other third party) which the
Company has possession of or access to as of the date hereof. A complete and
accurate copy of each such document has been provided to the Buyer.
(d) The Company is not aware of any material environmental liability of any
solid or hazardous waste transporter or treatment, storage or disposal facility
that has been used by the Company.
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2.22 Legal Compliance. Except with respect to tax matters that are treated
in Section 2.9, employee benefits matters that are treated in Section 2.20 and
environmental matters that are treated in Section 2.21, the Company, and the
conduct and operations of its business, are in compliance with each applicable
law (including rules and regulations thereunder) of any federal, state, local or
foreign government, or any Governmental Entity, except for any violations or
defaults that, individually or in the aggregate, have not had and would not
reasonably be expected to have a Company Material Adverse Effect.
2.23 Customers and Suppliers. No customer accounted for any revenues of
the Company during the last full fiscal year or the interim period through the
Most Recent Balance Sheet Date. Section 2.23 of the Disclosure Schedule sets
forth each supplier that is the sole supplier of any significant product to the
Company. No such supplier has indicated within the past year that it will stop,
or decrease the rate of, supplying products to the Company. No purchase order or
commitment of the Company is in excess of normal requirements, nor are prices
provided therein in excess of current market prices for the products or services
to be provided thereunder.
2.24 Permits. Section 2.24 of the Disclosure Schedule sets forth a list of
all permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity (including without limitation those issued or required under
Environmental Laws and those relating to the occupancy or use of owned or leased
real property) ("Permits") issued to or held by the Company as of the date
hereof. Such listed Permits are the only Permits that are required for the
Company to conduct its business as presently conducted or as proposed to be
conducted, except for those the absence of which, individually or in the
aggregate, have not had and would not reasonably be expected to have a Company
Material Adverse Effect. Each such Permit is in full force and effect and, to
the knowledge of the Company, no suspension or cancellation of such Permit is
threatened and there is no basis for believing that such Permit will not be
renewable upon expiration. Each such Permit will continue in full force and
effect immediately following the Closing.
2.25 Certain Business Relationships With Affiliates. No Affiliate of the
Company (a) owns any property or right, tangible or intangible, which is used in
the business of the Company, (b) has any claim or cause of action against the
Company, or (c) owes any money to, or is owed any money by, the Company. Section
2.25 of the Disclosure Schedule describes any transactions or relationships
between the Company and any Affiliate thereof which have occurred or existed
since the Company's inception, other than investments made with respect to the
Company Shares.
2.26 Brokers' Fees. Other than fees payable to Robertson Stephens Inc. and
W.R. Hambrecht & Co., the Company does not have any liability or obligation to
pay any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
2.27 Books and Records. The minute books and other similar records of the
Company contain complete and accurate records of all actions taken at any
meetings of the Company's stockholders, Board of Directors or any committee
thereof and of all written consents executed in lieu of the holding of any such
meeting. The books and records of the Company accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company and have been maintained in accordance with good
business and bookkeeping practices.
2.28 Disclosure. No representation or warranty by the Company contained in
this Agreement, and no statement contained in the Disclosure Schedule, contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary, in light of the circumstances under which it
was or will be made, in order to make the statements herein or therein not
misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company as follows:
3.1 Organization, Qualification and Corporate Power. Each of the Buyer and
the Transitory Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation. The Buyer is
duly qualified to conduct business and is in corporate and tax good standing
under the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, except where
the failure to be so qualified or in good standing would not have a Buyer
Material Adverse Effect (as defined below). The Buyer has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Buyer has furnished
or made available to the Company complete and accurate copies of its Certificate
of Incorporation and By-laws. For purposes of this Agreement, "Buyer Material
Adverse Effect" means a material adverse effect on the assets, business,
condition (financial or otherwise), operations or results of operations of the
Buyer and its subsidiaries, taken as a whole.
3.2 Capitalization. The authorized capital stock of the Buyer consists
solely of 105,824,172 shares of Buyer Common Stock, of which 90,284,760 shares
were issued and outstanding as of September 30, 2000; provided that the Board of
Directors of the Buyer has approved an amendment to the Buyer's certificate of
incorporation increasing the number of authorized shares of Buyer Common Stock
to 295,000,000 and creating a class of 5,000,000 shares of authorized "blank
check" preferred stock, which amendment the Buyer expects will be submitted for
approval by its stockholders, approved and filed prior to completion of the IPO.
All of the issued and outstanding shares of Buyer Common Stock are duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. All of the Merger Shares will be, when issued in accordance with this
Agreement, duly authorized, validly issued, fully paid, nonassessable and free
of all preemptive rights. As of September 30, 2000, the Buyer has reserved a
total of 14,139,381 shares of Buyer Common Stock for issuance pursuant to the
exercise of outstanding options, warrants or other securities convertible into
or exchangeable for shares of Buyer Common Stock and an additional 1,400,031
shares of Buyer Common Stock are reserved for future grants of stock options or
restricted stock awards. There are no outstanding or authorized stock
appreciation, phantom stock or similar rights with respect to the Buyer.
3.3 Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and (in the case of the Buyer) the Escrow Agreement and to perform its
obligations hereunder and thereunder. The execution and delivery by the Buyer
and the Transitory Subsidiary of this Agreement and (in the case of the Buyer)
the Escrow Agreement and the consummation by the Buyer and the Transitory
Subsidiary of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of the
Buyer and Transitory Subsidiary, respectively. This Agreement has been duly and
validly executed and delivered by the Buyer and the Transitory Subsidiary and
constitutes a valid and binding obligation of the Buyer and the Transitory
Subsidiary, enforceable against them in accordance with its terms.
3.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Exchange Act and the Hart-Scott-Rodino Act, if any, and the filing of the
Certificate of Merger as required by the Delaware General Corporation Law,
neither the execution and delivery by the Buyer or the Transitory Subsidiary of
this Agreement or (in the case of the Buyer) the Escrow Agreement, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated hereby or thereby, will (a) conflict with or violate any provision
of the charter or By-laws of the Buyer or the Transitory Subsidiary, (b) require
on the part of the Buyer or the Transitory Subsidiary any filing with, or
permit, authorization, consent or approval of, any Governmental Entity, (c)
conflict with, result in breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of
obligations under, create in any party any right to
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terminate, modify or cancel, or require any notice, consent or waiver under, any
contract or instrument to which the Buyer or the Transitory Subsidiary is a
party or by which either is bound or to which any of their assets are subject,
except for (i) any conflict, breach, default, acceleration, termination,
modification or cancellation which would not adversely affect the consummation
of the transactions contemplated hereby or (ii) any notice, consent or waiver
the absence of which would not adversely affect the consummation of the
transactions contemplated hereby, or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Buyer or the Transitory
Subsidiary or any of their properties or assets.
3.5 Reports and Financial Statements. The Buyer has previously furnished
or made available to the Company complete and accurate copies, as amended or
supplemented, of its Registration Statement on Form S-1 (the "IPO Registration
Statement"), as filed with the Securities and Exchange Commission (the "SEC"),
and all written comments provided by the staff of the SEC to the Buyer with
respect to the IPO Registration Statement and all responses to such comments
filed by the Buyer with the SEC (other than responses that the Buyer determines
should be kept confidential for bona fide business purposes, provided that the
Buyer shall in any event provide all responses that relate to the Company or the
transactions contemplated by this Agreement). The IPO Registration Statement
complied in all material respects with the requirements of the Securities Act of
1933, as amended (the "Securities Act") and the rules and regulations thereunder
when filed and, upon effectiveness thereof in accordance with the Securities
Act, the Buyer currently intends to offer shares of Buyer Common Stock to the
public pursuant thereto. As of the date of this Agreement, Credit Suisse First
Boston Corporation has advised the Buyer that it supports the Buyer's current
intention to go forward with the IPO. As of the date of this Agreement, subject
to the last three sentences of this Section 3.5, the IPO Registration Statement
does not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited financial statements and unaudited interim financial
statements of the Buyer included in the IPO Registration Statement, subject to
the last three sentences of this Section 3.5, (i) complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto when filed, (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated therein or in the notes
thereto, (iii) fairly present the consolidated financial condition, results of
operations and cash flows of the Buyer as of the respective dates thereof and
for the periods referred to therein, and (iv) are consistent with the books and
records of the Buyer. The Company acknowledges that the IPO Registration
Statement has not been declared effective and is the subject of ongoing review
by the staff of the SEC, and that additional modifications to the IPO
Registration Statement and the financial statements included therein may be
necessary in response to comments issued by the SEC staff. Among other things,
the SEC staff has issued comments regarding potential compensation expenses
attributable to "cheap stock" issued by the Buyer, regarding the period over
which certain intangible assets of the Buyer should be amortized and regarding
potential variable accounting with respect to certain stock options issued by
the Buyer. The Company agrees that any modification to the IPO Registration
Statement made by the Buyer after the date of this Agreement in response to
comments from the SEC staff, including any modifications to existing disclosure
or financial data or any addition of new disclosure, shall not give rise to a
breach of the representations and warranties made in this Section 3.5.
3.6 Absence of Material Adverse Change. Since June 30, 2000, there has
occurred no event or development which has had, or would reasonably be expected
to have in the future, a Buyer Material Adverse Effect.
3.7 Litigation. Except as disclosed in the IPO Registration Statement, as
of the date of this Agreement, there is no Legal Proceeding which is pending or,
to the Buyer's knowledge, threatened against the Buyer or any subsidiary of the
Buyer which, if determined adversely to the Buyer or such subsidiary, could
have, individually or in the aggregate, a Buyer Material Adverse Effect or which
in any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated by this Agreement.
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3.8 Interim Operations of the Transitory Subsidiary. The Transitory
Subsidiary was formed solely for the purpose of engaging in the transactions
contemplated by this Agreement and has engaged in no business activities other
than as contemplated by this Agreement.
3.9 Brokers' Fees. Other than fees payable to Credit Suisse First Boston
Corporation, neither the Buyer nor the Transitory Subsidiary has any liability
or obligation to pay any fees or commissions to any broker, finder or agent with
respect to the transactions contemplated by this Agreement.
3.10 Disclosure. No representation or warranty by the Buyer contained in
this Agreement contains or will contain any untrue statement of a material fact
or omit or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading.
3.11 Other Transactions. On the date hereof, the Buyer is not in active
and substantive discussions with any third party involving (i) an Acquisition
(as defined below) of the Buyer (ii) the Buyer's acquisition of any other
business or entity, or (iii) issuances by the Buyer of any of its securities,
other than (x) the IPO, (y) in connection with the exercise or conversion of
currently outstanding warrants, options and other convertible securities, and
(z) the issuance of further employee stock options and the issuance of the
Buyer's Common Stock pursuant thereto. An "Acquisition" is an acquisition,
purchase, merger, other business combination or other single transaction or
series of related transactions the result of which is a sale of all or
substantially all of the assets of the Buyer or a merger or acquisition of the
Buyer with, into or by any other corporation or corporations, in which the
shareholders of the corporation immediately prior to such transaction do not own
a majority of the outstanding shares of the surviving entity or entities.
ARTICLE IV
COVENANTS
4.1 Closing Efforts. Each of the Parties shall use its best efforts, to
the extent commercially reasonable ("Reasonable Best Efforts"), to take all
actions and to do all things necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, including without limitation using
its Reasonable Best Efforts to ensure that (i) its representations and
warranties remain true and correct in all material respects through the Closing
Date and (ii) the conditions to the obligations of the other Parties to
consummate the Merger are satisfied.
4.2 Governmental and Third-Party Notices and Consents.
(a) Each Party shall use its Reasonable Best Efforts to obtain, at its
expense, all waivers, permits, consents, approvals or other authorizations from
Governmental Entities, and to effect all registrations, filings and notices with
or to Governmental Entities, as may be required for such Party to consummate the
transactions contemplated by this Agreement and to otherwise comply with all
applicable laws and regulations in connection with the consummation of the
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, each of the Parties shall file any Notification and Report Forms
and related material that it may be required to file with the Federal Trade
Commission and the Antitrust Division of the United States Department of Justice
under the Hart-Scott-Rodino Act, shall use its Reasonable Best Efforts to obtain
an early termination of the applicable waiting period, and shall make any
further filings or information submissions pursuant thereto that may be
necessary, proper or advisable; provided, however, that, notwithstanding
anything to the contrary in this Agreement, the Buyer shall not be obligated to
sell or dispose of or hold separately (through a trust or otherwise) any assets
or businesses of the Buyer or its Affiliates.
(b) The Company shall use its Reasonable Best Efforts to obtain, at its
expense, all such waivers, consents or approvals from third parties, and to give
all such notices to third parties, as are required to be listed in Section 2.4
of the Disclosure Schedule.
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4.3 Special Meeting, Prospectus/Proxy Statement and Registration Statement.
(a) The Company shall use its Reasonable Best Efforts to obtain, as
promptly as practicable, the Requisite Stockholder Approval, either at a special
meeting of stockholders or pursuant to a written stockholder consent, all in
accordance with the applicable requirements of the Delaware General Corporation
Law. In connection with such special meeting of stockholders or written
stockholder consent, the Buyer shall prepare, with the assistance and
cooperation of the Company, a Registration Statement on Form S-4 (the
"Registration Statement"). In connection with the preparation of the
Registration Statement, the Company shall use its Reasonable Best Efforts to
provide to the Buyer no later than November 10, 2000 (i) financial statements of
the Company as of and for the nine months ended September 30, 2000, which
financial statements shall be audited by Arthur Andersen LLP, auditors of the
Company ("Arthur Andersen"), (ii) comparative unaudited income statements of the
Company for the quarter-to-date periods ended September 30, 1999 and 2000 and an
unaudited income statement and cash flow statement of the Company for the
year-to-date period ended September 30, 1999, (iii) audited financial statements
of the Company as of and for the year ended December 31, 1998 and 1999, (iv) a
reviewed (SAS E71 level) income statement of the Company for the twelve months
ended September 30, 2000, and (v) such other information as is required to be
provided with respect to the Company in the Registration Statement
(collectively, the information identified in clauses (i) through (v) being
referred to as the "Required Information"). The Registration Statement shall
include a prospectus/proxy statement to be used for the purpose of offering the
Merger Shares to stockholders of the Company and soliciting proxies or written
consents from stockholders of the Company for the purpose of obtaining the
Requisite Stockholder Approval (such prospectus/proxy statement, together with
any accompanying letter to stockholders, notice of meeting and form of proxy or
written consent, shall be referred to herein as the "Prospectus/Proxy
Statement"). The summary of the Merger in the Prospectus/Proxy Statement shall
include a summary of the terms relating to the indemnification obligations of
the Company Stockholders, the escrow arrangements and the authority of the
Indemnification Representatives, and a statement that the adoption of this
Agreement by the stockholders of the Company shall constitute approval of such
terms. Each of the Buyer and the Company shall use Reasonable Best Efforts in
order to prepare the Registration Statement and the Prospectus/Proxy Statement
as expeditiously as possible after the date hereof, with a view towards having
such documents prepared by the later of the tenth business day after the date
that the Company provides the Required Information and the tenth business day
after the date that the Buyer's IPO is consummated, provided that each of the
Buyer and the Company acknowledge that the Registration Statement shall not be
filed prior to the effectiveness of the IPO Registration Statement. The Buyer
shall file the Registration Statement with the SEC and shall, with the
assistance of the Company, promptly respond to any SEC comments on the
Registration Statement and shall otherwise use its Reasonable Best Efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable. Promptly following such time as the Registration
Statement is declared effective, the Company shall distribute the
Prospectus/Proxy Statement to its stockholders and, pursuant thereto, shall use
its Reasonable Best Efforts to obtain the Requisite Stockholder Approval. If the
Requisite Stockholder Approval is obtained by means of a written consent, the
Company shall send, pursuant to Sections 228 and 262(d) of the Delaware General
Corporation Law, a written notice to all stockholders olders of the Company that
did not execute such written consent informing them that this Agreement and the
Merger were adopted and approved by the stockholders of the Company and that
appraisal rights are available for their Common Shares pursuant to Section 262
of the Delaware General Corporation Law (which notice shall include a copy of
such Section 262), and shall promptly inform the Buyer of the date on which such
notice was sent.
(b) The Company, acting through its Board of Directors, shall include in
the Prospectus/Proxy Statement the unanimous recommendation of its Board of
Directors that the stockholders of the Company vote in favor of the adoption of
this Agreement and the approval of the Merger.
(c) The Company shall ensure that the Prospectus/Proxy Statement does not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading (provided that the
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Company shall not be responsible for the accuracy or completeness of any
information relating to the Buyer or furnished by the Buyer in writing for
inclusion in the Prospectus/Proxy Statement).
(d) The Buyer shall ensure that the Registration Statement does not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
(provided that the Buyer shall not be responsible for the accuracy or
completeness of any information relating to the Company or furnished by the
Company in writing for inclusion in the Registration Statement).
(e) Contemporaneously with the execution of this Agreement, the Company
Stockholders listed on Section 4.3(e) of the Disclosure Schedule hereto shall
each enter into a Stockholder Voting Agreement substantially in the form
attached hereto as Exhibit B.
4.4 Operation of Business. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, the
Company shall conduct its operations in the Ordinary Course of Business and in
compliance with all applicable laws and regulations and, to the extent
consistent therewith, use its Reasonable Best Efforts to preserve intact its
current business organization, keep its physical assets in good working
condition, keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business shall not be
impaired in any material respect. Without limiting the generality of the
foregoing, prior to the Effective Time, the Company shall not, without the
written consent of the Buyer:
(a) except for (i) the Options described on Section 4.4(a) of the
Disclosure Schedule (which Options shall contain the Buyer's standard
option terms and conditions and shall expressly provide that the Merger
shall not accelerate the vesting schedule thereof), (ii) the Options that
may be granted pursuant to offer letters which offers have not been
accepted, declined or terminated as of the date hereof and which are set
forth on Section 2.7 of the Disclosure Schedule and (iii) redemption of the
Series A Preferred Shares as contemplated by Section 5.2(s) hereof, issue
or sell, or redeem or repurchase, any stock or other securities of the
Company or any rights, warrants or options to acquire any such stock or
other securities (except pursuant to the conversion or exercise of
convertible securities or Options or Warrants outstanding on the date
hereof and except for repurchases of Restricted Shares with an aggregate
purchase price not exceeding $25,000 from employees of the Company upon
termination of their employment), or amend any of the terms of (including
without limitation the vesting of) any such convertible securities or
Options or Warrants;
(b) except for redemption of the Series A Preferred Shares as
contemplated by Section 5.2(s) hereof, split, combine or reclassify any
shares of its capital stock; declare, set aside or pay any dividend or
other distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock;
(c) create, incur or assume any indebtedness (including obligations
in respect of capital leases); assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person or entity; or make any loans,
advances or capital contributions to, or investments in, any other person
or entity, except (i) as contemplated by this Agreement, (ii) for advances
to the Company's employees for the purposes of business travel of up to
$5,000 in each instance and $25,000 in the aggregate, and (iii) for
incurrences of indebtedness after January 31, 2001 under the Company's loan
arrangement with Comdisco, Inc.;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.20(k) or increase in any manner the compensation or fringe
benefits of, or materially modify the employment terms of, its directors,
officers or employees, generally or individually, or pay any bonus or other
benefit to its directors, officers or employees (except for (i) existing
payment obligations as provided to Buyer pursuant to Section 2.19, (ii)
amendments to the Company's 1999 Stock Incentive Plan or the adoption of a
new stock option plan solely to permit the Option grants contemplated by
Section 4.4(a),
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(iii) compensation increases for employees of the Company (other than any
person identified in the fifth paragraph of the preamble to the Disclosure
Schedule) on his or her anniversary date, not to exceed 7% of such
employee's base salary, and (iv) an amendment required pursuant to Section
4.13(a) of this Agreement;
(e) acquire, sell, lease, license or dispose of any assets or
property (including without limitation any real property, shares or other
equity interests in or securities of any Subsidiary or any corporation,
partnership, association or other business organization or division
thereof), other than purchases and sales of assets in the Ordinary Course
of Business or a Permitted Contract (as defined below);
(f) mortgage or pledge any of its property or assets or subject any
such property or assets to any Security Interest;
(g) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the Ordinary Course of Business;
(h) amend the Company's Restated Certificate of Incorporation (the
"Company Charter"), by-laws or other organizational documents (except for
amendments to the Company Charter solely to permit the grants of Options
contemplated by Section 4.4(a) hereof and redemption of the Series A
Preferred Shares as contemplated by Section 5.2(s) hereof);
(i) change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable
change in GAAP;
(j) amend, terminate, take or omit to take any action that would
constitute a violation of or default under, or waive any rights under, any
contract or agreement that is listed on Schedule 2.13 or Schedule 2.14
hereto or enter into any contract or agreement, other than a Permitted
Contract, that would be required to be listed on either such schedule if it
existed on the date of this Agreement;
(k) make or commit to make any capital expenditure in excess of the
amounts set forth in the Company's budget for the fiscal year 2000, which
has been provided to Buyer, or in excess of the amounts set forth in the
budget for fiscal year 2001, approved by the Company's Board of Directors
and the Buyer after the date hereof; provided, however, that if the Company
and the Buyer are unable to agree upon a capital budget for 2001, then the
capital budget for the first quarter of 2001 shall be deemed for this
purpose to equal the amount of capital expenditures made by the Company in
the last quarter of 2000 increased by 15%, with the budget being increased
by 15% each quarter thereafter;
(l) institute or settle any Legal Proceeding;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in any of the conditions to the Merger set forth in Article V
not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing
actions.
A "Permitted Contract" shall mean (i) outbound software licenses,
substantially in accordance with the Company's standard form (which form
shall be finalized and approved by Buyer following the date hereof, such
approval not to be unreasonably withheld), which licenses shall not provide
any exclusive license rights and which shall have reasonable, arms-length
pricing with discounts not in excess of those that are customary in the
industry, (ii) inbound licenses of technology rights from third parties
which, in the aggregate (but excluding any license fees payable under
commercially available, off the shelf software under "shrink wrap"
licenses), would not bind the Company to pay license fees in excess of
$100,000, (iii) non-disclosure agreements with third parties, which contain
restrictions on disclosure by the third party that are substantially
similar to those contained in the Company's standard form as in effect on
the date of this Agreement, (iv) evaluation agreements on the Company's
standard form as in effect on the date of this Agreement and (v) contracts
with parties listed in, and regarding the subject matter specified in,
Section 4.4(e) of the Disclosure
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Schedule. In connection with the form of outbound software license
contemplated by (i) above, the Buyer and the Company agree that they will
use their Reasonable Best Efforts in order to review and agree promptly
after the date of this Agreement on a mutually agreeable form of license
agreement for use by the Company.
4.5 Access to Information.
(a) The Company shall permit representatives of the Buyer to have full
access (at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Company) to all premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to the Company.
(b) Within 15 days after the end of each month ending prior to the Closing,
beginning with October 2000, the Company shall furnish to the Buyer an unaudited
income statement for such month and a balance sheet as of the end of such month,
prepared on a basis consistent with the Financial Statements. Such financial
statements shall present fairly the financial condition and results of
operations of the Company as of the dates thereof and for the periods covered
thereby, and shall be consistent with the books and records of the Company.
(c) Buyer agrees to keep the Company advised of all material developments
regarding the IPO Registration Statement and the IPO. Buyer shall promptly
provide to the Company further amendments of the IPO Registration Statement as
they are filed, as well as any comments received by the Company from the SEC
staff regarding the IPO Registration Statement and any responses filed by the
Company with the SEC with respect to such comments (other than responses that
the Buyer determines should be kept confidential for bona fide business
purposes, provided that the Buyer shall in any event provide all responses that
relate to the Company or the transactions contemplated by this Agreement). Buyer
will use Reasonable Best Efforts to provide the Company with reasonable access
from time to time to the Buyer's lead underwriter involved in the IPO.
(d) In addition to the information provided by the Company under Section
4.5(c) above, in the event that the IPO is not consummated by December 31, 2000,
the Buyer shall permit representatives of the Company to have access to Buyer's
internal revenue forecasts and financial projections and information regarding
Buyer's backlog and supply chain.
4.6 Notice of Breaches.
(a) From the date of this Agreement until the Effective Time, the Company
shall promptly deliver to the Buyer supplemental information concerning events
or circumstances occurring subsequent to the date hereof which would render any
representation, warranty or statement in this Agreement or the Disclosure
Schedule inaccurate at any time after the date of this Agreement until the
Closing Date. No such supplemental information shall be deemed to cure any
misrepresentation or breach of warranty or constitute an amendment of any
representation, warranty or statement in this Agreement or the Disclosure
Schedule.
(b) From the date of this Agreement until the Effective Time, the Buyer
shall promptly deliver to the Company supplemental information concerning events
or circumstances occurring subsequent to the date hereof which would render any
representation or warranty in this Agreement inaccurate at any time after the
date of this Agreement until the Closing Date. No such supplemental information
shall be deemed to cure any misrepresentation or breach of warranty or
constitute an amendment of any representation or warranty in this Agreement.
4.7 Exclusivity. The Company shall not, and the Company shall require each
of its officers, directors, employees, representatives and agents not to,
directly or indirectly, except as otherwise expressly contemplated in Section
4.4(a) of this Agreement, (i) initiate, solicit, encourage or otherwise
facilitate any inquiry, proposal, offer or discussion with any party (other than
the Buyer) concerning any merger, reorganization, consolidation,
recapitalization, business combination, liquidation, dissolution, share
exchange, sale of stock, sale of material assets or similar business transaction
involving the Company or any
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division of the Company, (ii) furnish any non-public information concerning the
business, properties or assets of the Company or any division of the Company to
any party (other than the Buyer) or (iii) engage in discussions or negotiations
with any party (other than the Buyer) concerning any such transaction. The
Company shall immediately notify any party with which discussions or
negotiations of the nature described above were pending that the Company is
terminating such discussions or negotiations. If the Company receives any
inquiry, proposal or offer of the nature described above, the Company shall,
within one business day after such receipt, notify the Buyer of such inquiry,
proposal or offer, including the identity of the other party and the terms of
such inquiry, proposal or offer.
4.8 Expenses. Except as set forth in Article VI and the Escrow Agreement,
each of the Parties shall bear its own costs and expenses (including legal fees
and expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Company shall not incur more than an aggregate of $3.0 million in investment
banking, broker's, finder's, legal and accounting fees and expenses in
connection with the Merger, and all other fees and expenses of the Company in
connection with the transactions contemplated hereby shall be borne by the
Company Stockholders.
4.9 Agreements from Certain Affiliates of the Company. Upon the execution
of this Agreement, the Company shall provide to the Buyer a list of those
persons who are, in the Company's reasonable judgment, Affiliates of the
Company. The Company shall provide to the Buyer such information and documents
as the Buyer shall reasonably request for purposes of reviewing such list and
shall notify the Buyer in writing regarding any change in the identity of its
Affiliates prior to the Closing Date. In order to help ensure that the issuance
of and any resale of the Merger Shares will comply with the Securities Act, the
Company shall use its Reasonable Best Efforts to deliver or cause to be
delivered to the Buyer, as soon as practicable and in any case prior to the
mailing of the Prospectus/Proxy Statement (or, in the case of any person who
becomes an Affiliate after such date, as soon as practicable after such person
becomes an Affiliate), an Affiliate Agreement, in the form attached hereto as
Exhibit C (an "Affiliate Agreement"), executed by each of its Affiliates. The
Buyer shall be entitled to place appropriate legends on the certificates
evidencing any Merger Shares to be issued to Affiliates of the Company, and to
issue appropriate stop transfer instructions to the transfer agent for the Buyer
Common Stock, setting forth restrictions on transfer consistent with the terms
of the Affiliate Agreement.
4.10 Listing of Merger Shares. On or prior to the date that the
Registration Statement is declared effective by the SEC, Buyer shall submit a
properly completed application for listing of the Merger Shares on the Nasdaq
National Market ("Nasdaq"), and shall pay any fee required in connection
therewith. Thereafter, Buyer shall use its Reasonable Best Efforts to cause the
listing of the Merger Shares on Nasdaq, including responding promptly to any
reasonable requests or inquiries from Nasdaq with respect to such application.
4.11 Loan. The Company and the Buyer shall enter into a Loan and Security
Agreement in the form attached hereto as Exhibit D. Promptly after the date
hereof, the parties shall provide such agreement and any related agreements to
Comdisco, Inc. and Silicon Valley Bank for their review and approval, and the
parties shall execute such agreement and any related agreements promptly
following such approval. The Buyer acknowledges that such lenders will require
subordination of such loan to the Company's presently outstanding loans and
agrees to execute subordination agreements with those lenders that include
subordination provisions substantially similar to those contained in the
Subordination Agreement between Comdisco, Inc. and Silicon Valley Bank dated as
of June 5, 2000.
4.12 Directors and Officers Insurance.
(a) Provided that the Company obtains a directors' and officers' runoff
liability insurance polic(ies) with insurance carrier(s) reasonably acceptable
to Buyer and with a premium(s) not in excess of $75,000, with aggregate coverage
limits of at least $25 million and which provide coverage for claims for a
period of six years from and after the Effective Time (collectively, the "Runoff
Policy"), then for a period of six years from and after the Effective Time,
Buyer will fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification provision under the Company Charter or the
Company's bylaws
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as each is in effect on the date hereof (the persons to be indemnified pursuant
to the provisions referred to in this Section 4.12(a) shall be referred to as,
collectively, the "Company Indemnified Parties"). The provisions with respect to
indemnification and exculpation from liability set forth in the Company Charter
and the Company's bylaws on the date of this Agreement shall not be amended,
repealed or otherwise modified for a period of six years after the Effective
Time in any manner that would adversely affect the rights thereunder of any
Company Indemnified Party, except as may be required to conform with changes in
applicable law and any changes which do not affect the application of such
provisions to acts or omissions of such individuals prior to the Effective Time,
and except to the extent the Buyer expressly assumes the provisions relating to
indemnification.
(b) For six years after the Effective Time, Buyer shall use its Reasonable
Best Efforts to take any such actions, other than the payment of additional
premiums, as may be necessary in order to maintain in full force and effect the
Runoff Policy.
(c) This Section 4.12 shall survive the consummation of the Merger and the
Effective Time, is intended to benefit and may be enforced by the Company,
Buyer, the Surviving Corporation and the Company Indemnified Parties, and shall
be binding on all successors and assigns of Buyer and the Surviving Corporation.
4.13 Employee Benefit and Related Matters.
(a) Any Company-sponsored Employee Benefit Plans in effect at the Effective
Time will continue to be sponsored and maintained without material change
(except as required by law) by the Buyer and the Surviving Corporation until
such time as those Company plans are merged into Parent's benefit plans or the
participants in the Company Employee Benefit Plans who are employees or
immediate family members of employees immediately prior to the Effective Time
("Covered Employees") otherwise become covered under the Parent's benefit plans
or other benefit plans; provided, however, that, prior to the Effective Time,
the Company shall amend its Trust Star 401(k) plan to provide that such plan
does not cover employees of affiliated companies.
(b) If Covered Employees are included in any Employee Benefit Plan of Buyer
or its Subsidiaries, Buyer agrees that the Covered Employees shall receive
credit under such plan (other than any such plan providing for sabbaticals) for
service prior to the Effective Time with the Company to the same extent such
serve was counted under similar Company Employee Benefit Plans for purposes of
eligibility, vesting, eligibility for retirement (but not for benefit accrual)
and, with respect to vacation, disability and severance, the determination of
benefit levels. If Covered Employees are included in any medical, dental or
health plan other than the plan or plans they participated in immediately prior
to the Effective Time, Buyer agrees that any such plans shall not include
pre-existing condition exclusions, except to the extent such exclusions were
applicable under the similar Company Employee Benefit Plan immediately prior to
the Effective Time.
4.14 Certain Tax Matters.
(a) Each of Buyer and the Company will use its Reasonable Best Efforts to
cause the Merger to constitute a reorganization within the meaning of Section
368(a) of the Code, and to timely satisfy, or cause to be timely satisfied, all
applicable tax reporting and filing requirements contained in the Code and the
Treasury Regulations with respect to the Merger, including the reporting
requirements contained in Treasury Regulation 1.367(a)-3(c)(6).
(b) In connection with the filing of the Registration Statement, the
Company and Buyer shall execute and deliver to Hale and Dorr LLP and to Cooley
Godward LLP, tax representation letters in customary form, dated as of the date
of such filing. Following delivery of such tax representation letters, each of
Buyer and the Company will use Reasonable Best Efforts to cause Hale and Dorr
LLP and Cooley Godward LLP, respectively, to deliver a tax opinion satisfying
the requirements of Item 601 of Regulation S-K under the Securities Act and to
obtain the consent of Hale and Dorr LLP and Cooley Godward LLP to the filing of
such tax opinions as exhibits to the Registration Statement. In rendering
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such opinions, and in rendering the opinions referenced in Sections 5.2(l) and
5.3(g) hereof, each of such counsel shall be entitled to rely on the tax
representation letters described in this Section 4.14.
(c) Prior to the Effective Time, the Company shall submit to a stockholder
vote the right of any "disqualified individual" (as defined in Section 280G(c)
of the Code) to receive any and all payments that could be deemed "parachute
payments" under Section 280G(b) of the Code, in a manner that satisfies the
stockholder approval requirements for the small business exemption of Code
Section 280G(b)(5). In addition, prior to the Effective Time, the Company shall
provide adequate disclosure to the stockholders of the Company of all material
facts concerning each such payment that, but for such vote, could be deemed a
"parachute payment" to a "disqualified individual" under Code Section 280G, in a
manner that satisfied Code Section 280G(b)(5)(B).
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(b) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act, if applicable, shall have expired or otherwise
been terminated;
(c) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and there shall not
be in effect any stop order suspending the effectiveness of the
Registration Statement or any proceedings seeking such a stop order;
(d) the IPO shall have closed; and
(e) the Merger Shares shall have been approved for listing on the
Nasdaq National Market, subject to notice of issuance.
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction (or waiver by the Buyer)
of the following additional conditions:
(a) the number of Dissenting Shares shall not exceed 2.5% of the
number of outstanding Common Shares as of the Effective Time (calculated
after giving effect to the conversion into Common Shares of all outstanding
and Series B Preferred Shares);
(b) the Company shall have obtained (and shall have provided copies
thereof to the Buyer) all of the consents identified on Schedule 5.2(b)
(collectively, the "Required Closing Consents"); provided, that to the
extent that the Buyer waives the receipt of any Required Closing Consent
and proceeds to consummate the Merger, Buyer and any other Indemnified
Party (as defined in Article VI) shall not be permitted to make any claim
for indemnification under Article VI hereof with respect to the failure to
receive such Required Closing Consent or any Damages arising therefrom;
(c) the representations and warranties of the Company set forth in
this Agreement shall be true and correct, as of the date of this Agreement
and as of the Effective Time as though made as of the Effective Time,
except to the extent such representations and warranties are specifically
made as of a particular date or as of the date of this Agreement (in which
case such representations and warranties shall be true and correct as of
such date) and except for any failure to be true and correct which has not
resulted in, and would not be reasonably likely to result in, a Company
Material Adverse Change (as defined below);
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(d) the Company shall have performed or complied with in all material
respects its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time;
(e) no Legal Proceeding shall be pending or threatened in writing
(other than those specifically identified in Section 2.17 of the Disclosure
Schedule) wherein an unfavorable judgment, order, decree, stipulation or
injunction would reasonably be likely to (i) prevent consummation of any of
the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation or (iii) have a Company Material Adverse Effect, and no such
judgment, order, decree, stipulation or injunction shall be in effect;
(f) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (the "Company Certificate") to the effect that
each of the conditions specified in clause (a) of Section 5.1 and clauses
(a) through (e) (insofar as clause (e) relates to Legal Proceedings
involving the Company or a Subsidiary) of this Section 5.2 is satisfied in
all respects;
(g) the Buyer shall have received from counsel to the Company an
opinion with respect to the matters set forth in Exhibit E attached hereto,
addressed to the Buyer and dated as of the Closing Date;
(h) the Buyer shall have received copies of the resignations,
effective as of the Effective Time, of each director and officer of the
Company (other than any such resignations which the Buyer designates, by
written notice to the Company, as unnecessary);
(i) the employees of the Company identified in Section 5.2(i) of the
Disclosure Schedule (the "Key Employees") shall have (i) accepted an offer
of employment from Buyer (which offer may be contingent upon the Closing),
(ii) executed an offer letter in a form reasonably satisfactory to Buyer
and consistent with Buyer's past practice, (iii) taken no action to rescind
acceptance of such offer of employment, (iv) agreed that the occurrence of
the Merger, in and of itself, shall not constitute "Good Reason" with
respect to acceleration of such employee's Options upon termination of
employment; and (v) executed a Noncompetition and Nonsolicitation Agreement
in the form attached hereto as Exhibit F;
(j) the parties identified in Section 5.2(j) of the Disclosure
Schedule shall have executed lock-up agreements prior to effectiveness of
the IPO Registration Statement, substantially in the forms attached hereto
as Exhibit G-1 or G-2 (with the form on Exhibit G-1 being executed by
employees and the form on Exhibit G-2 being executed by non-employees);
(k) no circumstance with respect to, change in or effect on the
Company (a "Company Material Adverse Change") shall have occurred since the
date hereof that is reasonably likely to be or have a Company Material
Adverse Effect, other than a circumstance, change or effect resulting,
alone or in combination, from (a) failure of the Company to meet any
revenue or earnings projections, (b) the delay or cancellation of orders by
the Company's customers or the disruption or loss of any relationship set
forth in Section 5.2(k) of the Disclosure Schedule, (c) conditions
generally effecting the United States economy or the software industry, (d)
actions required to be taken or prohibited from being taken by this
Agreement, (e) change in accounting principles or requirements or
applicable laws or regulations, or (f) failure by Buyer to take action
required by this Agreement;
(l) the Buyer shall have received an opinion from Hale and Dorr LLP,
in a form reasonably satisfactory to the Buyer, dated the Closing Date, to
the effect that the Merger will constitute a reorganization for federal
income tax purposes within the meaning of Section 368(a) of the Code;
provided that if Hale and Dorr LLP does not render such opinion, this
condition shall nonetheless be deemed satisfied if Cooley Godward LLP
renders such opinion to the Buyer; provided, further, that this condition
shall be deemed satisfied, at the Company's election, if the Company is not
responsible for failure of the Merger to constitute such a reorganization;
(m) all outstanding Series B Preferred Shares shall have been
converted into Common Shares;
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(n) all Warrants shall have been exercised or terminated;
(o) the Buyer shall have received such other certificates and
instruments (including without limitation certificates of good standing of
the Company in their jurisdiction of organization and the various foreign
jurisdictions in which they are qualified, certified charter documents,
certificates as to the incumbency of officers and the adoption of
authorizing resolutions) as it shall reasonably request in connection with
the Closing;
(p) any "parachute payments" will have been approved by the percentage
of holders of the outstanding Company Shares as required by law as
described in Section 4.14(c);
(q) the Company shall have delivered to the Buyer a properly executed
statement satisfying the requirements of Treasury Regulation Sections
1.897-2(h) and 1.1445-2(c)(3) in a form reasonably acceptable to the Buyer;
and
(r) the Company shall have delivered to the Buyer all Tax good
standing and other clearance certificates or similar documents which are
required by any Tax authority in any jurisdiction in which the Company is
required to file Tax Returns to relieve the Buyer from any obligations to
withhold any portion of any consideration payable by reason of this
Agreement or the transactions contemplated hereby or thereby;
(s) the Company shall have caused to be redeemed, for the
consideration specified in the Company Charter, all outstanding Series A
Preferred Shares not later than the last day of the calendar month
preceding the month in which the Merger is consummated; and
(t) the Company shall have provided to the Buyer a balance sheet as of
the end of the calendar month preceding the month in which the Merger is
consummated, prepared in accordance with GAAP, and showing total assets of
less than $10.0 million.
5.3 Conditions to Obligations of the Company. The obligation of the
Company to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Buyer shall have effected all of the registrations, filings
and notices referred to in Section 4.2 which are required on the part of
the Buyer, except for any which if not obtained or effected would not have
a Buyer Material Adverse Effect or a material adverse effect on the ability
of the Parties to consummate the transactions contemplated by this
Agreement;
(b) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in the first sentence of Section 3.1 and Section 3.3
and any representations and warranties of the Buyer and the Transitory
Subsidiary set forth in this Agreement that are qualified as to materiality
shall be true and correct, and the representations and warranties of the
Buyer and the Transitory Subsidiary set forth in this Agreement that are
not so qualified (other than those set forth in Section 3.1 and Section
3.3) shall be true and correct in all material respects, in each case as of
the date of this Agreement and as of the Effective Time as though made as
of the Effective Time, except to the extent such representations and
warranties are specifically made as of a particular date or as of the date
of this Agreement (in which case such representations and warranties shall
be true and correct as of such date);
(c) each of the Buyer and the Transitory Subsidiary shall have
performed or complied with in all material respects its agreements and
covenants required to be performed or complied with under this Agreement as
of or prior to the Effective Time;
(d) no Legal Proceeding shall be pending or threatened wherein an
unfavorable judgment, order, decree, stipulation or injunction would (i)
prevent consummation of any of the transactions contemplated by this
Agreement, (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation or (iii) have a Buyer
Material Adverse Effect, and no such judgment, order, decree, stipulation
or injunction shall be in effect;
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(e) the Buyer shall have delivered to the Company a certificate (the
"Buyer Certificate") to the effect that each of the conditions specified in
clause (c) of Section 5.1 and in clauses (a) through (d) (insofar as clause
(d) relates to Legal Proceedings involving the Buyer) of this Section 5.3
is satisfied in all respects;
(f) the Company shall have received from counsel to the Buyer and the
Transitory Subsidiary an opinion with respect to the matters set forth in
Exhibit H attached hereto, addressed to the Company and dated as of the
Closing Date;
(g) the Company shall have received an opinion from Cooley Godward
LLP, in a form reasonably satisfactory to the Company, dated the Closing
Date, to the effect that the Merger will constitute a reorganization for
federal income tax purposes within the meaning of Section 368(a) of the
Code; provided that if Cooley Godward LLP does not render such opinion,
this condition shall nonetheless be deemed satisfied if Hale and Dorr LLP
renders such opinion to the Company; and
(h) the Company shall have received such other certificates and
instruments (including without limitation certificates of good standing of
the Buyer and the Transitory Subsidiary in their jurisdiction of
organization, certified charter documents, certificates as to the
incumbency of officers and the adoption of authorizing resolutions) as it
shall reasonably request in connection with the Closing.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by the Company Stockholders. The Company Stockholders
receiving the Merger Shares pursuant to Section 1.5 (the "Indemnifying
Stockholders"), severally but not jointly, shall indemnify the Buyer in respect
of, and hold it harmless against, any and all debts, obligations and other
liabilities (whether absolute, accrued, contingent, fixed or otherwise, or
whether known or unknown, or due or to become due or otherwise), monetary
damages, fines, fees, penalties, interest obligations, deficiencies, losses and
expenses (including without limitation amounts paid in settlement, interest,
court costs, costs of investigators, reasonable fees and expenses of attorneys,
accountants, financial advisors and other experts, and other reasonable expenses
of litigation) ("Damages") incurred or suffered by the Surviving Corporation or
the Buyer or any Affiliate thereof resulting from, relating to or constituting:
(a) any inaccuracy in or breach of any representation or warranty or
failure to perform any covenant or agreement of the Company contained in
this Agreement or the Company Certificate; or
(b) any claim by a stockholder or former stockholder of the Company,
or any other person or entity, seeking to assert, or based upon: (i)
ownership or rights to ownership of any shares of stock of the Company;
(ii) any rights of a stockholder (other than the right to receive the
Merger Shares pursuant to this Agreement or appraisal rights under the
applicable provisions of the Delaware General Corporation Law), including
any option, preemptive rights or rights to notice or to vote; (iii) any
rights under the Certificate of Incorporation or By-laws of the Company; or
(iv) any claim that his, her or its shares were wrongfully repurchased by
the Company.
6.2 Indemnification by the Buyer. The Buyer shall indemnify the
Indemnifying Stockholders in respect of, and hold them harmless against, any and
all Damages incurred or suffered by the Indemnifying Stockholders resulting
from, relating to or constituting any inaccuracy in or breach of any
representation or warranty or failure to perform any covenant or agreement of
the Buyer or the Transitory Subsidiary contained in this Agreement or the Buyer
Certificate.
6.3 Indemnification Claims.
(a) A party entitled, or seeking to assert rights, to indemnification under
this Article VI (an "Indemnified Party") shall give written notification to the
party from whom indemnification is sought (an "Indemnifying Party") of the
commencement of any suit or proceeding relating to a third party claim for which
indemnification pursuant to this Article VI may be sought. Such notification
shall be given within
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20 days after receipt by the Indemnified Party of notice of such suit or
proceeding, and shall describe in reasonable detail (to the extent known by the
Indemnified Party) the facts constituting the basis for such suit or proceeding
and the amount of the claimed damages; provided, however, that no delay on the
part of the Indemnified Party in notifying the Indemnifying Party shall relieve
the Indemnifying Party of any liability or obligation hereunder except to the
extent of any damage or liability caused by or arising out of such failure.
Within 20 days after delivery of such notification, the Indemnifying Party may,
upon written notice thereof to the Indemnified Party, assume control of the
defense of such suit or proceeding with counsel reasonably satisfactory to the
Indemnified Party; provided that (i) the Indemnifying Party may only assume
control of such defense if (A) it acknowledges in writing to the Indemnified
Party that any damages, fines, costs or other liabilities that may be assessed
against the Indemnified Party in connection with such suit or proceeding
constitute Damages for which the Indemnified Party shall be indemnified pursuant
to this Article VI and (B) the ad damnum is less than or equal to the amount of
Damages for which the Indemnifying Party is liable under this Article VI and
(ii) the Indemnifying Party may not assume control of the defense of a suit or
proceeding involving criminal liability or in which equitable relief is sought
against the Indemnified Party. If the Indemnifying Party does not so assume
control of such defense, the Indemnified Party shall control such defense. The
party not controlling such defense (the "Non-controlling Party") may participate
therein at its own expense; provided that if the Indemnifying Party assumes
control of such defense and the Indemnified Party reasonably concludes that the
Indemnifying Party and the Indemnified Party have conflicting interests or
different defenses available with respect to such suit or proceeding, the
reasonable fees and expenses of counsel to the Indemnified Party shall be
considered "Damages" for purposes of this Agreement. The party controlling such
defense (the "Controlling Party") shall keep the Non-controlling Party advised
of the status of such suit or proceeding and the defense thereof and shall
consider in good faith recommendations made by the Non-controlling Party with
respect thereto. The Non-controlling Party shall furnish the Controlling Party
with such information as it may have with respect to such suit or proceeding
(including copies of any summons, complaint or other pleading which may have
been served on such party and any written claim, demand, invoice, billing or
other document evidencing or asserting the same) and shall otherwise cooperate
with and assist the Controlling Party in the defense of such suit or proceeding.
The Indemnifying Party shall not agree to any settlement of, or the entry of any
judgment arising from, any such suit or proceeding without the prior written
consent of the Indemnified Party, which shall not be unreasonably withheld or
delayed; provided that the consent of the Indemnified Party shall not be
required if the Indemnifying Party agrees in writing to pay any amounts payable
pursuant to such settlement or judgment and such settlement or judgment includes
a complete release of the Indemnified Party from further liability and has no
other adverse effect on the Indemnified Party. The Indemnified Party shall not
agree to any settlement of, or the entry of any judgment arising from, any such
suit or proceeding without the prior written consent of the Indemnifying Party,
which shall not be unreasonably withheld or delayed.
(b) In order to seek indemnification under this Article VI, an Indemnified
Party shall give written notification (a "Claim Notice") to the Indemnifying
Party which contains (i) a description and the amount (the "Claimed Amount") of
any Damages incurred or reasonably expected to be incurred by the Indemnified
Party, (ii) a statement that the Indemnified Party is entitled to
indemnification under this Article VI for such Damages and a reasonable
explanation of the basis therefor, and (iii) a demand for payment (in the manner
provided in paragraph (c) below) in the amount of such Damages. If the
Indemnified Party is seeking to enforce such claim pursuant to the Escrow
Agreement, the Indemnifying Party shall deliver a copy of the Claim Notice to
the Escrow Agent.
(c) Within 20 days after delivery of a Claim Notice, the Indemnifying Party
shall deliver to the Indemnified Party a written response (the "Response") in
which the Indemnifying Party shall: (i) agree that the Indemnified Party is
entitled to receive all of the Claimed Amount (in which case the Response shall
be accompanied by a payment by the Indemnifying Party to the Indemnified Party
of the Claimed Amount, by check or by wire transfer; provided that if the
Indemnified Party is seeking to enforce such claim pursuant to the Escrow
Agreement, the Indemnifying Party and the Indemnified Party shall deliver to the
Escrow Agent, within three days following the delivery of the Response, a
written notice executed by both parties instructing the Escrow Agent to
distribute to the Buyer such number of Escrow Shares as
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have an aggregate Value (as defined below) equal to the Claimed Amount), (ii)
agree that the Indemnified Party is entitled to receive part, but not all, of
the Claimed Amount (the "Agreed Amount") (in which case the Response shall be
accompanied by a payment by the Indemnifying Party to the Indemnified Party of
the Agreed Amount, by check or by wire transfer; provided that if the
Indemnified Party is seeking to enforce such claim pursuant to the Escrow
Agreement, the Indemnifying Party and the Indemnified Party shall deliver to the
Escrow Agent, within three days following the delivery of the Response, a
written notice executed by both parties instructing the Escrow Agent to
distribute to the Buyer such number of Escrow Shares as have an aggregate Value
equal to the Agreed Amount) or (iii) dispute that the Indemnified Party is
entitled to receive any of the Claimed Amount. If the Indemnifying Party in the
Response disputes its liability for all or part of the Claimed Amount, the
Indemnifying Party and the Indemnified Party shall follow the procedures set
forth in Section 6.3(d) for the resolution of such dispute (a "Dispute"). For
purposes of this Article VI, the "Value" of any Escrow Shares delivered in
satisfaction of an indemnity claim shall be the average of the last reported
sale prices per share of the Buyer Common Stock on the Nasdaq National Market
over the ten consecutive trading days ending on the third day immediately
preceding the date of distribution of such Escrow Shares (subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock split
or similar event affecting the Buyer Common Stock since the beginning of such
ten-day period), multiplied by the number of such Escrow Shares.
(d) During the 60-day period following the delivery of a Response that
reflects a Dispute, the Indemnifying Party and the Indemnified Party shall use
reasonable efforts to resolve the Dispute. If the Dispute is not resolved within
such 60-day period, the Indemnifying Party and the Indemnified Party shall
discuss in good faith the submission of the Dispute to a mutually acceptable
alternative dispute resolution procedure (which may be non-binding or binding
upon the parties, as they agree in advance) (the "ADR Procedure"). In the event
the Indemnifying Party and the Indemnified Party agree upon an ADR Procedure,
such parties shall, in consultation with the chosen dispute resolution service
(the "ADR Service"), promptly agree upon a format and timetable for the ADR
Procedure, agree upon the rules applicable to the ADR Procedure, and promptly
undertake the ADR Procedure. The provisions of this Section 6.3(d) shall not
obligate the Indemnifying Party and the Indemnified Party to pursue an ADR
Procedure or prevent either such party from pursuing the Dispute in a court of
competent jurisdiction; provided that, if the Indemnifying Party and the
Indemnified Party agree to pursue an ADR Procedure, neither the Indemnifying
Party nor the Indemnified Party may commence litigation or seek other remedies
with respect to the Dispute (other than injunctive relief reasonably necessary
to protect such party's interest in the Dispute) prior to the completion of such
ADR Procedure. Any ADR Procedure undertaken by the Indemnifying Party and the
Indemnified Party shall be considered a compromise negotiation for purposes of
federal and state rules of evidence, and all statements, offers, opinions and
disclosures (whether written or oral) made in the course of the ADR Procedure by
or on behalf of the Indemnifying Party, the Indemnified Party or the ADR Service
shall be treated as confidential and, where appropriate, as privileged work
product. Such statements, offers, opinions and disclosures shall not be
discoverable or admissible for any purposes in any litigation or other
proceeding relating to the Dispute (provided that this sentence shall not be
construed to exclude from discovery or admission any matter that is otherwise
discoverable or admissible). The fees and expenses of any ADR Service used by
the Indemnifying Party and the Indemnified Party shall be shared equally by the
Indemnifying Party and the Indemnified Party. If the Indemnified Party is
seeking to enforce the claim that is the subject of the Dispute pursuant to the
Escrow Agreement, the Indemnifying Party and the Indemnified Party shall deliver
to the Escrow Agent, promptly following the resolution of the Dispute (whether
by mutual agreement, pursuant to an ADR Procedure, as a result of a judicial
decision or otherwise), a written notice executed by both parties instructing
the Escrow Agent as to what (if any) portion of the Escrow Shares shall be
distributed to the Buyer and/or the Indemnifying Stockholders (which notice
shall be consistent with the terms of the resolution of the Dispute).
(e) Notwithstanding the other provisions of this Section 6.3, if a third
party asserts (other than by means of a lawsuit) that an Indemnified Party is
liable to such third party for a monetary or other obligation which may
constitute or result in Damages for which such Indemnified Party may be entitled
to
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indemnification pursuant to this Article VI, and such Indemnified Party
reasonably determines that it has a valid business reason to fulfill such
obligation, then (i) such Indemnified Party shall be entitled to satisfy such
obligation, without prior notice to or consent from the Indemnifying Party, (ii)
such Indemnified Party may subsequently make a claim for indemnification in
accordance with the provisions of this Article VI, and (iii) such Indemnified
Party shall be reimbursed, in accordance with the provisions of this Article VI,
for any such Damages for which it is entitled to indemnification pursuant to
this Article VI (subject to the right of the Indemnifying Party to dispute the
Indemnified Party's entitlement to indemnification, or the amount for which it
is entitled to indemnification, under the terms of this Article VI).
(f) For purposes of this Section 6.3 and the last two sentences of Section
6.4, (i) if the Indemnifying Stockholders comprise the Indemnifying Party, any
references to the Indemnifying Party (except provisions relating to an
obligation to make or a right to receive any payments provided for in Section
6.3 or Section 6.4) shall be deemed to refer to the Indemnification
Representatives, and (ii) if the Indemnifying Stockholders comprise the
Indemnified Party, any references to the Indemnified Party (except provisions
relating to an obligation to make or a right to receive any payments provided
for in Section 6.3 or Section 6.4) shall be deemed to refer to the
Indemnification Representatives. The Indemnification Representatives shall have
full power and authority on behalf of each Indemnifying Stockholder to take any
and all actions on behalf of, execute any and all instruments on behalf of, and
execute or waive any and all rights of, the Indemnifying Stockholders under this
Article VI. The Indemnification Representatives shall have no liability to any
Indemnifying Stockholder for any action taken or omitted on behalf of the
Indemnifying Stockholders pursuant to this Article VI.
6.4 Survival of Representations and Warranties. All representations and
warranties contained in this Agreement, the Company Certificate and the Buyer
Certificate shall (a) survive the Closing and any investigation at any time made
by or on behalf of an Indemnified Party and (b) shall expire on the date one
year following the Closing Date, except that the representations and warranties
set forth in Section 2.2 (and any portion of the Company Certificate relating
thereto) shall survive the Closing without limitation. If an Indemnified Party
delivers to an Indemnifying Party, before expiration of a representation or
warranty, either a Claim Notice based upon a breach of such representation or
warranty, or a notice that, as a result of a legal proceeding instituted by or
written claim made by a third party, the Indemnified Party reasonably expects to
incur Damages as a result of a breach of such representation or warranty (an
"Expected Claim Notice"), then such representation or warranty shall survive
until, but only for purposes of, the resolution of the matter covered by such
notice. If the legal proceeding or written claim with respect to which an
Expected Claim Notice has been given is definitively withdrawn or resolved in
favor of the Indemnified Party, the Indemnified Party shall promptly so notify
the Indemnifying Party; and if the Indemnified Party has delivered a copy of the
Expected Claim Notice to the Escrow Agent and Escrow Shares have been retained
in escrow after the Termination Date (as defined in the Escrow Agreement) with
respect to such Expected Claim Notice, the Indemnifying Party and the
Indemnified Party shall promptly deliver to the Escrow Agent a written notice
executed by both parties instructing the Escrow Agent to distribute such
retained Escrow Shares to the Indemnifying Stockholders in accordance with the
terms of the Escrow Agreement.
6.5 Limitations.
(a) Notwithstanding anything to the contrary herein, except with respect to
Damages relating to willful misrepresentation, fraud or breach of the
representation and warranties in Section 2.2 (or the portion of the Company
Certificate relating thereto), (i) the aggregate liability of the Indemnifying
Stockholders, on the one hand, and the Buyer, on the other hand, for Damages
under this Article VI shall not exceed 10% of the Total Merger Consideration,
(ii) the Indemnifying Stockholders and the Buyer shall be liable under this
Article VI only if the aggregate Damages for which they or it would otherwise be
liable exceeds $1,000,000, but if the Damages do exceed that amount, then the
Indemnifying Stockholders or the Buyer, as the case may be, shall be liable for
all Damages, and (iii) each Indemnifying Stockholder shall only be liable for
his, her or its pro rata share (based on the number of Merger Shares received by
such Indemnifying Stockholder as a percentage of the total number of Merger
Shares issued); provided
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that the limitation set forth in clauses (i) and (ii) above shall not apply to a
claim pursuant to Section 6.1(a) relating to a breach of the covenants set forth
in Section 4.8. For purposes solely of this Article VI, all representations and
warranties of the Company in Article II (other than Section 2.28) and all
representations and warranties of the Buyer and the Transitory Subsidiary in
Article III (other than Section 3.10) shall be construed as if the term
"material" and any reference to "Company Material Adverse Effect" and "Buyer
Material Adverse Effect" (and variations thereof) were omitted from such
representations and warranties.
(b) Except for Damages relating to willful misrepresentation, fraud and
breach of the representation and warranties set forth in Section 2.2 or the
covenants set forth in Section 4.8, the Escrow Agreement shall be the exclusive
means for the Buyer to collect any Damages for which it is entitled to
indemnification under this Article VI.
(c) Except with respect to claims based on willful misrepresentation and
fraud, after the Closing, the rights of the Indemnified Parties under this
Article VI and the Escrow Agreement shall be the exclusive remedy of the
Indemnified Parties with respect to claims resulting from or relating to any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement contained in this Agreement.
(d) No Indemnifying Stockholder shall have any right of contribution
against the Company or the Surviving Corporation with respect to any breach by
the Company of any of its representations, warranties, covenants or agreements.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval), as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company is in breach of any representation,
warranty or covenant contained in this Agreement, and such breach,
individually or in combination with any other such breach, (i) would cause
the conditions set forth in clauses (c) or (d) of Section 5.2 not to be
satisfied and (ii) is not cured within 20 days following delivery by the
Buyer to the Company of written notice of such breach;
(c) the Company may terminate this Agreement by giving written notice
to the Buyer in the event the Buyer or the Transitory Subsidiary is in
breach of any representation, warranty or covenant contained in this
Agreement, and such breach, individually or in combination with any other
such breach, (i) would cause the conditions set forth in clauses (b) or (c)
of Section 5.3 not to be satisfied and (ii) is not cured within 20 days
following delivery by the Company to the Buyer of written notice of such
breach;
(d) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Stockholders have voted on
whether to approve this Agreement and the Merger in the event this
Agreement and the Merger failed to receive the Requisite Stockholder
Approval;
(e) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred on or before February
28, 2001 (the "Termination Date") by reason of the failure of any condition
precedent under Section 5.1 or 5.2 hereof (unless the failure results
primarily from a breach by the Buyer or the Transitory Subsidiary of any
representation, warranty or covenant contained in this Agreement); provided
that such date shall be extended until April 29, 2001
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in the event that the Registration Statement has been filed but has not
been declared effective by the Termination Date;
(f) the Company may terminate this Agreement by giving written notice
to the Buyer and the Transitory Subsidiary if the Closing shall not have
occurred on or before Termination Date by reason of the failure of any
condition precedent under Section 5.1 or 5.3 hereof (unless the failure
results primarily from a breach by the Company of any representation,
warranty or covenant contained in this Agreement); provided that such date
shall be extended until April 29, 2001 in the event that the Registration
Statement has been filed but has not been declared effective by the
Termination Date; or
(g) the Company may terminate this Agreement by giving written notice
to the Buyer and the Transitory Subsidiary if the IPO Registration
Statement has not been declared effective by January 31, 2001.
7.2 Effect of Termination. If any Party terminates this Agreement pursuant
to Section 7.1, all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party (except for any liability of any
Party for breaches of this Agreement), provided that the terms of the Mutual
Non-Disclosure Agreement dated September 20, 2000 between the Buyer and the
Company (the "NDA"), the letter agreement with respect to nonsolicitation of
employees dated October 3, 2000 between the Buyer and the Company (the "Letter
Agreement"), and the provisions of Article 9 hereof shall survive any such
termination without limitation.
ARTICLE VIII
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ ------------
<S> <C>
Acquisition................................................. 3.11
Actual Closing Shares....................................... 1.5(b)
Additional Shares........................................... 1.5(d)
ADR Procedure............................................... 6.3(d)
ADR Service................................................. 6.3(d)
Affiliate................................................... 2.14(a)(vii)
Affiliate Agreement......................................... 4.9
Agreed Amount............................................... 6.3(c)
Arthur Andersen............................................. 4.3(a)
Buyer....................................................... Introduction
Buyer Average Stock Price................................... 1.5(e)(vi)
Buyer Certificate........................................... 5.3(e)
Buyer Common Stock.......................................... 1.5(a)
Buyer Material Adverse Effect............................... 3.1
CERCLA...................................................... 2.21(a)
Certificates................................................ 1.7(a)
Certificate of Merger....................................... 1.1
Claim Notice................................................ 6.3(b)
Claimed Amount.............................................. 6.3(b)
Closing..................................................... 1.2
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ ------------
<S> <C>
Closing Date................................................ 1.2
Code........................................................ 1.9(a)
Common Conversion Ratio..................................... 1.5(b)
Common Shares............................................... 1.5(a)
Company..................................................... Introduction
Company Certificate......................................... 5.2(f)
Company Charter............................................. 4.4(h)
Company Indemnified Parties................................. 4.12(a)
Company Intellectual Property............................... 2.13(a)
Company Material Adverse Change............................. 5.2(k)
Company Material Adverse Effect............................. 2.1
Company Shares.............................................. 1.9(f)
Company Stockholders........................................ 1.5(c)
Controlling Party........................................... 6.3(a)
Covered Employee............................................ 4.13(a)
Customer Deliverables....................................... 2.13(a)
Damages..................................................... 6.1
Disclosure Schedule......................................... Article II
Dispute..................................................... 6.3(c)
Dissenting Shares........................................... 1.6(a)
Effective Time.............................................. 1.1
Employee Benefit Plan....................................... 2.20(a)(i)
Environmental Law........................................... 2.21(a)
ERISA....................................................... 2.20(a)(ii)
ERISA Affiliate............................................. 2.20(a)(iii)
Escrow Agreement............................................ 1.3(e)
Escrow Agent................................................ 1.3(e)
Escrow Shares............................................... 1.5(c)
Expected Claim Notice....................................... 6.4
Exchange Act................................................ 2.14(a)(vii)
Exchange Agent.............................................. 1.3(d)
Financial Statements........................................ 2.6
Fully-Diluted Closing Shares................................ 1.5(b)
GAAP........................................................ 2.6
Governmental Entity......................................... 2.4
Gross IPO Proceeds.......................................... 1.5(e)(vi)
Hart-Scott-Rodino Act....................................... 2.4
Indemnification Representatives............................. 1.3(e)
Indemnified Party........................................... 6.3(a)
Indemnifying Party.......................................... 6.3(a)
Indemnifying Stockholders................................... 6.1
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ ------------
<S> <C>
Initial Shares.............................................. 1.5(c)
Intellectual Property....................................... 2.13(a)
Internal Systems............................................ 2.13(a)
IPO......................................................... 1.5(e)(vi)
IPO Registration Statement.................................. 3.5
Key Employees............................................... 5.2(i)
Legal Proceeding............................................ 2.17
Letter Agreement............................................ 7.2
Materials of Environmental Concern.......................... 2.21(b)
Measurement Period.......................................... 1.5(e)(vi)
Merger...................................................... 1.1
Merger Shares............................................... 1.5(d)
Most Recent Balance Sheet................................... 2.8
Most Recent Balance Sheet Date.............................. 2.6
Nasdaq...................................................... 4.10
NDA......................................................... 7.2
Non-controlling Party....................................... 6.3(a)
Options..................................................... 1.9(a)
Ordinary Course of Business................................. 2.4
Parties..................................................... Introduction
Permits..................................................... 2.24
Permitted Contract.......................................... 4.4
Permitted Options........................................... 1.9(a)
Post-IPO Shares............................................. 1.5(e)(vi)
Prospectus/Proxy Statement.................................. 4.3(a)
Reasonable Best Efforts..................................... 4.1
Registration Rights Agreement............................... 2.2
Registration Statement...................................... 4.3(a)
Response.................................................... 6.3(c)
Required Closing Consents................................... 5.2(b)
Required Information........................................ 4.3(a)
Requisite Stockholder Approval.............................. 2.3
Restricted Shares........................................... 1.9(f)
Runoff Policy............................................... 4.12(a)
SEC......................................................... 3.5
Securities Act.............................................. 1.9(c)
Security Interest........................................... 2.4
Series A Preferred Shares................................... 2.2
Series B Preferred Shares................................... 1.5(b)
Software.................................................... 2.13(e)
Stockholders Agreement...................................... 2.2
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ ------------
<S> <C>
Surviving Corporation....................................... 1.1
Taxes....................................................... 2.9(a)(i)
Tax Returns................................................. 2.9(a)(ii)
Termination Date............................................ 7.1(e)
Threshold A................................................. 1.5(e)(vi)
Threshold B................................................. 1.5(e)(vi)
Threshold C................................................. 1.5(e)(vi)
Threshold D................................................. 1.5(e)(vi)
Total Closing Shares........................................ 1.5(c)
Total Merger Consideration.................................. 1.5(e)
Total Merger Shares......................................... 1.5(f)
Transitory Subsidiary....................................... Introduction
Value....................................................... 6.3(c)
Warrants.................................................... 1.9(d)
Year 2000 Compliant......................................... 2.13(i)
</TABLE>
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any press
release or public announcement relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
any Party may make any public disclosure it believes in good faith is required
by applicable law, regulation or stock market rule (in which case the disclosing
Party shall use reasonable efforts to advise the other Parties and provide them
with a copy of the proposed disclosure prior to making the disclosure).
9.2 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that (a) the provisions in
Article I concerning issuance of the Merger Shares and Article VI concerning
indemnification are intended for the benefit of the Company Stockholders and (b)
the provisions in Section 4.12 are intended for the benefit of the Company
Indemnified Parties.
9.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements or representations by or among the Parties,
written or oral, with respect to the subject matter hereof; provided that the
NDA and the Letter Agreement shall remain in effect in accordance with their
terms.
9.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer. In the
event of an Acquisition of Buyer, the following additional provisions shall
apply:
(a) In the event of an Acquisition prior to the Closing of the Merger,
this Agreement, unless previously terminated, shall continue to be binding
upon the Parties, except that (i) the conditions set forth in Sections
5.1(c), 5.1(d), 5.1(e), 5.2(j) and 5.2(n) shall be deemed to have been
satisfied and (ii) appropriate provision shall be made so that each Company
Stockholder and each holder of Options shall thereafter become entitled in
the Merger to the same consideration it would have
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received had the Merger closed immediately prior to the Acquisition. For
purposes of determining the number of shares of Buyer Common Stock each
Company Stockholder and each holder of Options would have been entitled to
in this event, (A) the Measurement Period shall be deemed to have elapsed
immediately upon the Acquisition, (B) the Buyer Average Stock Price shall
thereafter mean the value of the consideration received or to be received
in the Acquisition by the holders of Buyer Common Stock with respect to
each share of Buyer Common Stock outstanding immediately prior to the
closing of the Acquisition, determined in accordance with paragraph (d)
below, (C) Threshold B shall thereafter mean a fraction, the numerator of
which is $10 billion and the denominator of which is the sum of the number
of shares of Buyer Common Stock outstanding immediately prior to the
closing of the Acquisition plus the number of shares of Buyer Common Stock
issuable upon the exercise of options and warrants to purchase Buyer Common
Stock then outstanding, and (D) Threshold C shall thereafter mean a
fraction the numerator of which is $14 billion and the denominator of which
is the same as that described in clause (C) above.
(b) In the event of an Acquisition after the Closing of the Merger but
prior to the end of the Measurement Period, (i) the Measurement Period
shall be deemed to have elapsed immediately upon the Acquisition, (ii) the
Buyer Average Stock Price shall thereafter mean the value of the
consideration received or to be received in the Acquisition by the holders
of Buyer Common Stock with respect to each share of Buyer Common Stock
outstanding immediately prior to closing of the Acquisition, (iii)
Threshold B shall thereafter mean a fraction, the numerator of which is $10
billion and the denominator of which is the sum of the number of shares of
Buyer Common Stock outstanding immediately prior to the closing of the
Acquisition plus the number of shares of Buyer Common Stock issuable upon
the exercise of options and warrants to purchase Buyer Common Stock then
outstanding, (excluding any Initial Shares issued to Company Stockholders,
any shares underlying Options and warrants of the Company that were assumed
in connection with the Merger and any shares underlying Options issued
pursuant to Section 4.4(a)), and (iv) Threshold C shall thereafter mean a
fraction the numerator of which is $14 billion and the denominator of which
is the same as that described in clause (iii) above.
(c) If any portion of the consideration received or to be received by
the Holders of Buyer Common Stock in the Acquisition takes a form other
than cash or other consideration with a readily determinable value, the
value of such consideration shall be determined in good faith by the board
of directors of the Buyer, provided that if any portion of such
consideration consists of equity securities of a class that is traded on a
national securities exchange or quoted on the Nasdaq Stock Market, then the
value of each share of such security shall be the average of the last
reported sale price per share for the 20 consecutive trading days
immediately prior to the announcement of the Acquisition, unless the method
for valuing such consideration is specified in the definitive agreement
regarding the Acquisition, in which event such methodology shall be used.
The Indemnification Representatives shall have the authority, on behalf of
the Company Stockholders and the holders of Options, to approve any
interpretation, modification or waiver of this Section 9.4 and, if
requested by the acquiror in the Acquisition, to confirm that the terms of
this Section 9.4 have been complied with or waived. Any determination by
the Indemnification Representatives shall be final and binding on each
Company Stockholder and holder of Options.
9.5 Counterparts and Facsimile Signature. 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. This Agreement
may be executed by facsimile signature.
9.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly delivered four business
days after it is sent by registered or certified mail, return receipt requested,
postage
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prepaid, or one business day after it is sent for next business day delivery via
a reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
<TABLE>
<S> <C>
If to the Company: Copy to:
BroadSoft, Inc. Cooley Godward LLP
200 Perry Parkway, Suite 1 One Freedom Square
Gaithersburg, MD 20877 11951 Freedom Drive
Tel: (301) 977-9440 Reston, VA 20190
Fax: (301) 977-8846 Tel.: (703) 456-8000
Attn: Mr. Michael Tessler Fax: (703) 456-8100
Chief Executive Officer Attn: Adam Salassi, Esq.
If to the Buyer or Copies to:
the Transitory Subsidiary:
Unisphere Networks, Inc.
Unisphere Networks, Inc. 1 Executive Drive
1 Executive Drive Chelmsford, MA 01824
Chelmsford, MA 01824 Tel.: (978) 848-0300
Tel.: (978) 848-0300 Fax: (978) 441-0678
Fax: (978) 848-0599 Attn: Suzanne Zabitchuck, Esq.
Attn: Mr. James Dolce
Chief Executive Officer Hale and Dorr LLP
60 State Street
Boston, MA 02109
Tel.: (617) 526-6000
Fax: (617) 526-5000
Attn: Mark Borden, Esq.
</TABLE>
Any Party may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, or ordinary mail), but no
such notice, request, demand, claim or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of laws of
any jurisdictions other than those of the State of Delaware.
9.9 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Stockholder Approval
shall be subject to any restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
of any right or remedy hereunder shall be valid unless the same shall be in
writing and signed by the Party giving such waiver. No waiver by any Party with
respect to any default, misrepresentation or breach of warranty or covenant
hereunder shall be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence.
9.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to limit the term or
provision, to delete
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specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified.
9.11 Submission to Jurisdiction. Each of the Parties (a) submits to the
jurisdiction of any state or federal court sitting in Delaware in any action or
proceeding arising out of or relating to this Agreement, (b) agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court, and (c) agrees not to bring any action or proceeding arising out
of or relating to this Agreement in any other court. Each of the Parties waives
any defense of inconvenient forum to the maintenance of any action or proceeding
so brought and waives any bond, surety or other security that might be required
of any other Party with respect thereto. Any Party may make service on another
Party by sending or delivering a copy of the process to the Party to be served
at the address and in the manner provided for the giving of notices in Section
9.7. Nothing in this Section 9.11, however, shall affect the right of any Party
to serve legal process in any other manner permitted by law.
9.12 Construction.
(a) The language used in this Agreement shall be deemed to be the language
chosen by the Parties to express their mutual intent, and no rule of strict
construction shall be applied against any Party.
(b) Any reference to any federal, state, local or foreign statute or law
shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
UNISPHERE NETWORKS, INC.
By: /s/ JAMES A. DOLCE, JR.
------------------------------------
Title: President & CEO
-----------------------------------
PITCHER ACQUISITION CORP.
By: /s/ JAMES A. DOLCE, JR.
------------------------------------
Title: President
-----------------------------------
BROADSOFT, INC.
By: /s/ MICHAEL TESSLER
------------------------------------
Title: President & CEO
-----------------------------------
The undersigned, being the duly elected Secretary of the Transitory
Subsidiary, hereby certifies that this Agreement has been adopted by a majority
of the votes represented by the outstanding shares of capital stock of the
Transitory Subsidiary entitled to vote on this Agreement.
Suzanne M. Zabitchuck
--------------------------------------
Secretary
The undersigned, being the duly elected Secretary of the Company, hereby
certifies that this Agreement has been adopted by the requisite number of votes
of the Company's capital stock required to adopt this Agreement.
--------------------------------------
Secretary
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EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement is entered into as of , 200 , by and
among Unisphere Networks, Inc., a Delaware corporation (the "Buyer"), and
Michael Tessler and Robert Goodman (the "Indemnification Representatives") and
(the "Escrow Agent").
WHEREAS, the Buyer and BroadSoft, Inc. (the "Company") have entered into an
Agreement and Plan of Merger dated as of October 20, 2000 (the "Merger
Agreement") by and among the Company, the Buyer and a subsidiary of the Buyer,
pursuant to which such subsidiary will be merged (the "Merger") into the Company
which, as the surviving corporation (the "Surviving Corporation"), will become a
wholly-owned subsidiary of the Buyer;
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the indemnification obligations of the stockholders of the
Company receiving consideration pursuant to Section 1.5 of the Merger Agreement
(collectively, the "Indemnifying Stockholders") to the Buyer; and
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Consent of Company Stockholders. The Indemnifying Stockholders have,
either by virtue of their approval of the Merger Agreement or through the
execution of an instrument to such effect, consented to: (a) the establishment
of this escrow to secure the Indemnifying Stockholders' indemnification
obligations under Article VI of the Merger Agreement in the manner set forth
herein, (b) the appointment of the Indemnification Representatives as their
representatives for purposes of this Agreement and as attorneys-in-fact and
agents for and on behalf of each Indemnifying Stockholder, and the taking by the
Indemnification Representatives of any and all actions and the making of any
decisions required or permitted to be taken or made by them under this Agreement
and (c) all of the other terms, conditions and limitations in this Agreement.
2. Escrow and Indemnification.
(a) Escrow of Shares. Simultaneously with the execution of this Agreement,
the Buyer shall deposit with the Escrow Agent a certificate for 496,000 shares
of common stock of the Buyer, as determined pursuant to Section 1.5 of the
Merger Agreement, issued in the name of the Escrow Agent or its nominee. The
Escrow Agent hereby acknowledges receipt of such stock certificate. The Buyer
may from time to time deposit with the Escrow Agent additional shares of common
stock of the Buyer pursuant to Section 1.5(d) or the final sentence of Section
1.6(a) of the Merger Agreement. The shares deposited with the Escrow Agent
pursuant to the first sentence of this Section 2(a), together with any further
shares deposited by the Buyer pursuant to the immediately preceding sentence,
are referred to herein as the "Escrow Shares." The Escrow Shares shall be held
as a trust fund and shall not be subject to any lien, attachment, trustee
process or any other judicial process of any creditor of any party hereto. The
Escrow Agent agrees to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Stockholders have agreed in Article
VI of the Merger Agreement to indemnify and hold harmless the Buyer from and
against specified Damages (as defined in Section 6.1 of the Merger Agreement).
The Escrow Shares shall be security for such indemnity obligation of the
Indemnifying Stockholders, subject to the limitations, and in the manner
provided, in this Agreement.
(c) Dividends, Etc. Any securities distributed in respect of or in
exchange for any of the Escrow Shares, whether by way of stock dividends, stock
splits or otherwise, shall be issued in the name of the Escrow Agent or its
nominee, and shall be delivered to the Escrow Agent, who shall hold such
securities
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in the Escrow Account. Such securities shall be considered Escrow Shares for
purposes hereof. Any cash dividends or property (other than securities)
distributed in respect of the Escrow Shares shall promptly be distributed by the
Escrow Agent to the Indemnifying Stockholders in accordance with Section 3(c).
(d) Voting of Shares. The Indemnification Representatives shall have the
right, in their sole discretion, on behalf of the Indemnifying Stockholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares. The Indemnification Representatives
shall have no obligation to solicit consents or proxies from the Indemnifying
Stockholders for purposes of any such vote.
(e) Transferability. The respective interests of the Indemnifying
Stockholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Buyer, and no such assignment
or transfer shall be valid until such notice is given.
3. Distribution of Escrow Shares.
(a) The Escrow Agent shall distribute the Escrow Shares only in accordance
with (i) a written instrument delivered to the Escrow Agent that is executed by
the Buyer and both of the Indemnification Representatives and that instructs the
Escrow Agent as to the distribution of some or all of the Escrow Shares, (ii) an
order of a court of competent jurisdiction, a copy of which is delivered to the
Escrow Agent by either the Buyer or the Indemnification Representatives, that
instructs the Escrow Agent as to the distribution of some or all of the Escrow
Shares, or (iii) the provisions of Section 3(b) hereof.
(b) Within five business days after [insert one year anniversary of the
Closing Date] (the "Termination Date"), the Escrow Agent shall distribute to the
Indemnifying Stockholders all of the Escrow Shares then held in escrow,
registered in the name of the Indemnifying Stockholders. Notwithstanding the
foregoing, if the Buyer has previously delivered to the Escrow Agent a copy of a
Claim Notice (as defined in Section 6.3(b) of the Merger Agreement) and the
Escrow Agent has not received written notice executed by the Buyer and both
Indemnification Representatives of the resolution of the claim covered thereby,
or if the Buyer has previously delivered to the Escrow Agent a copy of an
Expected Claim Notice (as defined in Section 6.4 of the Merger Agreement) and
the Escrow Agent has not received written notice of the resolution of the
anticipated claim covered thereby, the Escrow Agent shall retain in escrow after
the Termination Date such number of Escrow Shares as have a Value (as defined in
Section 4 below and using a deemed distribution date of the Termination Date for
purposes thereof) equal to the Claimed Amount covered by such Claim Notice or
equal to the estimated amount of Damages set forth in such Expected Claim
Notice, as the case may be. Any Escrow Shares so retained in escrow shall be
distributed only in accordance with the terms of clauses (i) or (ii) of Section
3(a) hereof.
(c) Any distribution of all or a portion of the Escrow Shares (or cash or
other property pursuant to Section 2(c)) to the Indemnifying Stockholders shall
be made by delivery of stock certificates issued in the name of the Indemnifying
Stockholders covering such percentage of the Escrow Shares being distributed as
is calculated in accordance with the percentages set forth opposite such
holders' respective names on Attachment A attached hereto; provided, however,
that the Escrow Agent shall withhold the distribution of the portion of the
Escrow Shares otherwise distributable to an Indemnifying Stockholder who has
not, according to a written notice provided by the Buyer to the Escrow Agent,
prior to such distribution, surrendered pursuant to the terms of the Merger
Agreement his, her or its stock certificates formerly representing shares of
stock of the Company; and provided further that such Attachment A shall be
appropriately revised by the Buyer in the event the Buyer deposits additional
Escrow Shares with the Escrow Agent pursuant to Section 1.5(e) or the final
sentence of Section 1.6(a) of the Merger Agreement following the date of this
Agreement. Any such withheld shares shall be delivered to the Buyer promptly
after the Termination Date, and shall be promptly delivered by the Buyer to the
Indemnifying Stockholders to whom such shares would have otherwise been
distributed upon surrender of their Company stock certificates. Distributions to
the Indemnifying Stockholders shall be made by mailing stock certificates to
such holders at their respective addresses shown on Attachment A (or such other
address as
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may be provided in writing to the Escrow Agent by any such holder). No
fractional Escrow Shares shall be distributed to Indemnifying Stockholders
pursuant to this Agreement. Instead, the number of shares that each Indemnifying
Stockholder shall receive shall be rounded down to the nearest whole number and
cash shall be paid by the Buyer, without interest, in lieu of any fractional
share based upon the Value of the Escrow Shares being distributed.
4. Valuation of Escrow Shares. For purposes of this Agreement, the "Value"
of any Escrow Shares shall be the average of the last reported sale prices per
share of the common stock of the Buyer Common Stock on the Nasdaq National
Market over the ten consecutive trading days ending on the third day immediately
preceding the date of distribution of such Escrow Shares, multiplied by the
number of such Escrow Shares.
5. Fees and Expenses of Escrow Agent. The Buyer shall pay all of the fees
of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
6. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any action
taken or suffered by it in reliance upon any notice, direction, instruction,
consent, statement or other documents believed by it to be genuine and duly
authorized, nor for other action or inaction except its own willful misconduct
or gross negligence. The Escrow Agent shall not be responsible for the validity
or sufficiency of this Agreement. In all questions arising under the Escrow
Agreement, the Escrow Agent may rely on the advice of counsel, and the Escrow
Agent shall not be liable to anyone for anything done, omitted or suffered in
good faith by the Escrow Agent based on such advice. The Escrow Agent shall not
be required to take any action hereunder involving any expense unless the
payment of such expense is made or provided for in a manner reasonably
satisfactory to it. In no event shall the Escrow Agent be liable for indirect,
punitive, special or consequential damages.
(b) The Buyer and the Indemnifying Stockholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Buyer, on the one hand, and
the Indemnifying Stockholders, on the other hand, shall each be liable for
one-half of such amounts.
7. Liability and Authority of Indemnification Representatives; Successors
and Assignees.
(a) Each Indemnification Representative shall incur no liability to the
Indemnifying Stockholders with respect to any action taken or suffered by him in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by him to be genuinely and duly authorized, nor for other
action or inaction except his own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and the Indemnification Representatives
shall not be liable to the Indemnifying Stockholders for anything done, omitted
or suffered in good faith by the Indemnification Representatives based on such
advice.
(b) In the event of the death or permanent disability of any
Indemnification Representative, or his or her resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Stockholders, with each such Indemnifying Stockholder (or his, her
or its successors or assigns) to be given a vote equal to the number of votes
represented by the shares of stock of the Company held by such Indemnifying
Stockholder immediately prior to the effective time of the Merger. Each
successor Indemnification Representative shall have all of the power, authority,
rights and privileges conferred by this Agreement upon the original
Indemnification Representatives, and the term "Indemnification Representatives"
as used herein shall be deemed to include successor Indemnification
Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Stockholders,
and their successors, with respect to all matters
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arising under this Agreement and all actions taken by any Indemnification
Representative hereunder shall be binding upon the Indemnifying Stockholders,
and their successors, as if expressly confirmed and ratified in writing by each
of them. Without limiting the generality of the foregoing, the Indemnification
Representatives, acting together, shall have full power and authority to
interpret all of the terms and provisions of this Agreement, to compromise any
claims asserted hereunder and to authorize any release of the Escrow Shares to
be made with respect thereto, on behalf of the Indemnifying Stockholders and
their successors. All actions to be taken by the Indemnification Representatives
hereunder shall be evidenced by, and taken upon, the written direction of a
majority thereof.
(d) The Escrow Agent may rely on the Indemnification Representatives as the
exclusive agents of the Indemnifying Stockholders under this Agreement and shall
incur no liability to any party with respect to any action taken or suffered by
it in reliance thereon.
8. Amounts Payable by Indemnifying Stockholders. The amounts payable by
the Indemnifying Stockholders under this Agreement (i.e., the indemnification
obligations pursuant to Section 6(b)) shall be payable solely as follows. The
Escrow Agent shall notify the Indemnification Representative of any such amount
payable by the Indemnifying Stockholders as soon as it becomes aware that any
such amount is payable, with a copy of such notice to the Buyer. On the sixth
business day after the delivery of such notice, the Escrow Agent shall sell such
number of Escrow Shares (up to the number of Escrow Shares then available in the
Escrow Account), subject to compliance with all applicable securities laws, as
is necessary to raise such amount, and shall be entitled to apply the proceeds
of such sale in satisfaction of such indemnification obligations of the
Indemnifying Stockholders; provided that if the Buyer delivers to the Escrow
Agent (with a copy to the Indemnification Representatives), within five business
days after delivery of such notice by the Indemnification Representatives, a
written notice contesting the legitimacy or reasonableness of such amount, then
the Escrow Agent shall not sell Escrow Shares to raise the disputed portion of
such claimed amount except in accordance with the terms of clauses (i) or (ii)
of Section 3(a).
9. Termination. This Agreement shall terminate upon the distribution by
the Escrow Agent of all of the Escrow Shares in accordance with this Agreement;
provided that the provisions of Sections 6 and 7 shall survive such termination.
10. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
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If to the Buyer:
If to the Indemnification Representatives:
If to the Escrow Agent:
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery, telecopy
or ordinary mail), but no such notice, instruction or communication shall be
deemed to have been delivered unless and until it is actually received by the
party to whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other parties
to this Agreement notice thereof in the manner set forth in this Section 10.
11. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days prior to the date when such resignation shall take effect. The Buyer may
appoint a successor Escrow Agent without the consent of both Indemnification
Representatives so long as such successor is a bank with assets of at least $500
million, and may appoint any other successor Escrow Agent with the consent of
the Indemnification Representatives, which shall not be unreasonably withheld.
If, within such notice period, the Buyer provides to the Escrow Agent written
instructions with respect to the appointment of a successor Escrow Agent and
directions for the transfer of any Escrow Shares then held by the Escrow Agent
to such successor, the Escrow Agent shall act in accordance with such
instructions and promptly transfer such Escrow Shares to such designated
successor. If no successor Escrow Agent is named as provided in this Section 11
prior to the date on which the resignation of the Escrow Agent is to properly
take effect, the Escrow Agent may apply to a court of competent jurisdiction for
appointment of a successor Escrow Agent.
12. General.
(a) Governing Law; Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) 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.
(c) Entire Agreement. Except for those provisions of the Merger Agreement
referenced herein, this Agreement constitutes the entire understanding and
agreement of the parties with respect to the subject matter of this Agreement
and supersedes all prior agreements or understandings, written or oral, between
the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition
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or breach, in any one instance, shall be deemed to be a further or continuing
waiver of any such condition or breach or a waiver of any other condition or
breach of any other provision contained herein.
(e) Amendment. This Agreement may be amended only with the written consent
of the Buyer, the Escrow Agent and both of the Indemnification Representatives.
(f) Consent to Jurisdiction and Service. The parties hereby absolutely and
irrevocably consent and submit to the jurisdiction of the courts in the State of
Delaware and of any Federal court located in said State in connection with any
actions or proceedings brought against any party hereto by the Escrow Agent
arising out of or relating to this Escrow Agreement. In any such action or
proceeding, the parties hereby absolutely and irrevocably waive personal service
of any summons, complaint, declaration or other process and hereby absolutely
and irrevocably agree that the service thereof may be made by certified or
registered first-class mail directed to such party, at their respective
addresses in accordance with Section 10 hereof.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
UNISPHERE NETWORKS, INC.
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Michael Tessler
By:
------------------------------------
Robert Goodman
[ESCROW AGENT]
By:
------------------------------------
Name:
Title:
7
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ATTACHMENT A
<TABLE>
<CAPTION>
INDEMNIFYING STOCKHOLDER PERCENTAGE
------------------------ ----------
<S> <C>
</TABLE>
8
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EXHIBIT B
STOCKHOLDER VOTING AGREEMENT
STOCKHOLDER VOTING AGREEMENT, effective as of October 20, 2000 (this
"AGREEMENT"), among the stockholders listed on the signature page(s) hereto
(collectively, "STOCKHOLDERS" and each individually, a "STOCKHOLDER"),
BroadSoft, Inc., a Delaware corporation (the "COMPANY") and Unisphere Networks,
Inc., a Delaware corporation ("BUYER"). Capitalized terms used and not otherwise
defined herein shall have the respective meanings assigned to them in the Merger
Agreement referred to below.
WHEREAS, as of the date hereof, the Stockholders collectively own of record
and beneficially shares of capital stock of the Company, as set forth on
Schedule I hereto (such shares, or any other voting or equity of securities of
the Company hereafter acquired by any Stockholder prior to the termination of
this Agreement, being referred to herein collectively as the "SHARES");
WHEREAS, concurrently with the execution of this Agreement, Buyer and the
Company are entering into an Agreement and Plan of Merger, dated as of the date
hereof (the "MERGER AGREEMENT"), pursuant to which, upon the terms and subject
to the conditions thereof, a subsidiary of Buyer will be merged with and into
the Company, and the Company will be the surviving corporation (the "MERGER");
and
WHEREAS, as a condition to the willingness of Buyer to enter into the
Merger Agreement, Buyer has required that the Stockholders agree, and in order
to induce Buyer to enter into the Merger Agreement, the Stockholders are willing
to agree to vote in favor of adopting the Merger Agreement and approving the
Merger and certain other matters described herein, upon the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereby agree, severally and not jointly, as follows:
SECTION 1. VOTING OF SHARES.
(a) Each Stockholder, severally and not jointly, covenants and agrees that
until the termination of this Agreement in accordance with the terms hereof, at
any meeting of the stockholders of the Company, however called, and in any
action by written consent of the stockholders of the Company, such Stockholder
will vote, or cause to be voted, all of his, her or its respective Shares (a) in
favor of adoption of the Merger Agreement and approval of the Merger
contemplated by the Merger Agreement, as the Merger Agreement may be modified or
amended from time to time, (b) if stockholder consent is necessary or
appropriate, in favor of approval of each other transaction contemplated by the
Merger Agreement (including, without limitation, (x) an amendment the Company's
Restated Certificate of Incorporation (the "Charter") to provide that the Series
A Stock (as defined below) may be redeemed at the option of the Company and (y)
any grants of stock options pursuant to Section 4.4 of the Merger Agreement and,
if necessary, any associated approval of a new stock option plan or amendment to
the Company's 1999 Stock Incentive Plan or to the Company's Restated Certificate
of Incorporation), and (c) against any other acquisition (whether by way of
merger, consolidation, share exchange, stock purchase or asset purchase) of all
or a majority of the outstanding capital stock of the Company or all or
substantially all of the assets of the Company.
(b) Each Stockholder further agrees that he, she or it will take all
actions necessary to terminate all obligations of the Company under the
Company's Amended and Restated Registration Rights Agreement, dated April 25,
2000 and Second Amended and Restated Stockholders' Agreement, dated May 23,
2000, effective upon the consummation of the Merger.
(C) Each Stockholder that owns any shares of the Company's Series B
Convertible Preferred Stock ("SERIES B STOCK"), severally and not jointly,
covenants and agrees that such Stockholder will vote and consent to, or cause to
be voted and consented to, all of his, her or its respective Shares of Series B
Stock, at any meeting of holders of Series B Stock or in any written consent of
holders of Series B Stock, (1) to
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elect, as contemplated by Article IV, Section 2(a)(iii) of the Charter, that the
Merger shall not be treated as a liquidation, dissolution or winding up of the
Company, (2) to elect that the Merger shall not give rise to any right of
redemption of the Series B Stock under Article IV, Section 2(e)(ii) of the
Charter, and (3) in favor of automatic conversion of all outstanding shares of
Series B Stock into shares of the Company's Common Stock pursuant to Article IV,
Section 2(d)(ii)(2) of the Charter, effective immediately prior to the
consummation of the Merger, and further covenants that such Stockholder will not
rescind any such vote, election, waiver or approval during the term hereof and
will take all actions necessary to cause such automatic conversion.
(D) Each Stockholder that owns any shares of the Company's Series A
Preferred Stock ("SERIES A STOCK"), severally and not jointly, covenants and
agrees that such Stockholder will vote and consent to, or cause to be voted and
consented to, all of his, her or its respective Shares of Series A Stock, at any
meeting of holders of Series A Stock or in any written consent of holders of
Series A Stock, to elect, as contemplated by Article IV, Section 2(a)(iii) of
the Charter, that the Merger shall not be treated as a liquidation, dissolution
or winding up of the Company, and further covenants that such Stockholder will
not rescind any such vote, election, waiver or approval during the term hereof
and shall take all actions necessary to cause such waiver of redemption rights
and conversion.
(E) Each Stockholder, severally and not jointly, hereby irrevocably grants
to, and appoints, Buyer, and any individual designated in writing by it, and
each of them individually, as its proxy and attorney-in-fact (with full power of
substitution), for and in its name, place and stead, to vote his, her or its
Shares at any meeting of the stockholders of the Company called with respect to
any of the matters specified in, and in accordance and consistent with this
Section 1. Each Stockholder understands and acknowledges that Buyer is entering
into the Merger Agreement in reliance upon the Stockholder's execution and
delivery of this Agreement. Each Stockholder hereby affirms that the irrevocable
proxy set forth in this Section 1(e) is given in connection with the execution
of the Merger Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of such Stockholder under this Agreement. Except as
otherwise provided for herein, each Stockholder hereby (i) affirms that the
irrevocable proxy is coupled with an interest and may under no circumstances be
revoked, (ii) ratifies and confirms all that the proxies appointed hereunder may
lawfully do or cause to be done by virtue hereof and (iii) affirms that such
irrevocable proxy is executed and intended to be irrevocable in accordance with
the provisions of Section 212(e) of the Delaware General Corporation Law.
Notwithstanding any other provisions of this Agreement, the irrevocable proxy
granted hereunder shall automatically terminate upon the termination of this
Agreement.
SECTION 2. TRANSFER OF SHARES.
(A) Each Stockholder, severally and not jointly, covenants and agrees that
such Stockholder will not directly or indirectly (a) sell, assign, transfer
(including by merger, testamentary disposition, interspousal disposition
pursuant to a domestic relations proceeding or otherwise by operation of law),
pledge, encumber or otherwise dispose of any of the Shares, (b) deposit any of
the Shares into a voting trust or enter into a voting agreement or arrangement
with respect to the Shares or grant any proxy or power of attorney with respect
thereto which is inconsistent with this Agreement or (c) enter into any
contract, option or other arrangement or undertaking with respect to the direct
or indirect sale, assignment, transfer (including by merger, testamentary
disposition, interspousal disposition pursuant to a domestic relations
proceeding or otherwise by operation of law) or other disposition of any Shares;
provided, that a Stockholder may transfer Shares to his or her spouse or
children, to a trust established for the benefit of his or her spouse, children
or himself or herself, or to an entity wholly-owned by such Stockholder, or
dispose of them under his or her will, provided that the transferee agrees to be
bound by all the provisions hereunder and such transferee executes an instrument
confirming the same to the Buyer prior to the action.
(B) Each Stockholder, severally and not jointly, agrees to submit to the
Company contemporaneously with or promptly following execution of this Agreement
all certificates representing the Shares so that the
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Company may place thereon a conspicuous legend referring to the transfer
restrictions set forth in this Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each
Stockholder on his, her or its own behalf hereby severally and not jointly
represents and warrants to Buyer with respect to himself, herself or itself and
his, her or its ownership of the Shares as follows:
(A) OWNERSHIP OF SHARES. On the date hereof, the Shares are owned
beneficially by Stockholder or its nominee. Stockholder has sole voting
power, without restrictions (other than restrictions imposed pursuant to
the Company's Second Amended and Restated Stockholders' Agreement, dated
May 23, 2000), with respect to all of the Shares.
(B) POWER, BINDING AGREEMENT. Stockholder has the legal capacity,
power and authority to enter into and perform all of its obligations, under
this Agreement. The execution, delivery and performance of this Agreement
by Stockholder will not violate any material agreement to which Stockholder
is a party, including, without limitation, any voting agreement,
stockholders' agreement, partnership agreement or voting trust. This
Agreement has been duly and validly executed and delivered by Stockholder
and constitutes a valid and binding obligation of Stockholder, enforceable
against Stockholder in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally and
subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding at law or in equity).
(C) NO CONFLICTS. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby will not,
conflict with or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, any provision of any loan or credit agreement,
note, bond, mortgage, indenture, lease, or other agreement, instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Stockholder or any of its
properties or assets, other than such conflicts, violations or defaults or
terminations, cancellations or accelerations which individually or in the
aggregate do not materially impair the ability of Stockholder to perform
its obligations hereunder.
SECTION 4. NO SOLICITATION. Prior to the termination of this Agreement in
accordance with its terms, each Stockholder agrees, in its individual capacity
as a stockholder of the Company, that (i) it will not, nor will it authorize or
permit any of its employees, agents and representatives to, directly or
indirectly, (a) initiate, solicit, encourage or otherwise facilitate any
inquiry, proposal, offer or discussion with any party (other than the Buyer)
concerning any merger, reorganization, consolidation, recapitalization, business
combination, liquidation, dissolution, share exchange, sale of stock, sale of
material assets or similar business transactions involving the Company or a
division of the Company, (b) furnish any non-public information concerning the
business, properties or assets of the Company or any division of the Company to
any party (other than Buyer) or (c) engage in any discussions or negotiations
with any party (other than Buyer) concerning any such transaction described in
paragraph (a) above, and (ii) it will notify Buyer as soon as possible if any
such inquiries or proposals are received by, any information or documents is
requested from, or any negotiations or discussions are sought to be initiated or
continued with, it or any of its affiliates in its individual capacity.
SECTION 5. TERMINATION. This Agreement shall terminate upon the earliest
to occur of (i) the Effective Time (as such term is defined in the Merger
Agreement) or (ii) any termination of the Merger Agreement in accordance with
the terms thereof; provided that no such termination shall relieve any party of
liability for a willful breach hereof prior to termination.
SECTION 6. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
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SECTION 7. FIDUCIARY DUTIES. Each Stockholder is signing this Agreement
solely in such Stockholder's capacity as an owner of his, her or its respective
Shares, and nothing herein shall prohibit, prevent or preclude such Stockholder
from taking or not taking any action in his or her capacity as an officer or
director of the Company, to the extent permitted by the Merger Agreement.
SECTION 8. MISCELLANEOUS.
(A) This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings, both written and oral, between the parties with
respect thereto. This Agreement may not be amended, modified or rescinded except
by an instrument in writing signed by each of the parties hereto.
(B) If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in a mutually acceptable manner in order that the terms of this
Agreement remain as originally contemplated to the fullest extent possible.
(C) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware without regard to the principles of conflicts
of law thereof.
(D) This Agreement may be executed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
instrument.
[SIGNATURE PAGE TO FOLLOW]
4
<PAGE> 299
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed individually or by its respective duly authorized officer.
<TABLE>
<S> <C>
BROADSOFT, INC.
Dated: ---------------------- By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
UNISPHERE NETWORKS, INC.
Dated: ---------------------- By:
------------------------------------------------
Name:
------------------------------------------------
Title:
------------------------------------------------
STOCKHOLDERS:
Dated: ----------------------
------------------------------------------------
Michael Tessler
Dated: ----------------------
------------------------------------------------
Scott D. Hoffpauir
Dated: ----------------------
------------------------------------------------
Robert Goodman
Bessemer Venture Partners IV, L.P.
Dated: ---------------------- By: Deer IV & Co. LLC, General Partner
By:
------------------------------------------------
Title: Manager
</TABLE>
5
<PAGE> 300
<TABLE>
<S> <C>
Bessec Ventures IV, L.P.
By: Deer IV & Co. LLC, General Partner
Dated: ---------------------- By: ----------------------------------------------------
Title: Manager
Cove Ventures, LLC
By: Cove Road Associates, LLC, its Managing
Member
Dated: ---------------------- By: ----------------------------------------------------
Name:
Title:
Charles River Partnership IX
Dated: ---------------------- By: ----------------------------------------------------
General Partner
Columbia Broadsoft Investors, LLC
By: Columbia Capital, L.L.C., its Managing Partner
Dated: ---------------------- By: ----------------------------------------------------
Name:
Title:
Crescendo IV, L.P.
Dated: ---------------------- By: ----------------------------------------------------
Jeffrey J. Hinck, General Partner
Plum Bush Inc.
Dated: ---------------------- By: ----------------------------------------------------
Name:
Title:
</TABLE>
6
<PAGE> 301
SCHEDULE I
TO
STOCKHOLDER VOTING AGREEMENT
<TABLE>
<CAPTION>
STOCKHOLDER SHARES
----------- ------
<S> <C>
Michael Tessler.......................... 2,535,102 shares of Common Stock
Scott Hoffpauir.......................... 2,195,918 shares of Common Stock
Robert Goodman........................... 1,724,490 shares of Common Stock
Bessemer Venture Partners IV, L.P. ...... 5,259,182 shares of Common Stock
2,400,000 shares of Series A Stock
792,000 shares of Series B Stock
Bessec Ventures IV, L.P. ................ 3,506,124 shares of Common Stock
1,600,000 shares of Series A Stock
528,000 shares of Series B Stock
Cove Ventures, LLC....................... 440,000 shares of Series B Stock
Charles River Partnership IX............. 4,800,000 shares of Common Stock
2,400,000 shares of Series A Stock
1,320,000 shares of Series B Stock
Columbia Broadsoft Investors, LLC........ 2,000,000 shares of Common Stock
1,000,000 shares of Series A Stock
1,320,000 shares of Series B Stock
Crescendo IV, L.P. ...................... 1,980,000 shares of Series B Stock
Plum Bush Inc. .......................... 1,600,000 shares of Common Stock
</TABLE>
<PAGE> 302
EXHIBIT C
AFFILIATE AGREEMENT
, 200
Unisphere Networks, Inc.
1 Executive Drive
Chelmsford, MA 01824
BroadSoft, Inc.
200 Perry Parkway, Suite 1
Gaithersburg, MD 20877
Dear Sirs:
An Agreement and Plan of Merger dated as of October 20, 2000 (the "Merger
Agreement") has been entered into by and among Unisphere Networks, Inc. (the
"Buyer"), Pitcher Acquisition Corp. (the "Transitory Subsidiary") and BroadSoft,
Inc. (the "Company"). The Merger Agreement provides for the merger of the
Transitory Subsidiary with and into the Company (the "Merger"). In accordance
with the Merger Agreement, the shares of each class of capital stock of the
Company (collectively, the "Company Stock") owned by the undersigned at the
Effective Time (as defined in the Merger Agreement) shall be converted into
shares of common stock, $.01 par value per share, of the Buyer (the "Buyer
Common Stock"), as described in the Merger Agreement.
The undersigned may be deemed to be an "affiliate" of the Company within
the meaning of the rules promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), and the rules relating to pooling of interests
accounting. In consideration of the mutual agreements set forth in the Merger
Agreement and hereinafter in this agreement, the undersigned represents and
agrees as follows:
1. Rule 145.
(a) The undersigned will not offer, sell, transfer, pledge, hypothecate or
otherwise dispose of, or reduce the undersigned's interest in or risk relating
to, any shares of Buyer Common Stock issued to the undersigned in the Merger
unless at such time either: (i) such transaction shall be permitted pursuant to
the provisions of Rule 145 under the Securities Act; (ii) the undersigned shall
have furnished to the Buyer an opinion of counsel, satisfactory to the Buyer, to
the effect that no registration under the Securities Act would be required in
connection with the proposed offer, sale, transfer, pledge, hypothecation or
other disposition; or (iii) a registration statement under the Securities Act
covering the proposed offer, sale, transfer, pledge, hypothecation or other
disposition shall be effective under the Securities Act.
(b) The undersigned understands that all certificates representing shares
of Buyer Common Stock delivered to the undersigned pursuant to the Merger shall
bear a legend substantially in the form set forth below, until the earliest to
occur of (i) one of the events referred to in paragraph (a) above or (ii) the
date on which the undersigned requests removal of such legend, provided that
such request occurs at least two years from the Effective Time and that the
undersigned is not at the time of such request, and has not been during the
three-month period immediately preceding such request, an affiliate of the
Buyer:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 of the Securities Act of 1933 applies and may
only be transferred in accordance with the provisions of such rule. In
addition, the shares represented by this certificate may only be
transferred in accordance with the terms of an Affiliate Agreement dated as
of , 200 between the initial holder hereof and the
corporation, a copy of which agreement may be inspected by the holder of
this certificate at the principal offices of the corporation, or furnished
by the corporation to the holder of this certificate upon written request
without charge."
<PAGE> 303
(c) The Buyer, in its discretion, may cause stop transfer orders to be
placed with its transfer agent with respect to the certificates for the shares
of Buyer Common Stock which are required to bear the foregoing legend.
2. Miscellaneous.
(a) This agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
(b) This agreement shall be binding on the undersigned's successors and
assigns, including his heirs, executors and administrators.
The undersigned has carefully read this agreement and discussed its
requirements, to the extent the undersigned believed necessary, with its counsel
or counsel for the Company.
Very truly yours,
--------------------------------------
Print Name:
--------------------------------------
Accepted:
Unisphere Networks, Inc.
By:
----------------------------------------------------
Name:
Title:
---------------------------------------------------------
Date
BroadSoft, Inc.
By:
----------------------------------------------------
Name:
Title:
---------------------------------------------------------
Date
2
<PAGE> 304
EXHIBIT D
LOAN AND SECURITY AGREEMENT
DATED AS OF , 200
BETWEEN
UNISPHERE NETWORKS, INC. (THE "LENDER")
AND
BROADSOFT, INC. (THE "BORROWER")
<PAGE> 305
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement, dated as of , 200 , is
between Unisphere Networks, Inc., a Delaware corporation (the "Lender"), and
BroadSoft, Inc., a Delaware corporation having a principal place of business at
200 Perry Parkway, Gaithersburg, Maryland 20877 (the "Borrower").
RECITALS:
WHEREAS, the Lender and Borrower have entered into an Agreement and Plan of
Merger, dated October , 2000 (the "Merger Agreement"), that contemplates the
merger of the Borrower into a wholly-owned subsidiary of the Lender (the
"Merger"); and
WHEREAS, pending consummation of the Merger, the Borrower may require
additional credit for the operation of its business; and
WHEREAS, Lender is willing to provide Borrower with such financing
arrangements on the terms and conditions hereafter provided.
NOW, THEREFORE, in consideration of the undertakings set forth herein and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Agreement" means this Loan and Security Agreement, as it may be
amended or modified and in effect from time to time.
"Authorized Officer" means the President, Vice President, Treasurer or
Secretary of the Borrower, acting singly.
"Base Rate" means the annual rate of interest published and in effect
from time to time in the "Money Rates" column of the Wall Street Journal,
eastern edition, as the "prime rate."
"Business Day" means, with respect to any borrowing or payment, a day
other than Saturday or Sunday on which banks are open for business in
Boston, Massachussetts.
"Change In Control" means the existing shareholders cease to own
(either directly or indirectly) at least sixty-seven percent (67%) of the
voting stock of the Borrower.
"Code" means the Uniform Commercial Code of the jurisdiction with
respect to which such term is used, as in effect from time to time.
"Collateral" shall have the meaning assigned to such term in Article
IV hereof.
"Commitment Termination Date" means the earliest to occur of (a) 5:00
p.m., eastern daylight time, on August 31, 2001, (b) the Effective Time
(within the meaning of the Merger Agreement) and (c) the termination of the
Merger Agreement.
"Credit Commitment" means the obligation of Lender to make Loans to
Borrower in the aggregate amount not to exceed $9,000,000.
"Default" means an event described in Article VII.
"Effective Date" means the date of this Agreement.
"GAAP" shall have the meaning given to such term in the Merger
Agreement.
2
<PAGE> 306
"Indebtedness" means all liabilities, obligations and indebtedness of
any and every kind and nature, including, without limitation, all
liabilities and all obligations to general creditors (other than trade
payables), whether now or hereafter owing, arising, due or payable, from
Borrower to any Person, and howsoever evidenced, created, incurred,
acquired or owing, whether primary, secondary, direct, contingent, fixed or
otherwise.
"Intellectual Property Security Agreement" means the Intellectual
Property Agreement, substantially in the form attached hereto as Exhibit
"D", executed and delivered by Borrower in favor of the Lender.
"Intellectual Property Collateral" means all of the following, to the
extent owned, or ownership is hereafter acquired, by the Borrower:
(a) any and all copyrights, copyright rights, copyright
applications, copyright registrations and like protections in each work
or authorship and deviation work thereof, whether published or
unpublished, and whether or not the same also constitutes a trade
secret, now or hereafter existing, created, acquired or held;
(b) any and all patents, patent applications and like protections
including, without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same
("the Patents");
(c) any and all trademark and servicemark rights, whether
registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of
Borrower connected with or symbolized by such trademarks;
(d) any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now
or hereafter existing, created, acquired or held;
(e) any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(f) any and all claims for damages by any of past, present and
future infringement of any of the rights included above, with the right,
but not the obligation, to sue for or collect such damages for said use
or infringement of the intellectual property rights identified above;
(g) all licenses or other rights to use any of the intellectual
property rights identified above, and all license fees and royalties
arising from such use to the extent permitted by such license or rights;
(h) all amendments, renewals and extensions of any of the
intellectual property rights identified above; and
(i) all proceeds and products of the foregoing, including, without
limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Landlord Waiver" means that certain landlord waiver executed and
delivered by each landlord for the premises leased by the Borrower where
any Collateral is located, in substantially the form attached hereto as
Exhibit "C".
"Loan" as defined in Section 2.1(a).
"Loan Documents" means this Agreement, the Note, the Intellectual
Property Security Agreement, the Landlord Waivers and any Supplemental
Documentation.
"Loan Request" means a loan request in substantially the form attached
hereto as Exhibit "B".
"Material Adverse Effect" shall have the meaning given to the term
"Company Material Adverse Effect" in the Merger Agreement and shall also
include any material adverse effect on (i) the Borrower's ability to pay
the Obligations in accordance with the terms thereof, or (ii) the
Collateral or the Lender's liens on the Collateral or the priority of such
liens.
3
<PAGE> 307
"Material Adverse Change" shall have the meaning given to the term
"Company Material Adverse Change" in the Merger Agreement.
"Maturity Date" means the first anniversary of the date upon which the
Merger Agreement is terminated or the Merger is closed.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Note and all other obligations, interest, fees, charges and
expenses of the Borrower to the Lender arising under or in connection with
the Loan Documents.
"Permitted Indebtedness" means the indebtedness or obligations
described in Section 6.5(a) of this Agreement.
"Permitted Liens" means the liens, mortgages, encumbrances, pledges
and other security interests described in Section 6.5(b) of this Agreement.
"Person" means any corporation, natural person, firm, joint venture,
partnership, trust, unincorporated organization, enterprise, government or
any department or agency of any government.
"Reasonable Best Efforts" shall have the meaning given to such term in
the Merger Agreement.
"Supplemental Documentation" means agreements, instruments, documents,
financing statements, warehouse receipts, bills of lading, notices of
assignment of accounts, schedules of accounts assigned, mortgages and other
written matter necessary or reasonably requested by the Lender to perfect
and maintain perfected the Lender's security interest in the Collateral.
All undefined terms contained in this Agreement shall, unless the context
indicates otherwise, have the meanings provided for by the Code as in effect in
the Commonwealth of Massachusetts to the extent the same are used or defined
therein. The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Agreement as a whole, including the Exhibits and Schedules
hereto, as the same may from time to time be amended, modified or supplemented,
and not to any particular section, subsection or clause contained in this
Agreement.
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter.
ARTICLE II
THE LOAN FACILITY
2.1 Loan Facility.
(a) Loans. Subject to satisfaction of the conditions set forth in Article
III hereof, the Lender agrees, on the terms and conditions set forth in this
Agreement, to make loans and advances (each, a "Loan") to the Borrower at the
Borrower's request for working capital purposes, from March 1, 2001 until the
Commitment Termination Date, which loans and advances in an aggregate amount
outstanding from time to time do not exceed the Commitment. In no event shall
the Borrower request, or the Lender be required to advance, loans or advances in
excess of $1,500,000 during any calendar month. The Borrower shall repay the
aggregate outstanding principal amount of each such Loan, together with all
interest due thereon, and all other amounts owing under this Agreement or the
Loan Documents in connection with such Loan in full on the Maturity Date. If the
aggregate of all outstanding Loans shall at any time exceed the Commitment, the
Borrower shall immediately pay such excess to the Lender. The obligation of the
Borrower to repay the principal amount of each Loan, and any and all interest
which accrues thereon, shall be evidenced by a promissory note in the original
principal amount of the Commitment, executed and delivered by the Borrower in
substantially the form of Exhibit "A" hereto (the "Note").
(b) Making the Loans. Each Loan shall be made on notice of the principal
amount of each Loan given by the Borrower to Lender not later than 12:00 noon on
the third Business Day prior to the date of
4
<PAGE> 308
the proposed Loan (which shall also be on Business Day). Such notice shall be
made by submitting to the Lender a duly executed Loan Request (which specifies
the amount of such Loan). Each Loan shall comply with all of the provisions of
this Agreement. The Lender shall promptly advance the requested amount to the
Borrower in immediately available funds to the deposit account specified by the
Borrower.
2.2 Interest.
(a) Interest Rates. The Borrower shall pay interest on the Loans at a per
annum rate equal to the Base Rate plus four percent (4%) (the "Applicable
Rate"), payable monthly in arrears on the first day of each calendar month
commencing after the first Loan is made, provided, however, that while any
Default exists, amounts payable under the Loan Documents shall bear interest
(compounded monthly and payable on demand with respect to overdue amounts) at a
rate per annum equal to two percent (2%) above the Applicable Rate until such
amounts are paid in full.
(b) Interest Basis. Interest shall be calculated for actual days elapsed
on the basis of a 360-day year. Interest shall be payable for the day the Loan
is made but not for the day of any payment on the amount paid if payment is
received prior to noon (local time) at the place of payment. If any payment of
principal of or interest on the Loan shall become due on a day which is not a
Business Day, such payment shall be made on the next succeeding Business Day
and, in the case of a principal payment, such extension of time shall be
included in computing interest in connection with such payment.
2.3 Method of Payment. All payments of principal, interest, and fees
hereunder shall be made in immediately available funds in United States Dollars
to the Lender at the Lender's address specified pursuant to Section 9.14, by
noon (local time) on the date when due. Any of the Loans outstanding at any time
under this Loan Agreement may be prepaid in whole or in part without penalty.
Amounts repaid or prepaid with respect to the Loans may not be reborrowed,
provided that the Borrower shall give the Lender written notice of its intention
to prepay any of the outstanding amounts, which notice shall specify the amount
to be so prepaid and the date of such prepayment, not less than 2 days prior to
such prepayment.
ARTICLE III
CONDITIONS PRECEDENT
3.1 Conditions to Initial Loan. The Lender shall not be required to make
any Loans under this Agreement unless, on the date of the initial Loan Request
delivered by the Borrower to the Lender, the Borrower has furnished to the
Lender, or caused to be furnished to the Lender (unless otherwise waived by
Lender in writing), the following, in a form and substance reasonably
satisfactory to the Lender and its counsel, each dated as of the date of the
initial Loan Request (or such other date as shall be acceptable to the Lender):
(a) the Note; (b) the Intellectual Property Security Agreement; (c) a
certificate of the secretary of the Borrower: (1) certifying that attached
thereto are true and correct copies of the Borrower's charter documents,
by-laws, and documents evidencing all corporate action taken to authorize this
transaction and (2) giving the name, position and signature specimen of all
authorized officers; (d) the written opinion of counsel to the Borrower,
addressed to the Lender in form and substance reasonably satisfactory to Lender;
(e) written documentation satisfactory to Lender evidencing that Lender holds a
first priority perfected security interest in the Collateral, junior only to
Silicon Valley Bank and Comdisco and only with respect to borrowings from them
under credit facilities that exist on the Effective Date; and (f) such other
documents as Lender or its counsel may reasonably request.
3.2 Conditions To All Borrowings. The obligations of the Lender to make
any Loan whether or not after the Effective Date, shall also be subject to the
following conditions precedent that on the date such Loan is made and after
giving effect thereto:
(a) Each of the representations and warranties of the Borrower
contained in this Agreement, the Loan Documents or the Merger Agreement
shall be true and correct as of the date as of which they were made and,
except to the extent such representations and warranties are specifically
made as of a
5
<PAGE> 309
particular date (in which case such representations and warranties shall be
true and correct as of such date), shall also be true and correct as of the
date the Loan is made, except for any failure to be true and correct which
has not resulted in, and would not be reasonably likely to result in, a
Material Adverse Change, and no Default shall have occurred and be
continuing;
(b) Borrower shall deliver to the Lender a Loan Request, executed by
the chief executive officer of Borrower, affirming compliance with the
foregoing Section 3.2(a) as of such date;
(c) The Merger Agreement shall not have been terminated;
(d) The Closing (as defined in the Merger Agreement) shall not have
occurred, and the failure of the Closing to have occurred shall not be
attributable to the failure of the Borrower to have satisfied the
conditions to closing set forth in Sections 5.1(a) and 5.2 of the Merger
Agreement;
(e) The Lender shall not have the right (whether or not exercised) to
terminate the Merger Agreement under Section 7.1(b) thereof; and
(f) The Borrower shall comply with all other requirements under this
Agreement.
ARTICLE IV
GRANT OF SECURITY INTEREST
4.1 To secure payment and performance of all Obligations, the Borrower
hereby grants to the Lender a security interest in the following property
(collectively, the "Collateral"):
All of the Borrower's now owned or hereafter acquired, wherever
located:
(a) Inventory, including but not limited to all inventory,
supplies, raw materials, work in process, goods, merchandise, finished
inventory and other tangible personal property held by the Borrower for
sale or for lease, furnished or to be furnished under contracts of
service, or used or consumed in the Borrower's business, goods in
transit, any and all returned or repossessed inventory or merchandise
and all documents of title (whether negotiable or negotiable)
representing any of the foregoing, and all proceeds thereof; and
(b) Accounts, including, but not limited to, all accounts, all
rights of the Borrower to payment for goods sold or leased or for
services rendered, all accounts receivable of the Borrower; all
obligations owing to the Borrower evidenced by an instrument or chattel
paper; all rights of the Borrower to payment under a contract not yet
earned by performance; all obligations owing to the Borrower of any kind
or nature, including all writings, if any, evidencing the same,
including all instruments, drafts, acceptances and chattel paper; any
and all proceeds of any of the foregoing. Further included within the
term "Accounts" are all right, title and interest of Borrower in and to
the Inventory which gave rise to any Account, (including the right of
stoppage in transit) all guaranties of, and security and liens with
respect to any Account, and all Accounts, Documents and Contract Rights
of Borrower as defined in the Uniform Commercial Code; and
(c) Instruments, and Chattel Paper, including all instruments and
chattel paper as defined in the Uniform Commercial Code and all proceeds
thereof; and
(d) General Intangibles, including, but not limited to, all general
intangibles as defined in the Uniform Commercial Code, all Intellectual
Property Collateral and all proceeds thereof, including without
limitation, any and all rights of Borrower to any refund of any tax
assessed against Borrower or paid by Borrower, loss carry-back tax
refunds, insurance premium rebates, unearned premiums, insurance
proceeds, choses in action, names, trade names, goodwill (whether
related to the business, any intellectual property, or otherwise), trade
secrets, computer programs, computer records, data, computer software,
customer lists, patents, patent rights, patent applications, patents
pending, patent licenses or assignments, development ideas and concepts,
6
<PAGE> 310
licenses, permits, franchises, telephone numbers, literary rights,
rights to performance, trademarks, trademark applications, trademark
rights, logos, intellectual property, copyrights, copyright
applications, licenses, proprietary or other processes, blueprints,
drawings, designs, diagrams, plans, reports, charts, catalogs, manuals,
research, literature, proposals, cost estimates, routes, and other
reproductions on paper or otherwise, of any and all concepts or ideas,
whether or not related to the business or operations of Borrower, and
including the patents and trademarks listed on Schedule A hereto; and
(e) Equipment, including but not limited to all equipment,
vehicles, machinery, tools, furniture, fixtures, trade fixtures and
parts. Further included within the term "Equipment" is all tangible
personal property utilized in the conduct of the Borrower's business
(but excluding any property hereinbefore defined as "Inventory") and all
additions, accessions, substitutions, components, and replacements
thereto, therefor and thereof and all proceeds thereof; and
(f) Other tangible and intangible property including, without
limitation, all investment property; and
(g) all products and proceeds of the above, including insurance
proceeds.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that on the date hereof,
and on the date of each and every Loan made after the date hereof:
5.1 Executive Offices. The location of the Borrower's chief executive
office, principal place of business, other offices and places of business and of
the Borrower's Accounts and Inventory are set forth on Schedule 5.1 hereto, and
are the sole offices and places of business of Borrower. Borrower will provide
Lender with at least thirty (30) days' prior written notice of any proposed
change to the locations set forth on Schedule 5.1 hereof.
5.2 Corporate Power; Authorization; Enforceable Obligations. The
execution, delivery and performance by Borrower of the Loan Documents, to the
extent it is a party thereto, and the creation of all liens provided for herein
and therein: (i) are within Borrower's corporate power; (ii) have been and will
be duly authorized by all necessary or proper action; (iii) are not in
contravention of any provision of Borrower's by-laws or charter; (iv) will not
violate any law or regulation, or any order or decree of any court or
governmental instrumentality; (v) will not conflict with or result in the breach
or termination of, constitute a default under, or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which Borrower is a party or by which Borrower or any of its
property is bound (except for such conflict, breach, termination, default or
acceleration as could not reasonably be expected to have a Material Adverse
Effect); (vi) will not result in the creation or imposition of any lien upon any
of the property of Borrower other than those in favor of the Lender, all
pursuant to the Loan Documents; and (vii) do not require the consent or approval
of any governmental body, agency, authority or any other Person, except such
consents as have been obtained. Each of the Loan Documents delivered in
connection herewith at such time shall have been duly executed and delivered for
the benefit of or on behalf of Borrower, and each shall then constitute a legal,
valid and binding obligation of Borrower, enforceable against it in accordance
with its terms.
5.3 Title to Collateral. Except as disclosed to the Lender in writing,
including in the Merger Agreement or the disclosure schedule thereto, Borrower
owns all of its personal property and has good, clear and marketable title
thereto, free and clear of all liens and encumbrances, except (i) liens created
hereunder; and (ii) liens listed on Schedule 6.5 attached hereto. There are no
outstanding commitments of Borrower relative to the purchase, sale, mortgage or
lease of said property, other than in the usual course of business.
7
<PAGE> 311
5.4 Intellectual Property Collateral. Borrower is the sole owner of the
Intellectual Property Collateral, except for non-exclusive licenses granted by
Borrower to its customers in the ordinary course of business. Each of the
Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party.
ARTICLE VI
COVENANTS
(A) Following the Effective Date and through the period ending on the
closing of the Merger or the termination of the Merger Agreement, Borrower shall
comply in all material respects with all of its covenants set forth in the
Merger Agreement and shall use its Reasonable Best Efforts to obtain Landlord
Waivers from each landlord where material assets of the Borrower are located.
(B) Following the closing of the Merger or the termination of the Merger
Agreement and for the remainder of the term of this Agreement and for so long as
any loans to Borrower remain outstanding under this Agreement, unless the Lender
shall otherwise consent in writing:
6.1 Reports and Notices. Borrower shall deliver, or cause to be delivered,
to the Lender:
(a) Within 90 days after the close of Borrower's fiscal year, copies
of the audited annual financial statements of Borrower and statements of
income and cash flows for such fiscal year audited by a certified public
accountant satisfactory to Lender and prepared on a consistent basis and in
accordance with GAAP.
(b) As soon as practicable, but in any event within 2 Business Days
after Borrower becomes aware of the existence of any Default, or any
development or other information which could reasonably be expected to have
a Material Adverse Effect, telephonic or telecopy notice specifying the
nature of such Default or development or information, including the
anticipated effect thereof, which notice shall be promptly confirmed in
writing within 5 days.
(c) Such other information respecting the Borrower's business,
financial condition or prospects as the Lender may, from time to time,
reasonably request.
6.2 Transactions with Affiliates. Borrower shall not make any payments or
distributions of any kind to any shareholder of the Borrower or any affiliates
of such shareholder and Borrower shall not enter into any transaction for the
purchase, sale or exchange of property or the rendering of any service to or for
any shareholder or director of the Borrower, or any affiliate of such person or
entity unless such payments or transactions are in the ordinary course of
Borrower's business and are upon fair and reasonable terms no less favorable to
Borrower than Borrower would obtain in a comparable arm's-length transaction
with an unaffiliated person.
6.3 Corporate Existence, etc. Borrower shall maintain its corporate
existence, business and assets, keep its business and assets adequately insured,
maintain its chief executive office at the location provided in Section 5.2
hereof, continue to engage in the same lines of business, and comply in all
material respects with all requirements of law. Borrower will maintain all of
its assets and properties in good repair and working order. Borrower will not
relocate its chief executive office or permit any of its assets or property to
be kept at any locations other than as provided in Section 5.2 hereof.
6.4 Cooperation with Lender. Borrower shall cooperate with the Lender,
take such action, execute such documents, and provide such information as the
Lender may from time to time reasonably request in order further to effect the
transactions contemplated by and the purposes of the Loan Documents.
6.5 Indebtedness and Liens.
(a) The Borrower will not create, incur, assume, guarantee or become
liable, contingently or otherwise, with respect to any indebtedness or
obligation, except (i) Indebtedness to the Lender arising
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under the Loan Documents; (ii) Indebtedness which is subordinated to the
Obligations, provided the terms of such Indebtedness, including the terms of
subordination thereof, are reasonably satisfactory to the Lender in all
respects; (iii) current liabilities of the Borrower not incurred through the
borrowing of money or the obtaining of credit (except credit on an open account
customarily extended); (iv) Indebtedness in respect of taxes or other
governmental charges which are being contested in good faith by the appropriate
proceedings; (v) operating or capital leases entered into by the Borrower in the
ordinary course, provided such operating or capital leases shall not cause a
Default herein; (vi) purchase money security interests; and (vii) such other
Indebtedness described on Schedule 6.5 hereto.
(b) The Borrower will not create, incur, or allow to be created or exist
any lien, encumbrance, mortgage, pledge or other security interest of any kind
upon any of its assets, except (i) liens securing the Obligations; (ii) liens
securing taxes or governmental charges not yet due; (iii) liens securing capital
leases; (iv) purchase money security interests; (v) liens to secure worker's
compensation, employment insurance and social security obligations incurred in
the ordinary course or (vi) liens described on Schedule 6.5 hereto.
6.6 Insurance. Borrower agrees to keep all the Collateral insured with
coverages in amounts not less than usually carried by one engaged in a like
business (and in any event not less than that required by Lender), naming the
Lender as a loss payee, and payable to the Lender and Borrower, as their
interests may appear. Borrower hereby appoints Lender as attorney-in-fact for
Borrower in obtaining, adjusting, settling and canceling such insurance and
endorsing any drafts. As further assurance for the payment and performance of
the Obligations, Borrower hereby assigns to Lender all sums, including returned
or unearned premiums, that may become payable under any policy of insurance on
the Collateral, and Borrower hereby directs each insurance company issuing any
such policy to make payment of such sums directly to Lender.
6.7 Inspection. Borrower will keep accurate and complete records of the
Collateral, and Lender or any of its agents shall have the right, upon
reasonable notice, to inspect the Collateral wherever located and to visit
Borrower's place or places of business, at intervals to be determined by Lender
and without Borrower's hindrance or delay, to inspect, audit, check and make
extracts from any copies of books, records, journals, orders, receipts and
correspondence that relate to the Collateral or to the general financial
condition of Borrower. Lender may temporarily remove any of the Borrower's
records for the purpose of having copies made thereof.
6.8 Taxes. Borrower will pay all real and personal property taxes,
assessments and charges as well as all franchise, income, unemployment, old age
benefit, withholding, sales and other taxes assessed against it, or payable by
it at such times and in such manner as to prevent any penalty from accruing or
any lien or charge from attaching to its property, and will furnish the Lender
upon request, receipts, or other evidence that deposits or payments have been
made.
6.9 Sales or Mergers. Borrower will (a) not sell or dispose of any of its
assets, including the Collateral, except in the ordinary and usual course of its
business or (b) merge or consolidate, or permit any of its subsidiaries to merge
or consolidate with or into any business or entity.
6.10 Government Accounts. Borrower will immediately notify Lender if any
of Borrower's accounts arise out of contracts with the United States, any state
or municipality, or any department, agency or instrumentality thereof, and
execute any instruments and take any steps required by Lender in order that all
monies due and to become due under such contracts shall be assigned to Lender.
6.11 Reimbursement. Borrower will reimburse Lender on demand for any sums
paid or advanced by Lender to satisfy any tax, lien or security interest or
other encumbrance on the Collateral, to provide insurance on the Collateral or
to pay for the maintenance and preservation of the Collateral; provided however,
that Lender shall not be obligated to make any such payments or deposits. Any
such sums paid or advanced by Lender shall be deemed secured by the Collateral
and constitute part of the Obligations.
6.12 Repair. Borrower will maintain all of its assets and property in good
repair and working order.
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6.13 Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered (to the extent not
already registered) with the United States Patent and Trademark Office or the
United States Patent and Trademark Office or the United States Copyright Office,
as applicable, any additional intellectual property rights developed or acquired
by Borrower from time to time, including, without limitation, which are material
to the business of the Borrower and/or any of its subsidiaries, revisions or
additions to the intellectual property rights currently owned by the Borrower,
provided that Borrower shall not be required to make such registration if it
reasonably determines that there are valid business reasons for not so doing.
Borrower shall execute and deliver such instruments, agreements and documents,
including, without limitation, the Intellectual Property Security Agreements, as
Lender shall reasonably request from time to time to perfect the Lender's
security interests in the Borrower's intellectual property rights.
(b) Borrower shall (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property Collateral, (ii) use its best
efforts to detect infringements of the Intellectual Property Collateral and
promptly advise Lender in writing of material infringements detected and (iii)
not allow any Intellectual Property Collateral to be abandoned, forfeited or
dedicated to the public without the written consent of Lender, which shall not
be unreasonably withheld.
(c) Lender may audit Borrower's Intellectual Property Collateral to confirm
compliance with this Section 6.13, provided such audit may not occur more often
than once per year, unless an Event of Default has occurred and is continuing.
Lender shall have the right, but not the obligation, to take, at Borrower's sole
expense, any actions that Borrower is required under this Section 6.13 to take,
but which Borrower fails to take, after fifteen (15) days' notice to Borrower.
Borrower shall reimburse and indemnify Lender for all reasonable costs and
reasonable expenses incurred in the reasonable exercise of its rights under this
Section 6.13.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall constitute
Default:
7.1 Any representation or warranty made in this Agreement or the Merger
Agreement by or on behalf of the Borrower to the Lender shall be materially
false on the date as of which made.
7.2 Nonpayment of principal or interest due under the Note within 7
calendar days following the date when due.
7.3 The breach by the Borrower of any of the covenants contained in this
Agreement or the Merger Agreement, which default shall not have been cured
within 20 calendar days after written notice thereof is given to the Borrower by
the Lender.
7.4 The occurrence of default or an event of default under any of the Loan
Documents, or under any other material agreement, instrument or document with
respect to borrowed money to which the Borrower is a party, which remains
uncured for 15 calendar days after written notice thereof is given to the
Borrower.
7.5 The Borrower shall (i) have an order for relief entered with respect to
it under the federal bankruptcy laws as now or hereafter in effect, (ii) make an
assignment for the benefit of creditors, (iii) apply for, seek, consent to,
acquiesce in, or have appointed for it or any substantial portion of its
property a receiver, custodian, trustee, examiner, liquidator or similar
official for it or any substantial part of its property, (iv) institute any
proceeding seeking an order for relief under the Federal bankruptcy laws as now
or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other
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pleading denying the material allegations of any such proceeding filed against
it, (v) take any corporate action to authorize or effect any of the foregoing
actions set forth in this Section 7.5.
7.6 This Agreement or the Intellectual Property Security Agreements shall
for any reason fail to create a valid and perfected security interest in any
collateral purported to be covered thereby, except as permitted by the terms of
such agreements, or this Agreement or any of the other Loan Documents shall fail
to remain in full force or effect or any action shall be taken to discontinue or
to assert the invalidity or unenforceability thereof.
7.7 A Change in Control (other than pursuant to the Merger Agreement) shall
have occurred.
7.8 Borrower shall make any payment to, or any payment shall be made on
account of any Indebtedness other that Indebtedness permitted under Section 6.5,
except as may be agreed to by Lender.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1 Acceleration. If any Default described in Section 7.5 occurs with
respect to the Borrower, the Obligations shall immediately become due and
payable without any election, notice or action on the part of the Lender. If any
other Default occurs, the Lender may declare the Obligations to be due and
payable, whereupon the Obligations shall become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which the
Borrower hereby expressly waives.
8.2 Amendments. The Lender and the Borrower may enter into written
agreements supplemental hereto for the purpose of adding or modifying any
provisions to the Loan Documents or changing in any manner the rights of the
Lender or the Borrower hereunder or waiving any Default hereunder. To be
effective, any such amendment or waiver must be in writing and signed by the
Lender and the Borrower.
8.3 Preservation of Rights, No Adverse Impact. No delay or omission of the
Lender to exercise any right under this Agreement or any of the Loan Documents
shall impair such right or be construed to be a waiver of any Default or an
acquiescence therein. Any single or partial exercise of any such right shall not
preclude other or further exercise thereof or the exercise of any other right,
and no waiver, amendment or other variation of the terms, conditions or
provisions of the Loan Documents whatsoever shall be valid unless in writing
signed by the Lender, and then only to the extent in such writing specifically
set forth. All remedies contained in the Loan Documents, or by law afforded
shall be cumulative and all shall be available to the Lender until the
Obligations have been paid in full.
8.4 Remedies.
(a) Upon the occurrence and during the continuance of a Default, the Lender
may proceed to protect and enforce to Lender's rights by suit in equity, action
of law and/or other appropriate proceeding either for specific performance of
any covenant or condition contained in this Agreement, any Loan Document or in
any instrument or document delivered to the Lender pursuant hereto, or in the
exercise of any rights, remedies or powers granted in this Agreement, any Loan
Document and/or any such instrument or document the Lender may proceed to
declare the obligations under this Agreement or any Loan Document to be due and
payable pursuant to Section 8.1 hereof and the Lender proceed to enforce payment
of such documents as provided herein, or in any Loan Document, and may offset
and apply toward the payment of such amount any indebtedness of the Lender to
the Borrower.
(b) Upon the occurrence and during the continuance of a Default, the Lender
may enter and take possession of all Collateral and the premises on which they
are located, and in the Lender's sole discretion operate and use Borrower's
equipment, whether or not Collateral hereunder, complete work in process, apply
as Borrower's attorney-in-fact for domestic or foreign patents or other
intellectual property rights with respect to inventions and seek registration or
assignment, foreign and domestic, of any trademarks, trade names, styles, logos
or copyrights, and sell, lease or license the Collateral to third persons or
associations without being liable to Borrower on account of any losses, damage
or depreciation that may
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occur as a result thereof so long as Lender shall act reasonably and in good
faith; and at the Lender's option and without notice to Borrower (except as
specifically herein provided) Lender may sell, lease, assign and deliver the
whole or any part of the Collateral, or any substitute therefor or any addition
thereto, at public or private sale, for cash, upon credit, or for future
delivery, at such prices and upon such terms as Lender deems advisable,
including without limitation, the right to sell or lease in conjunction with
other property, real or personal, and allocate the sale or lease proceeds among
the items of property sold without the necessity of the Collateral being present
at any such sale or lease, or in view of prospective purchasers thereof. Lender
shall give Borrower at least ten (10) days' by hand delivery at or by United
States first-class mail, postage prepaid (in which event notice shall be deemed
to have been given when so deposited in the mail), to the address specified
herein, of the time and place of any public or private sale or other disposition
unless the Collateral is perishable, threatens to decline speedily in value, or
is the type customarily sold in a recognized market. Upon such sale, Lender may
become the purchaser of the whole or any part of the Collateral, discharged from
all claims and free from any right of redemption. In case of any such sale by
Lender of all or any of said Collateral on credit or for future delivery,
property so sold may be retained by Lender until the selling price is paid by
the purchaser. Lender shall incur no liability in case of the failure of the
purchaser to take up and pay for the property so sold. In case of any such
failure, the said property may again be sold.
(c) The Lender for a term to commence on the date of this Agreement and
continuing thereafter until all debts and Obligations of any kind or character
owing from Borrower to Lender are fully paid and discharged, may enter and use
all premises or places of business which Borrower presently has or may hereafter
have and where any of said Collateral may be located, and the Lender may use all
machinery and equipment owned or leased by Borrower and all goodwill, patent
rights, trade names, or logos, whether or not Collateral hereunder.
(d) Borrower will assemble the Collateral in a single location at a place
to be designated by Lender and make the Collateral at all times secure and
available to Lender.
(e) At Borrower's expense the Lender in its own name or in the name of
others may communicate with account debtors in order to verify with them to
Lender's satisfaction the existence, amount and terms of any accounts or
contract rights and also notify account debtors that Collateral has been
assigned to Lender and that payments shall be made directly to Lender. Upon
request of Lender, Borrower will so notify such account debtors and will
indicate on all billings to such account debtors that their accounts must be
paid to Lender. Borrower does hereby appoint Lender and its agents as Borrower's
attorney-in-fact: to collect, compromise, endorse, sell or otherwise deal with
the Collateral or proceeds thereof in its own name or in the name of the
Borrower; to endorse the Batter upon any notes, checks, drafts, money orders, or
other instruments, documents, receipts or Collateral that may come into its
possession and to apply the same in full or part payment of any amounts owing to
Lender; to sign and endorse the Batter upon any documents, instruments, drafts
against account debtors, assignments, verifications and notices in connection
with Accounts, and any instrument or document relating thereto or to Borrower's
rights therein; and to give written notice to any office and officials of the
United States Post Office to effect such change or changes of address that all
mail addressed to Borrower may be delivered directly to Lender. Borrower hereby
grants to its said attorney-in-fact full power to do any and all things
necessary to be done in and about the premises as fully and effectually as
Borrower might or could do, and hereby ratifies all that its attorney-in-fact
shall lawfully do or cause to be done by virtue hereof. This power of attorney
is coupled with an interest and is irrevocable for the term of this Agreement
for all transactions hereunder and thereafter as long as Borrower may be
indebted to Lender.
8.5 Application of Proceeds. Any and all proceeds of any Collateral
realized or obtained by the Lender upon exercise of its rights and remedies
hereunder, shall be applied to the amounts outstanding
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under this Agreement or any other Loan Document, after payment of any and all
costs and expenses, fees and commission and taxes of such sale, collection or
other realization, in accordance with the following:
(a) Any and all proceeds of any Collateral shall first be applied to
the payment of any and all expenses, charges or other amounts which may be
due and owing under this Agreement or the Loan Documents; and
(b) Any and all proceeds of any Collateral remaining after application
as provided in paragraph (a) above shall be applied to the payment of
principal, interest or charges outstanding with respect to the Loans or
under the Note; and
(c) Any surplus remaining after application as provided in paragraphs
(a) and (b) above, shall be paid to the Borrower, or its successors or
assigns, or to whomsoever may be lawfully entitled to receive the same.
ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Representations. All representations and warranties of the
Borrower contained in this Agreement shall survive delivery of the Notes and the
making of the Loan herein contemplated.
9.2 Headings. Section headings in the Loan Documents are for convenience
of reference only, and shall not govern the interpretation of any of the
provisions of the Loan Documents.
9.3 Entire Agreement. The Loan Documents and the Merger Agreement embody
the entire agreement and understanding between the Borrower and the Lender and
supersede all prior agreements and understandings between the Borrower and the
Lender relating to the subject matter thereof.
9.4 No Third Party Beneficiary. This Agreement shall not be construed so
as to confer any right or benefit upon any Person other than the parties to this
Agreement and their respective successors and assigns.
9.5 Expenses. The Borrower agrees to pay, on demand, all of the Lender's
own out-of-pocket expenses (including reasonable attorneys' fees) incurred in
connection with preparing, executing and delivering this Agreement and the Loan
Documents and all related instruments and documents executed and delivered in
connection herewith, and in connection with any and all amendments and/or
modifications of the Loan Documents. Upon the occurrence of a Default, and so
long as a Default is continuing, Borrower shall pay to Lender on demand all
expenses incurred in connection with the collection and enforcement of all
Obligations under the Loan Documents including, without limitation, all
reasonable attorneys' fees, and all reasonable costs incurred by Lender in
connection with the collection and enforcement of the Obligations and in
connection with any proceeding commenced by or against Borrower under Title 11
of the U.S. Code.
9.6 Indemnity. Borrower hereby indemnifies the Lender and its respective
directors, officers, employees, affiliates and agents (collectively,
"Indemnified Persons") against, and agrees to hold each such Indemnified Person
harmless from, any and all losses, claims, damages and liabilities, including
claims brought by any officer, director or shareholder or former officer,
director or shareholder of Borrower, and related expenses including reasonable
counsel fees and expenses, incurred by such Indemnified Person arising out of
any claim, litigation, investigation or proceeding (whether or not such
Indemnified Person is a party thereto) relating to any transactions, services or
matters that are the subject of the Loan Documents; provided, however, that such
indemnity shall not apply to any such losses, claims, damages, or liabilities or
related expenses determined by a court of competent jurisdiction to have arisen
from the gross negligence or willful misconduct of such Indemnified Person. All
amounts due hereunder shall be payable on demand and shall constitute
Obligations hereunder.
9.7 Severability of Provisions. Any provision in any Loan Document that is
held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as
to that jurisdiction, be inoperative, unenforceable, or
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invalid without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.8 Nonliability of Lender. The relationship between the Borrower and the
Lender shall be solely that of borrower and lender. The Lender shall have no
fiduciary responsibilities to the Borrower. The Lender undertakes no
responsibility to the Borrower to review or inform the Borrower of any matter in
connection with any phase of the Borrower's business or operations.
9.9 CHOICE OF LAW. THIS AGREEMENT AND THE LOAN DOCUMENTS (OTHER THAN THOSE
CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS (AND NOT THE LAW OF
CONFLICTS) OF THE COMMONWEALTH OF MASSACHUSETTS.
9.10 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS AND THE
UNITED STATES DISTRICT COURTS SITTING THERIN FOR THE PURPOSE OF ANY SUIT, ACTION
OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY LOAN
DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF
ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT
IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO
BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE LENDER OR ANY AFFILIATE OF
THE LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR ANY LOAN DOCUMENT SHALL BE
BROUGHT ONLY IN A COURT IN THE COMMONWEALTH OF MASSACHUSETTS.
9.11 WAIVER OF JURY TRIAL. THE BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY
JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER
SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO,
OR CONNECTED WITH THIS AGREEMENT OR ANY LOAN DOCUMENT OR THE RELATIONSHIP
ESTABLISHED THEREUNDER.
9.12 Further Assurances. The Borrower, at its own expense, shall do, make,
execute and deliver all such additional and further acts, deeds, assurances,
documents, instruments and certificates as the Lender may reasonably require,
including, without limitation, (a) executing, delivering and filing financing
statements and continuation statements under the Uniform Commercial Code, (b)
obtaining governmental and other third party consents and approvals, and (c)
obtaining waivers from mortgagees and landlords.
9.13 Successors and Assigns. The terms and provisions of this Agreement
and the Loan Documents shall be binding upon and inure to the benefit of the
Borrower and the Lender and their respective successors and assigns, except that
the Borrower shall not have the right to assign its rights or obligations under
the Loan Documents.
9.14 Giving Notice. All notices and other communications provided to any
party hereto under this Agreement or any other Loan Document shall be in writing
or by telex or by facsimile and addressed or delivered to such party at their
addresses as follows (unless otherwise designated in writing to the other
parties): (i) if to Borrower, at the address set forth below the Borrower's name
on the signature page hereto and (ii) if to Lender, at the address set forth the
Lender's name on the signature page hereto. Any notice, if mailed and properly
addressed with postage prepaid, shall be deemed given three Business Days
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after being sent; any notice, if transmitted by telex or facsimile, shall be
deemed given when transmitted (answer back confirmed in the case of telexes).
9.15 Change of Address. The Borrower and the Lender may each change the
address for service of notice upon it by a notice in writing to the other
parties hereto.
9.16 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by the
Borrower and the Lender.
9.17 Revised Article 9 of the Uniform Commercial Code. The parties
acknowledge and agree to the following provisions in anticipation of the
possible application, in one or more jurisdictions, to the transactions
contemplated hereby of the revised Article 9 of the UCC in the form or
substantially in the form approved by the American Law Institute and the
National Conference of Commissioners on Uniform State Law and contained in the
1999 official text of Revised Article 9 ("Revised Article 9"). In applying the
law of any jurisdiction in which Revised Article 9 is in effect, the Collateral
shall be and include all assets of the Borrower, whether or not within the scope
of Revised Article 9. The Collateral shall include, without limitation, the
following categories of assets (as defined in Revised Article 9) belonging to
the Borrower or in which the Borrower has any rights: goods (including
inventory, equipment and any accessions thereto), instruments (including
promissory notes), documents, accounts, chattel paper (whether tangible or
electronic), deposit accounts, letter-of-credit rights (whether or not the
letter of credit is evidenced by a writing), commercial tort claims, securities
and all other investment property, general intangibles (including payment
intangibles and software), supporting obligations and any and all proceeds of
any thereof, wherever located, whether now owned and hereafter acquired. The
Lender may at any time and from time to time file financing statements,
continuation statements and amendments thereto that describe the Collateral as
all assets of the Borrower or words of similar effect and which contain any
other information required by Part 5 of the Revised Article 9 for the
sufficiency or filing office acceptance of any financing statement, continuation
statement or amendment, including whether the Borrower is an organization, the
type of organization and any organization identification number issued to the
Borrower. The Borrower agrees to furnish any such information to the Lender
promptly upon request. Any such financing statements, continuation statements or
amendments may be signed by the Lender on behalf of the Borrower and may be
filed at any time in any jurisdiction whether or not Revised Article 9 is then
in effect in that jurisdiction. The Borrower shall at all times and from time to
time, whether or not Revised Article 9 is in effect in any particular
jurisdiction, take such steps as the lender may reasonably request for the
Lender to obtain an acknowledgement, in form and substance satisfactory to the
Lender, of any bailee having possession of any of the Collateral that the bailee
holds such Collateral for the Lender. Nothing contained in this Section shall be
construed to narrow the scope of the Lender's security interest in any of the
Collateral or the perfection or priority thereof or to impair or otherwise limit
any of the rights, powers, privileges or remedies of the Lender hereunder except
(and then only to the extent) mandated by Revised Article 9 to the extent then
applicable.
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IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Agreement as of the date first above written.
Borrower: BROADSOFT, INC
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Address: 200 Perry Parkway
Gaithersburg, MD 20877
Lender: UNISPHERE NETWORKS, INC.
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Address: One Executive Drive
Chelmsford, MA 01824
SCHEDULES
Schedule 5.1 -- Executive Offices
Schedule 6.5 -- Permitted Liens and Indebtedness
EXHIBITS
Exhibit "A" -- Note
Exhibit "B" -- Loan Request
Exhibit "C" -- Landlord Waiver
Exhibit "D" -- Intellectual Property Security Agreement
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EXHIBIT "A"
NOTE
$ , 2000
Boston, Massachusetts
FOR VALUE RECEIVED, on the Maturity Date, BroadSoft, Inc., a Delaware
corporation having a principal place of business at ,
(the "Borrower"), promises to pay to Unisphere Networks, Inc.
(the "Lender"), or order, at , or such other place as Lender or
any holder hereof may from time to time designate, the principal sum of
[ Dollars ($ )] or, if less, the aggregate unpaid principal
amount of all Loans, in United States Dollars and in immediately available funds
as provided in the Loan and Security Agreement of even date between the Borrower
and Lender (the "Loan Agreement"), together with interest on the unpaid
principal amount hereof from time to time outstanding, at the rates and on the
dates set forth in the Loan Agreement. Interest shall be calculated on the basis
of a three hundred sixty (360) day year and actual days elapsed.
This Note is issued pursuant to, and is entitled to the benefits of, the
Loan Agreement, as it may be amended from time to time. Reference is hereby made
thereto for a statement of the terms and conditions under which this Note may be
prepaid or its maturity date accelerated. This Note is secured pursuant to the
terms of the Loan Agreement and other Loan Documents certain, and reference is
made thereto for a statement of the terms and provisions thereof. Capitalized
terms used herein and not otherwise defined herein are used with the meanings
attributed to them in the Loan Agreement.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of the Loan and the date and amount of each principal
payment hereunder.
If any payment of principal or interest is not made when due hereunder, or
if any other Default shall occur for any reason, or if the Loan Agreement shall
be terminated or not renewed for any reason whatsoever, then and in any such
event, in addition to all rights and remedies of Lender under the Loan Agreement
or any Loan Document, applicable law or otherwise, all such rights and remedies
being cumulative and enforceable alternatively, successively and concurrently,
Lender may, at its option, declare any and all of the Borrower's obligations,
liabilities and indebtednesses owing by Borrower under this Note, the Loan
Agreement and any other Loan Document (collectively, the "Obligations") to be
due and payable, whereupon the then unpaid balance thereof, together with all
interest accrued thereon or expenses incurred in connection therewith shall
forthwith become due and payable, together with all interest accruing thereafter
at the rate set forth in the Loan Agreement until the indebtedness evidenced by
this Note is paid in full, plus all costs and expenses of collection hereof,
including, without limitation, reasonable attorneys' fees and expenses.
Borrower shall pay all Lender's costs and expenses (including, without
limitation, all reasonable attorneys' fees and expenses) incurred in connection
with the enforcement of or preservation of rights under this Note on the terms
provided in the Loan Agreement.
No delay or omission on the part of the Lender in exercising any right
hereunder shall operate as a waiver of such right or of any other right of
Lender, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Borrower and every indorser or guarantor of this Note regardless of the time,
order or place of signing waives presentment, demand, protest and notices of
every kind and assents to any extension or postponement of the time of payment
or any other indulgence, to any substitution, exchange or release of collateral,
and to the addition or release of any other party or person primarily or
secondarily liable.
None of the terms or provisions of this Note may be excluded, modified, or
amended except by a written instrument duly executed on behalf of the holder
expressly referring hereto and setting forth the provision so excluded, modified
or amended. This Note shall be binding upon the successors and assigns of the
Borrower and inure to the benefit of Lender and its successors, endorsees and
assigns. If any term or provision of this Note shall be held to be invalid or
unenforceable, in whole or in part in any jurisdiction,
17
<PAGE> 321
then such invalidity or unenforceability shall only effect such term or
provision, and shall not effect such term or provision in any other jurisdiction
or any other term or provision of this Note.
BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE OR ANY OF
THE OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURTS AND SERVICE OF PROCESS IN ANY SUCH SUIT
BEING MADE UPON THE BORROWER AT THE ADDRESS PROVIDED BELOW THE BORROWER'S
EXECUTION HEREOF. BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT
IS BROUGHT IN AN INCONVENIENT COURT.
BORROWER HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION
OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS NOTE OR ANY OF THE
OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE
PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts (without giving effect to principles of conflicts
or choice of laws) and this Note shall be deemed to be made under seal.
<TABLE>
<S> <C>
ATTEST: BROADSOFT, INC.
By: ------------------------------------------------
-----------------------------------------------------
Secretary Name: ------------------------------------------------
Title:
------------------------------------------------
</TABLE>
18
<PAGE> 322
SCHEDULE OF LOAN AND PAYMENTS OF PRINCIPAL
TO
NOTE OF BROADSOFT, INC.
Dated: , 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY PRINCIPAL
OF OF INTEREST AMOUNT UNPAID
DATE LOAN PERIOD PAID BALANCE
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
</TABLE>
19
<PAGE> 323
EXHIBIT "B"
FORM OF LOAN REQUEST
BROADSOFT, INC.
[DATE]
Unisphere Networks, Inc.
1 Executive Drive
Chelmsford, MA 01824
Attn:
Re: Loan Request
Ladies and Gentlemen:
The undersigned (the "Borrower") hereby requests that you make a Loan
pursuant to the terms and conditions set forth in the Loan and Security
Agreement dated as of , 2000, by and between the Borrower and
Unisphere Networks, Inc. (the "Lender"), as the same may be amended and in
effect from time to time (the "Loan Agreement"), as set forth below. Capitalized
terms not otherwise defined herein shall have the meaning ascribed to them in
the Loan Agreement.
The Borrower hereby certifies that the conditions precedent to the Loan set
forth in Article III of the Loan Agreement have been complied with.
The Borrower hereby requests, pursuant to sec.2.1(b) of the Loan Agreement,
that the Lender make a Loan in the principal amount of $ on [Date],
(the "Drawdown Date"). We understand that this request obligates us to accept
the requested Loan on the proposed Drawdown Date.
You are hereby directed to transfer the proceeds of the requested Loan to
Borrower in accordance with the following instructions: wire to: [WIRE
INSTRUCTIONS].
Very truly yours,
BROADSOFT, INC.
By:
------------------------------------
Title:
-----------------------------------
Duly Authorized
20
<PAGE> 324
EXHIBIT "C"
LANDLORD WAIVER
WHEREAS, Unisphere Networks, Inc. ("Lender") has or is about to provide
certain financing arrangements to BroadSoft, Inc. ("Borrower") pursuant to which
Lender has been or will be granted a security interest in all of the Borrower's
personal property described on Schedule A attached hereto and made a part hereof
(hereafter "Collateral") and,
WHEREAS, the Collateral has or may become affixed to or be located on,
wholly or in part, the certain real estate located at , as more
fully described in the Lease (defined below), a true and correct copy of which
is attached hereto as Exhibit A (the "Premises") and,
WHEREAS, the undersigned has an interest in the Premises as owner and
lessor pursuant to a certain lease between Borrower, as tenant, and the
undersigned, as landlord, dated (together with any amendments or
modifications thereof, the "Lease"),
NOW, THEREFORE, for good and valuable considerations, the receipt and
sufficient of which are hereby acknowledge, the undersigned agrees as follows:
(a) That it waives and relinquishes any landlord's lien, all rights of
levy or distraint, security interest or other interest the undersigned may
now or hereafter have in any of the Collateral whether for rent or
otherwise;
(b) That the Collateral may be installed in or located on the Premises
and shall not be deemed a fixture or part of the real estate but shall at
all times be considered personal property;
(c) That it disclaims any interest in the Collateral and agrees
neither to assert any claim to nor take any action with respect to the
Collateral while Borrower is indebted to Lender;
(d) That Lender or its representatives may, in accordance with the
terms of the Loan and Security Agreement between Borrower and Lender dated
, 2000 ("Loan Agreement"), enter upon the Premises at any time
to inspect or remove the Collateral and may advertise and conduct a public
or private auction thereon;
(e) That Lender, at its option, may, in accordance with the Loan
Agreement, enter the Premises for the purpose of repossessing, removing,
selling or otherwise dealing with the Collateral, and such license shall be
irrevocable and shall continue from the date Lender enters the Premises for
as long as Lender deems necessary but not to exceed a period of sixty (60)
days after the receipt by Lender of written notice by the undersigned
directing removal of the Collateral; provided that during such sixty (60)
day period, Lender makes payment of rent at the rate set forth in the
Lease, prorated on a per diem basis to be determined on a thirty (30) day
month, without incurring any other obligations of Borrower. Lender may,
subsequent to the sixty (60) day period, remain on said Premises for an
additional period not to exceed ninety (90) days at the rental provided
under the Lease, prorated on a per diem basis to be determined on a thirty
(30) day month, without incurring any other obligation of Borrower. Lender
shall promptly repair any damages to the Premises caused directly by any
repossession or removal by Lender or its agents of the Collateral or Lender
or its agents otherwise dealing with any of the Collateral and shall
indemnify, pay, protect, defend and hold harmless the undersigned, its
lender and their respective successors and assigns from and against any
loss, claim, damage, cost or expense arising directly out of Lender's entry
onto the Premises or Lender's repossession, removal, sale or otherwise
dealing with the Collateral; and
(f) The undersigned agrees to give notice in writing by certified or
registered mail to Lender of any Event of Default (as defined in the Lease)
by Borrower under the provisions of the Lease. Any such notice shall be
promptly sent to (or such address as Lender may specify in writing to the
undersigned):Unisphere Networks, Inc., at One Executive Drive, Chelmsford,
MA 01824, Attn: .
21
<PAGE> 325
Upon receipt of said notice, Lender shall thereupon have the right, but not
the obligation, to cure any monetary Event of Default within five (5) days
thereafter and any non-monetary Event of Default within ten (10) days
thereafter. In no event shall Lender be permitted to cure any monetary Event of
Default more than twice in any Lease Year (as defined in the Lease). Any payment
made or act done by Lender to cure any such Event of Default shall not
constitute an assumption of the Lease or any obligations of Borrower or the
undersigned.
This waiver may not be changed or terminated orally and is binding upon the
undersigned and the heirs, personal representatives, successors and assigns of
the undersigned and inures to the benefit of Lender and the successors and
assigns of Lender.
Dated this day of , 2000.
[LANDLORD]
By:
----------------------------------------
Title:
----------------------------------------
Address:
----------------------------------------
----------------------------------------
[ ]
COUNTY OF
The foregoing instrument was acknowledged this day of
, 2000 by , the of (the
"Landlord"), to be his free act and deed in said capacity and the free act and
deed of the Landlord, on behalf of said Landlord, before me,
--------------------------------------
Notary Public
My commission expires:
22
<PAGE> 326
SCHEDULE A TO UCC-1
All of the Borrower's now owned or hereafter acquired:
(a) Inventory, including but not limited to all inventory, supplies,
raw materials, work in process, goods, merchandise, finished inventory and
other tangible personal property held by the Borrower for sale or for
lease, furnished or to be furnished under contracts of service, or used or
consumed in the Borrower's business, goods in transit, any and all returned
or repossessed inventory or merchandise and all documents of title (whether
negotiable or negotiable) representing any of the foregoing, and all
proceeds thereof; and
(b) Accounts including, but not limited to all accounts, all rights of
the Borrower to payment for goods sold or leased or for services rendered,
all accounts receivable of the Borrower; all obligations owing to the
Borrower evidenced by an instrument or chattel paper; all rights of the
Borrower to payment under a contract not yet earned by performance; all
obligations owing to the Borrower of any kind or nature, including all
writings, if any, evidencing the same, including all instruments, drafts,
acceptances and chattel paper; any and all proceeds of any of the
foregoing. Further included within the term "Accounts" are all right, title
and interest of Borrower in and to the Inventory which gave rise to any
Account, (including the right of stoppage in transit) all guaranties of,
and security and liens with respect to any Account, and all Accounts,
Documents and Contract Rights of Borrower as defined in the Uniform
Commercial Code; and
(c) Instruments, and Chattel Paper, including all instruments and
chattel paper as defined in the Uniform Commercial Code and all proceeds
thereof; and
(d) General Intangibles, including but not limited to all general
intangibles as defined in the Uniform Commercial Code, the Intellectual
Property Collateral described on the attached Schedule A-1 and all proceeds
thereof, including without limitation, any and all rights of Borrower to
any refund of any tax assessed against Borrower or paid by Borrower, loss
carry-back tax refunds, insurance premium rebates, unearned premiums,
insurance proceeds, choses in action, names, trade names, goodwill, trade
secrets, computer programs, computer records, data, computer software,
customer lists, patents, patent rights, patent applications, patents
pending, patent licenses or assignments, development ideas and concepts,
licenses, permits, franchises, telephone numbers, literary rights, rights
to performance, trademarks, trademark applications, trademark rights,
logos, intellectual property, copyrights, proprietary or other processes,
blueprints, drawings, designs, diagrams, plans, reports, charts, catalogs,
manuals, research, literature, proposals, cost estimates, routes, and other
reproductions on paper or otherwise, of any and all concepts or ideas,
whether or not related to the business or operations of Borrower; and
(e) Equipment, including but not limited to all equipment, vehicles,
machinery, tools, furniture, fixtures, trade fixtures and parts. Further
included within the term "Equipment" is all tangible personal property
utilized in the conduct of the Borrower's business (but excluding any
property hereinbefore defined as "Inventory") and all additions,
accessions, substitutions, components, and replacements thereto, therefor
and thereof and all proceeds thereof; and
(f) Other tangible and intangible property; and all products and
proceeds of the above, including insurance proceeds.
23
<PAGE> 327
EXHIBIT "D"
INTELLECTUAL PROPERTY SECURITY AGREEMENT
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of
, 2000 between Unisphere Networks, Inc. ("Lender") and BroadSoft,
Inc. ("Grantor").
RECITALS
A. Lender has agreed to make certain advances of money and to extend
certain financial accommodations to Grantor (the "Loans") in the amounts and
manner set forth in that certain Loan and Security Agreement between Lender and
Grantor dated of even date herewith (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"). Lender is willing to make
the Loans to Grantor, but only upon the condition, among others, that Grantor
shall grant to Lender a security interest in, among other things, certain
Copyrights, Trademarks and Patents to secure the obligations of Grantor under
the Loan Agreement. Capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted to
Lender a security interest in all of Grantor's right, title and interest,
whether presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
as collateral security for the prompt and complete payment when due of its
obligations under the Loan Agreement, Grantor hereby represents, warrants,
covenants and agrees as follows:
AGREEMENT
To secure its obligations under the Loan Agreement, Grantor grants and
pledges to Lender a security interest in all of Grantor's right, title and
interest in, to and under its Intellectual Property Collateral (including
without limitation those Copyrights, Patents and Trademarks listed on Schedules
A, B and C hereto), together with all goodwill of the business symbolized by the
Trademarks, the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all re-issues, divisions
continuations, renewals, extensions and continuations-in-part thereof, and all
proceeds of each of the foregoing (including, without limitation, all license
royalties and proceeds of infringement suits).
This security interest is granted in conjunction with the security interest
granted to Lender under the Loan Agreement. The rights and remedies of Lender
with respect to the security interest granted hereby are in addition to those
set forth in the Loan Agreement and the other Loan Documents, and those which
are now or hereafter available to Lender as a matter of law or equity. Each
right, power and remedy of Lender provided herein or in the Loan Agreement or
any of the Loan Documents, or now or hereafter existing at law or in equity
shall be cumulative and concurrent and shall be in addition to every right,
power or remedy provided for herein and the exercise by Lender of any one or
more of the rights, powers or remedies provided for in this Intellectual
Property Security Agreement, the Loan Agreement or any of the other Loan
Documents, or now or hereafter existing at law or in equity, shall not preclude
the simultaneous or later exercise by any person, including Lender, of any or
all other rights, powers or remedies.
24
<PAGE> 328
IN WITNESS WHEREOF, the parties have cause this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: BROADSOFT, INC.
200 Perry Parkway
Gaithersburg, MD
20877
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
LENDER:
Address of Lender:UNISPHERE NETWORKS,
INC.
One Executive Drive
Chelmsford, MA 01824
By:
--------------------------------------
Name:
Title:
[ ]
COUNTY OF
The foregoing instrument was acknowledged this day of
, 2000 by , the of BroadSoft, Inc.
(the "Grantor"), to be his free act and deed in said capacity and the free act
and deed of the Grantor, on behalf of said Grantor, before me,
--------------------------------------
Notary Public
My commission expires:
[ ]
COUNTY OF
The foregoing instrument was acknowledged this day of
, 2000 by , the of Unisphere Networks,
Inc. (the "Lender"), to be his free act and deed in said capacity and the free
act and deed of the Lender, on behalf of said Lender, before me,
--------------------------------------
Notary Public
My commission expires:
25
<PAGE> 329
EXHIBIT A
COPYRIGHTS
<TABLE>
<CAPTION>
REGISTRATION/ REGISTRATION/
APPLICATION APPLICATION
DESCRIPTION NUMBER DATE
----------- ------------- -------------
<S> <C> <C>
</TABLE>
26
<PAGE> 330
EXHIBIT B
PATENTS
<TABLE>
<CAPTION>
REGISTRATION/ REGISTRATION/
APPLICATION APPLICATION
DESCRIPTION NUMBER DATE
----------- ------------- -------------
<S> <C> <C>
</TABLE>
27
<PAGE> 331
EXHIBIT C
TRADEMARKS
<TABLE>
<CAPTION>
REGISTRATION/ REGISTRATION/
APPLICATION APPLICATION
DESCRIPTION NUMBER DATE
----------- ------------- -------------
<S> <C> <C>
</TABLE>
28
<PAGE> 332
EXHIBIT E
FORM OF OPINION OF COUNSEL TO THE COMPANY
Note: This exhibit contains the substantive opinions that will be rendered by
counsel to the Company at the Closing. The parties acknowledge that such legal
opinions will be delivered in a manner that is consistent with such counsel's
standard form of legal opinion, with customary qualifications, assumptions and
limitations.
1. The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware. The
Company has all requisite corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it.
2. The authorized capital stock of the Company consists of [repeat
description in first sentence of Section 2.2 of the Agreement]. All of the
issued and outstanding shares of capital stock of the Company are duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. Except as set forth on the Disclosure Schedule and, with respect to
redemption rights, other than pursuant to the Company Charter, to the best of
such counsel's knowledge, there are no outstanding or authorized options,
warrants, rights, contracts, calls, puts, rights to subscribe, conversion rights
or other agreements or commitments to which the Company is a party or which are
binding upon the Company providing for the issuance or redemption of any of its
capital stock. All of the issued and outstanding shares of capital stock of the
Company were issued in compliance with the registration requirements (or valid
exemptions therefrom) under the Securities Act of 1933.
3. The Company has all requisite corporate power and authority to execute
and deliver the Agreement and to perform its obligations thereunder. The
execution and delivery by the Company of the Agreement and the consummation by
the Company of the transactions contemplated thereby have been duly and validly
authorized by all necessary corporate action (including the Requisite
Stockholder Approval) on the part of the Company. The Agreement has been duly
and validly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as rights to indemnity may be limited under applicable
laws and except as enforcement may be limited by applicable bankruptcy,
insolvency and similar laws affecting the rights of creditors generally.
4. Except as set forth in Section 2.4 of the Agreement or Section 2.4 of
the Disclosure Schedule, neither the execution and delivery by the Company of
the Agreement, nor the consummation by the Company of the transactions
contemplated thereby, (i) conflicts with or violates any provision of the
Company Charter or By-laws of the Company, (ii) to the best knowledge of such
counsel, conflicts with, results in a breach of, constitutes (with or without
due notice or lapse of time or both) a default under, results in the
acceleration of obligations under, creates in any party the right to terminate,
modify or cancel, or requires any notice, consent or waiver under, any material
contract or instrument known to such counsel to which the Company is a party or
by which the Company is bound or to which any of its material assets is subject,
(iii) to the best of such counsel's knowledge, results in the imposition of any
Security Interest upon any material assets of the Company or (iv) violates any
statute, rule or regulation, or any order, writ, injunction or decree known to
such counsel, that is applicable to the Company or any of its properties or
assets.
5. Except as set forth in the Disclosure Schedule, to the best of such
counsel's knowledge, there is no Legal Proceeding which is pending or threatened
against the Company which, if determined adversely to the Company, could have a
Company Material Adverse Effect or which in any manner challenges or seeks to
prevent, enjoin, alter or delay the transactions contemplated by this Agreement.
6. Upon the filing of the Certificate of Merger with the Secretary of State
of Delaware, the Merger will be effective under Delaware law.
<PAGE> 333
EXHIBIT F
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
AGREEMENT dated as of , 200 , by and between Unisphere
Networks, Inc. with its principal place of business at One Executive Drive,
Chelmsford, Massachusetts 01824 ("Unisphere"), and ("the Employee").
WHEREAS, pursuant to an Agreement and Plan of Merger dated as of October
20, 2000 (the "Merger Agreement") among Unisphere, Pitcher Acquisition Corp., a
Delaware corporation ("Acquisition"), and BroadSoft, Inc. ("BroadSoft"),
Acquisition was merged with and into BroadSoft (the "Merger") and BroadSoft was
the surviving corporation in the Merger;
WHEREAS, the Employee's stock and stock options in BroadSoft were acquired
or assumed, respectively, by Unisphere in connection with the Merger;
WHEREAS, following the Merger, BroadSoft was owned, directly or indirectly,
by Unisphere (collectively with its subsidiaries, the "Company");
WHEREAS, the Company deems it of significant importance to its Business (as
hereinafter defined) and the Merger to prohibit the Employee from engaging in a
business in competition with the Business, or interfering with the Company's
employees, and, in order to accomplish such purpose, believes it to be in its
best interest to enter into an agreement with the Employee restricting such
actions; and
WHEREAS, Employee is willing to refrain from engaging in certain activities
which would be to the detriment of the Company in consideration of payments
received by the Employee in connection his employment with the Company and with
the Merger.
Accordingly, the parties hereto agree as follows:
1. Term. This Agreement shall be for a term commencing on the date hereof
and ending on the later to occur of (i) the [second/third](1) anniversary of
this Agreement and (ii) one year following the date on which the Employee shall
cease to be an employee of the Company and its affiliates (the "Restricted
Period"). Nothing contained in this Agreement shall confer on the Employee any
right to continue in the employ of the Company or its affiliates.
2. Covenant Against Competition, Other Covenants. The Employee
acknowledges that (i) the Employee's work for BroadSoft and the Company has
given and will continue to give him access to the confidential affairs and
proprietary information of the Company; (ii) the value of all goodwill resulting
from the operation of the business of the Company and its subsidiaries and other
affiliates should properly belong to the Company; (iii) the covenants and
agreements of the Employee contained in this Section 2 are essential to such
goodwill of the Company; (iv) the highly innovative and proprietary technologies
developed by the Company and its predecessors offer the Company a distinct
competitive advantage, and (v) the Company would not have entered into the
Merger Agreement but for the covenants and agreements set forth in this Section
2. Accordingly, the Employee covenants and agrees that:
2.1. Non-Competition Covenant. By and in consideration of the salary and
benefits provided and to be provided by BroadSoft and the Company and by and in
consideration of the consideration received pursuant to the Merger Agreement,
and further in consideration of the Employee's exposure to the proprietary
information of the Company, the Employee covenants and agrees that, during the
Restricted Period, he shall not within any state in the United States or within
any country in which the Company directly or indirectly conducts, or reasonably
expects to conduct, its business, directly or indirectly, (i) engage in the
Business, or (ii) render any services to any person, corporation, partnership or
other entity (other than the Company or its affiliates) engaged in the Business
or (iii) become financially
---------------
1 Agreements executed by Michael Tessler and Scott Hoffpauir will provide for
the third anniversary and agreements executed by all other key employees will
provide for the second anniversary.
<PAGE> 334
interested in any person, corporation, partnership or other entity engaged in
the Business (other than the Company or its affiliates) as a partner,
shareholder, principal, agent, employee, consultant or in any other relationship
or capacity; provided, however, that, notwithstanding the foregoing, the
Employee may (i) invest in securities of any entity solely for investment
purposes and without participating in the business thereof, if (A) the Employee
does not, directly or indirectly own 5% or more of any class of securities of
such entity, (B) the Employee does not, directly or indirectly, provide any
services to such entity and, (C) the Employee does not become a member of the
board of directors of such entity, and (ii) invest in venture capital funds
solely for investment purposes so long as the Employee is not a controlling
person or manager of, or member of a group which controls or manages such
entity. For purposes hereof, "Business" shall mean: the development,
manufacturing, marketing or sale of any product that is competitive with any
product developed, manufactured, marketed or sold, or under development (as
evidenced by a written development plan), by the Company while the Employee is
employed by the Company, provided, that the term "Business" shall not include
the business of any entity that acquires the Company after the date hereof
(whether by stock acquisition, asset acquisition, merger or otherwise).
2.2. Non-Solicitation. During the Restricted Period, the Employee shall
not, without the Company's prior written consent, directly or indirectly,
solicit or encourage any person who, at any time during the period that the
Employee is employed by the Company or its affiliates, is or was an employee or
independent contractor of the Company or its subsidiaries to terminate his, her
or its relationship with the Company or any of its subsidiaries. From the date
hereof through the end of the Restricted Period, the Employee will not, whether
for his or her own account or for the account of any other person, firm,
corporation or other business organization, intentionally interfere with the
Company's or any of its subsidiaries' relationship with any person who, at any
time during the period that the Employee is employed by the Company or its
affiliates, is or was a customer or client of the Company or any of its
subsidiaries. During the Restricted Period, the Employee shall not hire or
engage (on behalf of the Employee or any other person or entity) any employee or
independent contractor who is employed or engaged by the Company at the time of
the Employee's termination of employment or at any time within the 180-day
period which precedes such termination.
3. Rights and Remedies upon Breach of the Agreement.
3.1. The Employee acknowledges and agrees that any breach by him of any of
the provisions of Section 2 (the "Restrictive Covenants") will result in
irreparable injury and damage for which money damages might not provide an
adequate remedy. Therefore, if the Employee breaches, or threatens to commit a
breach of, any of the provisions of Section 2, the Company and its subsidiaries
shall have the following rights and remedies, each of which rights and remedies
shall be independent of the other and severally enforceable, and all of which
rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company and its subsidiaries under law or
in equity (including, without limitation, the recovery of damages): the right
and remedy to seek to have the Restrictive Covenants specifically enforced
(without posting bond and without the need to prove damages) by any court having
equity jurisdiction, including, without limitation, the right to an entry
against the Employee of restraining orders and injunctions (preliminary,
mandatory, temporary and permanent) against violations, threatened or actual,
and whether or not then continuing, of such covenants.
3.2. The Employee acknowledges that any breach of the Restrictive Covenants
will entitle the Company to seek specific performance and other equitable
relief. The existence of any claim or cause of action by the Employee, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement of the Restrictive Covenants.
4. Severability. The Employee acknowledges and agrees that (i) he has had
an opportunity to seek advice of counsel in connection with this Agreement and
(ii) the Restrictive Covenants are reasonable in geographical and temporal scope
and in all other respects. If it is determined that any of the provisions of
this Agreement, including, without limitation, any of the Restrictive Covenants,
or any part thereof, is invalid or unenforceable, the remainder of the
provisions of this Agreement shall not thereby be affected and shall be given
full effect, without regard to the invalid portions.
2
<PAGE> 335
5. Duration and Scope of Covenants. If any court, arbitrator or other
decision-maker of competent jurisdiction determines that any of Employee's
covenants contained in this Agreement, including, without limitation, any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographical scope of such provision, then, after such determination
has become final and unappealable, the duration or scope of such provision, as
the case may be, shall be reduced so that such provision becomes enforceable
and, in its reduced form, such provision shall then be enforceable and shall be
enforced.
6. Dispute Resolution. Any and all claims, disputes, and controversies
between the Employee and the Company with respect to interpretation,
construction, breach, enforceability, and/or enforcement of the terms and
provisions of this Agreement may be submitted for resolution by the state and
federal courts in Montgomery County, Maryland, and the parties hereby expressly
consent to the non-exclusive personal jurisdiction of the state and federal
courts in Montgomery County, Maryland in any lawsuit arising from or related to
this Agreement.
7. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, five days after the date of deposit in the United States mails as
follows:
(i) If to the Company, to:
Unisphere Networks, Inc.
One Executive Drive
Chelmsford, Massachusetts 01824
Attention: President and Chief Executive Officer
with a copy to:
Unisphere Networks, Inc.
One Executive Drive
Chelmsford, Massachusetts 01824
Attention: Suzanne Zabitchuck, Esq.
(ii) If to the Employee, at:
Any such person may by notice given in accordance with this Section 7 to the
other parties hereto designate another address or person for receipt by such
person of notices hereunder.
8. Entire Agreement. Other than with respect to that certain Employee
Patent and Secrecy Agreement between the Company and the Employee dated as of
the date hereof, the Merger Agreement and that certain Employee Nondisclosure
and Noncompete Agreement (with the exception of paragraphs 8, 9 and 10 thereof)
with BroadSoft (which agreements shall survive in their entirety without regard
to this Agreement), this Agreement contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all other prior
agreements, written or oral, with respect thereto.
9. Waivers and Amendments. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any such right power or privilege nor any
single or partial exercise of any such right, power or privilege, preclude any
other or further exercise thereof or the exercise of any other such right, power
or privilege.
3
<PAGE> 336
10. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
11. Assignment. This Agreement, and the Employee's rights and obligations
hereunder, may not be assigned by the Employee; any purported assignment by the
Employee in violation hereof shall be null and void. In the event of any sale,
transfer or other disposition of all or substantially all of the Company's
assets or business, whether by merger, consolidation or otherwise, the Company
may assign this Agreement and the rights hereunder.
12. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, permitted assigns,
heirs, executors and legal representatives.
13. Counterpart. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original but all such counterparts together shall constitute one and the same
instrument. Each counterpart may consist of two copies hereof each signed by one
of the parties hereto.
14. Survival. Anything contained in this Agreement to the contrary
notwithstanding, the provisions of Sections 2, 3 and 6, and the other provisions
of this Agreement (to the extent necessary to effectuate the survival of
Sections 2, 3 and 6), shall survive termination of this Agreement.
15. Headings. The headings in this Agreement are for reference only and
shall not affect the interpretation of this Agreement.
[Signature page to follow]
4
<PAGE> 337
IN WITNESS WHEREOF, the parties hereto have signed their names as of the
day and year first above written.
UNISPHERE NETWORKS, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
EMPLOYEE
--------------------------------------
5
<PAGE> 338
EXHIBIT G-1
, 2000
Unisphere Networks, Inc.
1 Executive Drive
Chelmsford, MA 01824
Credit Suisse First Boston Corporation
UBS Warburg LLC
J.P. Morgan & Co. Inc.
as Representatives of the several
Underwriters to be named in the
within-mentioned Underwriting Agreement
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Dear Sirs:
As an inducement to the Underwriters to execute the Underwriting Agreement,
pursuant to which an offering will be made that is intended to result in the
establishment of a public market for shares of common stock, par value $0.01 per
share (the "Securities"), of Unisphere Networks, Inc. (the "Company"), the
undersigned hereby agrees that from the date hereof and until 180 days after the
initial public offering (the "Commencement Date") of the Securities pursuant to
the Underwriting Agreement to which you are or expect to become parties, the
undersigned will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of Securities or securities convertible
into or exchangeable or exercisable for any shares of Securities, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Securities, whether any such aforementioned
transaction is to be settled by delivery of the Securities or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation ("CSFBC"). In addition, the
undersigned agrees that, without the prior written consent of CSFBC, it will
not, during the period commencing on the date hereof and ending 180 days after
the Commencement Date, make any demand for or exercise any right with respect
to, the registration of any Securities or any security convertible into or
exercisable or exchangeable for the Securities.
Any Securities received upon exercise of options granted to the undersigned
also will be subject to this Agreement. Any Securities acquired by the
undersigned in the open market and any Securities sold by the undersigned to the
Representatives in the initial public offering pursuant to the Underwriting
Agreement will not be subject to this Agreement. Any transfer without
consideration of Securities (i) as a bona fide gift or gifts, (ii) to a family
member or trust, (iii) to an affiliate or (iv) to any wholly-owned subsidiary,
limited partner, member or stockholder of the undersigned may be made, provided
the transferee agrees in advance in writing to be bound by the terms of this
Agreement. Any transfers made pursuant to this paragraph shall not be counted in
determining whether the limits set forth in the second and third paragraphs of
this letter have been exceeded.
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Securities if such transfer would constitute a violation or breach of this
Agreement.
<PAGE> 339
This Agreement shall be binding on the undersigned and the successors,
heirs, personal representatives and assigns of the undersigned. This Agreement
shall lapse and become null and void if (i) the Commencement Date shall not have
occurred on or before December 31, 2000, (ii) the Company notifies the
Underwriters in writing prior to the execution of the Underwriting Agreement
that it does not intend to proceed with the Offering, or (iii) the Underwriting
Agreement is terminated in accordance with its terms.
Very truly yours,
--------------------------------------
Name:
--------------------------------------
2
<PAGE> 340
EXHIBIT G-2
, 2000
Unisphere Networks, Inc.
1 Executive Drive
Chelmsford, MA 01824
Credit Suisse First Boston Corporation
UBS Warburg LLC
J.P. Morgan & Co. Inc.
as Representatives of the several
Underwriters to be named in the
within-mentioned Underwriting Agreement
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, New York 10010-3629
Dear Sirs:
As an inducement to the Underwriters to execute the Underwriting Agreement,
pursuant to which an offering will be made that is intended to result in the
establishment of a public market for shares of common stock, par value $0.01 per
share (the "Securities"), of Unisphere Networks, Inc. (the "Company"), the
undersigned hereby agrees that from the date hereof and until 180 days after the
initial public offering (the "Commencement Date") of the Securities pursuant to
the Underwriting Agreement to which you are or expect to become parties, the
undersigned will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of Securities or securities convertible
into or exchangeable or exercisable for any shares of Securities, enter into a
transaction that would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of the Securities, whether any such aforementioned
transaction is to be settled by delivery of the Securities or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation ("CSFBC"). In addition, the
undersigned agrees that, without the prior written consent of CSFBC, it will
not, during the period commencing on the date hereof and ending 180 days after
the Commencement Date, make any demand for or exercise any right with respect
to, the registration of any Securities or any security convertible into or
exercisable or exchangeable for the Securities.
Notwithstanding the foregoing, that number of the Securities will be
released (the "Early Release") from the 180-day restriction described in the
preceding paragraph equal to the product of (x) 1,500,000 (such number to be
adjusted for stock splits, stock combinations, recapitalizations and the like)
and (y) the quotient of (i) the number of Securities owned by the undersigned
(excluding Securities acquired by the undersigned in the open market), divided
by (ii) the number of Securities owned in the aggregate by the undersigned and
the other stockholders of the Company who are signatories to this form of
Agreement (together, the "Release Stockholders") (excluding Securities acquired
by the Release Stockholders in the open market) (it being agreed that no
fractional shares will be released as of the result of such formula and that the
number of Securities calculated pursuant to such formula shall be rounded down
to the nearest whole share) provided that (1) any such transactions may be
effected beginning on the later to occur of (a) the 90th day after the
Commencement Date and (b) the 20th trading day after the first complete trading
day following the public announcement of the Company's quarterly financial
results for the first quarter ending after the initial public offering (the
"Early Release Date"), (2) the last reported sales price of the Securities on
The Nasdaq Stock Market's National Market is at least twice the offering price
of the Securities in the initial public offering (such numbers to be adjusted
for stock splits, stock combinations, recapitalizations and the like) for 20 of
the 30 trading days ending on the last trading day preceding the Early Release
Date, (3) the undersigned gives CSFBC
<PAGE> 341
and the Company prior written notice (the "Written Notice") of its intention to
take any of the actions set forth in the first sentence of this paragraph
pursuant to such Early Release, indicating the number of Securities in respect
of which the undersigned desires to dispose pursuant to such Early Release, and
(4) the undersigned executes any such action only through CSFBC or any of its
affiliates acting as broker (the "Brokerage Action"), unless otherwise agreed in
writing by CSFBC. In the event that, within 30 days after the Early Release
Date, CSFBC has not received Written Notices from Release Stockholders
indicating an intention to dispose of an aggregate of 1,500,000 Securities,
additional Securities held by each Release Stockholder so notifying CSFBC of an
intention by such stockholders to so dispose (collectively, the "Notifying
Release Stockholders") shall be released from the 180-day restriction described
in the preceding paragraph, up to an amount equal to the product of (A) the
difference of 1,500,000 minus all Securities covered by Written Notices
regarding an intention to dispose and (B) the quotient of (i) the number of
Securities owned by each Notifying Release Stockholder (excluding Securities
acquired by Notifying Release Stockholders in the open market) by (ii) the
number of Securities owned in the aggregate by all Notifying Release
Stockholders (excluding Securities acquired by all Notifying Release
Stockholders in the open market); provided that such Notifying Release
Stockholder provides prior written notice to CSFBC and the Company of the number
of additional Securities it desires to dispose pursuant to the last sentence of
this paragraph (the "Additional Written Notice"). The undersigned shall be
entitled to apportion the Securities subject to Early Release under this
paragraph among itself and its affiliates in such proportion as it deems
appropriate. In no case, however, shall the total number of Securities intended
to be disposed by a Release Shareholder, a Notifying Release Shareholder or
their respective affiliates be greater than the sum of the Securities available
for Early Release under this paragraph of such Release Shareholder, Notifying
Release Shareholder or their respective affiliates.
CSFBC shall effect the Brokerage Action within a period not to exceed 30
days from the date of the delivery of each Written Notice and each Additional
Written Notice to CSFBC in a manner at its sole discretion deemed necessary to
minimize the impact of such transactions on he trading price of the Securities.
CSFBC shall consult with the undersigned regarding the amount and timing of the
Brokerage Action and shall use its reasonable best efforts to effect the
Brokerage Action involving in the aggregate for the Release Stockholders no less
than 250,000 Securities (such number to be adjusted for stock splits, stock
combinations, recapitalizations and the like) per calendar week. Notwithstanding
anything to the contrary set forth herein, the Release Stockholders may effect
the transactions described above with respect to, in the aggregate, no more than
1,500,000 Securities (such number to be adjusted for stock splits, stock
combinations, recapitalizations and the like) pursuant to the preceding
paragraph upon satisfaction of the conditions set forth herein.
In addition, the Release Stockholders shall be entitled to receive the
benefit (along with any other associated obligations) of any additional early
release provisions granted to any other holder of Securities, except for the
early release of not more than 500,000 Securities from lock-up arrangements set
forth in the registration statement on Form S-1 relating to the initial public
offering (excluding Securities that may be released pursuant to the second
paragraph of this Agreement) including, without limitation, the early release of
Securities held by employees or consultants of the Company. None of the 500,000
Securities subject to early release under this paragraph shall include any
Securities held by Siemens Corporation or its affiliates.
Any Securities received upon exercise of options granted to the undersigned
also will be subject to this Agreement. Any Securities acquired by the
undersigned in the open market and any Securities sold by the undersigned to the
Representatives in the initial public offering pursuant to the Underwriting
Agreement will not be subject to this Agreement. Any transfer without
consideration of Securities (i) as a bona fide gift or gifts, (ii) to a family
member or trust, (iii) to an affiliate or (iv) to any wholly-owned subsidiary,
limited partner, member or stockholder of the undersigned may be made, provided
the transferee agrees in advance in writing to be bound by the terms of this
Agreement. Any transfers made pursuant to this paragraph shall not be counted in
determining whether the limits set forth in the second and third paragraphs of
this letter have been exceeded.
2
<PAGE> 342
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Securities if such transfer would constitute a violation or breach of this
Agreement.
This Agreement shall be binding on the undersigned and the successors,
heirs, personal representatives and assigns of the undersigned. This Agreement
shall lapse and become null and void if (i) the Commencement Date shall not have
occurred on or before December 31, 2000, (ii) the Company notifies the
Underwriters in writing prior to the execution of the Underwriting Agreement
that it does not intend to proceed with the Offering, or (iii) the Underwriting
Agreement is terminated in accordance with its terms.
Very truly yours,
--------------------------------------
Name:
----------------------------------
3
<PAGE> 343
EXHIBIT H
FORM OF OPINION OF COUNSEL TO THE BUYER
AND THE TRANSITORY SUBSIDIARY
Note: This exhibit contains the substantive opinions that will be rendered by
counsel to the Buyer and the Transitory Subsidiary at the Closing. The parties
acknowledge that such legal opinions will be delivered in a manner consistent
with such counsel's standard form of legal opinion, with customary
qualifications, assumptions and limitations.
1. Each of the Buyer and the Transitory Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. The Buyer has all requisite corporate power and authority to
carry on the business in which it is engaged and to own and use the properties
owned and used by it.
2. The authorized capital stock of the Company consists of [repeat
description in first sentence of Section 3.2 of the Agreement]. Except as set
forth in Section 3.2 of the Agreement, to the best of such counsel's knowledge,
there are no outstanding or authorized options, warrants, rights, contracts,
calls, puts, rights to subscribe, conversion rights or other agreements or
commitments to which the Company is a party or which are binding upon the
Company providing for the issuance or redemption of any of its capital stock.
3. Each of the Buyer and the Transitory Subsidiary has all requisite
corporate power and authority to execute and deliver the Agreement and (in the
case of the Buyer) the Escrow Agreement and to perform its obligations
thereunder. The execution and delivery by the Buyer and the Transitory
Subsidiary of the Agreement and (in the case of the Buyer) the Escrow Agreement
and the consummation by the Buyer and the Transitory Subsidiary of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action on the part of the Buyer and the Transitory
Subsidiary, respectively. The Agreement and (in the case of the Buyer) the
Escrow Agreement have been duly and validly executed and delivered by the Buyer
and the Transitory Subsidiary and constitute valid and binding obligations of
the Buyer and the Transitory Subsidiary, enforceable against the Buyer and the
Transitory Subsidiary in accordance with their terms, except as rights to
indemnity may be limited under applicable laws and except as enforcement may be
limited by applicable bankruptcy, insolvency and similar laws affecting the
rights of creditors generally.
4. Except as set forth in Section 3.3 of the Agreement, neither the
execution and delivery by the Buyer or the Transitory Subsidiary of the
Agreement or (in the case of the Buyer) the Escrow Agreement, nor the
consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated thereby, (i) conflicts with or violates any provision of the
charter or by-laws of the Buyer or the Transitory Subsidiary, (ii) to the best
of such counsel's knowledge, conflicts with, results in a breach of, constitutes
(with or without due notice or lapse of time or both) a default under, results
in the acceleration of obligations under, creates in any party the right to
terminate, modify or cancel, or requires any notice, consent or waiver under,
any material contract or instrument known to such counsel to which the Buyer or
the Transitory Subsidiary is a party, or (iii) violates any statute, rule or
regulation, or any order, writ, injunction or decree known to such counsel that
is applicable to the Buyer or the Transitory Subsidiary or any of their
properties or assets.
5. Upon the filing of the Certificate of Merger with the Secretary of State
of Delaware, the Merger will be effective under Delaware law.
<PAGE> 344
Annex B
October 18, 2000
PRIVILEGED AND CONFIDENTIAL
Board of Directors
BroadSoft, Inc.
220 Perry Parkway
Gaithersburg, MD 20877
Gentlemen:
We understand that BroadSoft Inc., a Delaware corporation ("Company"),
Unisphere Networks, Inc., a Delaware corporation ("Parent") and Pitcher
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent
("Subsidiary"), propose to enter into an Agreement and Plan of Merger, a draft
of which has been provided to us, dated October 17, 2000 (the "Agreement"),
pursuant to which Subsidiary will be merged with and into the Company, which
will be the surviving entity and which will become a wholly-owned subsidiary of
Parent (the "Merger"). Pursuant to the Merger, as more fully described in the
Agreement, we understand that the merger consideration to BroadSoft shareholders
and option holders (the "Consideration") shall be equal to: (W) 4.96 million
shares and options of Unisphere in the event that the Unisphere Average Stock
Price is greater than $136.93; (X) 5.46 million shares and options of Unisphere
in the event that the Unisphere Average Stock Price is greater than $89.36 and
less than $124.39; 6.71 million shares and options of Unisphere in the event
that the Unisphere Average Stock Price is less than $72.72; (Y) a number of
shares and options of Unisphere determined by dividing (a) $488 million by (b)
the Unisphere Average Stock Price in the event the Unisphere Average Stock Price
is greater than $72.72 and less than $89.36; or (Z) a number of shares and
options of Unisphere determined by dividing (a) $679 million by (b) the
Unisphere Average Stock Price in the event the Unisphere Average Stock Price is
greater than $124.39 and less than $136.93. The "Unisphere Average Stock Price"
shall be equal to the average price for Unisphere common stock for the 20
consecutive trading days immediately following the later of, the public
announcement of Unisphere's first reported quarterly results as a public
company, or the 30th day following the closing of the Merger. The terms and
conditions of the Merger are set forth in more detail in the Agreement.
You have asked our opinion as investment bankers as to whether the
Consideration to be received by the stockholders of the Company under the
Agreement pursuant to the Merger is fair to such stockholders from a financial
point of view, as of the date of the Agreement. As you are aware, we were not
retained to nor did we advise the Company with respect to alternatives to the
Merger or the Company's underlying decision to proceed with or effect the
Merger. Further, we were not requested to nor did we
<PAGE> 345
Board of Directors
BroadSoft, Inc.
October 18, 2000
Page Two
solicit or assist the Company in soliciting indications of interest from third
parties for all or any part of the Company.
In connection with our opinion, we have, among other things: (i) reviewed
publicly available financial and other data with respect to the Parent, and
certain other relevant financial and operating data relating to the Company and
Parent made available to us; (ii) reviewed the financial terms and conditions of
the Agreement in the form presented to the Company's Board of Directors; (iii)
compared the financial position and operating results of the Company and Parent
with certain other public companies which we deemed to be relevant; (iv)
considered the financial terms, to the extent publicly available, of selected
recent business combinations which we deemed to be comparable, in whole or in
part, to the Merger; (v) discussed with representatives of the management of the
Company and Parent certain information of a business and financial nature
regarding the Company and Parent, including the historical and current financial
condition and operating results, as well as the future prospects, of the Company
and Parent; (vi) made inquiries regarding and discussed the Merger and the
Agreement and other matters related thereto with the Company's counsel; and
(vii) performed such other analyses and examinations as we have deemed
appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Company and Parent provided to us by their respective managements,
upon their advice and with your consent we have assumed for purposes of our
opinion that the forecasts have been reasonably prepared on bases reflecting the
best available estimates and judgments of their respective managements at the
time of preparation as to the future financial performance of Company and Parent
and that they provide a reasonable basis upon which we can form our opinion. We
have also assumed that there have been no material changes in the Company's or
Parent's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of counsel and independent accountants
to the Company as to all legal and financial reporting matters with respect to
the Company, the Merger and the Agreement. We have assumed that the Merger will
be consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act of 1933 (the "Securities Act"), the Securities
Exchange Act of 1934 and all other applicable federal and state statutes, rules
and regulations. In addition, we have not assumed responsibility for reviewing
any patent applications, technology license agreements, individual credit files,
etc. or making an independent evaluation, appraisal or physical inspection of
any of the assets or liabilities (contingent or otherwise) of the Company or
Parent, nor have we been furnished with any such appraisals. We are not experts
in the evaluation of patents or copyrights and have assumed, with your consent,
that patents and copyrights of each of the Company and Parent are valid and
enforceable. Finally, our opinion is based on economic, monetary and market and
other conditions as in effect on, and the information made
<PAGE> 346
Board of Directors
BroadSoft, Inc.
October 18, 2000
Page Three
available to us as of, the date hereof. Accordingly, although subsequent
developments may affect this opinion, we have not, by delivering this opinion,
assumed any obligation to update, revise or reaffirm this opinion.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Agreement, without any
further amendments thereto, and without waiver by the Company of any of the
conditions to its obligations thereunder. We also have assumed that in the
course of obtaining the necessary regulatory approvals for the Merger, no
restrictions will be imposed that could have a material adverse effect on the
contemplated benefits of the Merger.
We have been retained solely for the purpose of advising you on the
fairness, from a financial point of view, of the Merger and will receive a fee
for our services.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the stockholders of
the Company pursuant to the Merger was fair to such stockholders from a
financial point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the Parent
Common Stock may trade at any future time. The Consideration to be received by
the stockholders of the Company pursuant to the Merger is based upon a fixed
exchange ratio and, accordingly, the market value of the Consideration may vary
significantly.
This opinion is directed to the Board of Directors of the Company in its
consideration of the Merger and is not a recommendation to any stockholder as to
how such stockholder should vote with respect to the Merger, nor is any person
or entity entitled to rely hereon other than the Board of Directors of the
Company. Further, this opinion addresses only the financial fairness of the
Consideration to be received by the stockholders of the Company and does not
address the relative merits of the Merger and any alternatives to the Merger,
the Company's underlying decision to proceed with or affect the Merger or any
other aspect of the Merger. This opinion may not be used or referred to by the
Company, or quoted or disclosed to any person in any manner, or filed with any
regulatory authority without our prior written consent.
Very truly yours,
W.R. HAMBRECHT+CO LLC
<PAGE> 347
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a non-stock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a non-stock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
<PAGE> 348
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
2
<PAGE> 349
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
3
<PAGE> 350
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
4
<PAGE> 351
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article EIGHTH of Unisphere's amended and restated certificate of
incorporation provides that Unisphere will indemnify its directors and officers
(a) against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement incurred in connection with any litigation or other
legal proceeding (other than an action by or in the right of Unisphere) brought
against him by virtue of his position as a director or officer of Unisphere if
he acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, Unisphere's best interests, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful and
(b) against all expenses (including attorneys' fees) and amounts paid in
settlement incurred in connection with any action by or in the right of
Unisphere brought against him by virtue of his position as a director or officer
of Unisphere if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, our best interests, except that no indemnification
shall be made with respect to any matter as to which such person will have been
adjudged to be liable to Unisphere, unless a court determines that, despite such
adjudication but in view of all of the circumstances, he is entitled to
indemnification of such expenses. Notwithstanding the foregoing, to the extent
that a director or officer has been successful, on the merits or otherwise,
including, without limitation, the dismissal of an action without prejudice,
Unisphere is required to indemnify him against all expenses (including
attorneys' fees) incurred in connection therewith. Expenses shall be advanced to
the director or officer at his request, provided that he undertakes to repay the
amount advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless Unisphere determines that the
applicable standard of conduct required for indemnification has not been met. If
Unisphere determines that the director or officer did not meet the applicable
standard of conduct required for indemnification, or if Unisphere fails to make
an indemnification payment within 60 days after such payment is claimed by such
person, such person is permitted to petition the court to make an independent
determination as to whether such person is entitled to indemnification. As a
condition precedent to the right of indemnification, the director or officer
must give notice to Unisphere of the action for which indemnity is sought and
Unisphere has the right to participate in such action or assume the defense
thereof.
Article EIGHTH of Unisphere's amended and restated certificate of
incorporation further provides that the indemnification provided therein is not
exclusive and that if the Delaware General Corporation Law is amended to expand
the indemnification permitted to directors or officers, Unisphere must indemnify
those persons to the fullest extent permitted by such laws as so amended.
Article NINTH of the Unisphere's amended and restated certificate of
incorporation provides that none of Unisphere's directors will be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits the
elimination or limitation of liability of directors for breach of fiduciary
duty.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1(1) Agreement and Plan of Merger by and among the Registrant,
Pitcher Acquisition Corp. and BroadSoft, Inc., dated as of
October 20, 2000
3.1(2) Amended and Restated Certificate of Incorporation
3.2(2) Amended and Restated By-Laws
</TABLE>
II-1
<PAGE> 352
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
4.1(2) Specimen certificate for shares of common stock
5.1* Opinion of Hale and Dorr LLP
10.1* 1999 Stock Incentive Plan, as amended
10.2* 2000 Employee Stock Purchase Plan
10.3(2) Amended and Restated Employment Agreement by and between the
Registrant and James A. Dolce, Jr., dated as of July 31,
2000
10.4(2) Employment Agreement by and between the Registrant and John
J. Connolly, dated as of June 16, 2000
10.5(2) Employment Agreement by and between Castle Networks, Inc.
and Thomas M. Burkardt, dated as of March 7, 1999
10.6(2) Employment Agreement by and between Redstone Communications,
Inc. and Kurt A. Melden, dated as of March 14, 1999
10.7(2) Employment Agreement by and between Redstone Communications,
Inc. and Jeffrey P. Lindholm, dated as of March 14, 1999
10.8(2) Employment Agreement by and between the Registrant and
Martin C. Clague, dated as of April 1, 1999
10.9(2) Severance Agreement by and between the Registrant and Martin
C. Clague, dated as of January 31, 2000
10.10(2)+ Custom Sales Agreement by and between Redstone
Communications, Inc. and IBM Corporation, dated as of
January 1, 1999
10.11(2)+ Manufacturing Services Agreement by and between Redstone
Communications, Inc. and ACT Manufacturing, Inc., dated as
of December 3, 1998
10.12(2)+ Software License Agreement by and between Trillium Digital
Systems, Inc. and Castle Networks, Inc., dated as of
February 25, 1998
10.13(2) Master Purchase Agreement by and between the Registrant and
Siemens AG, dated as of August 1, 2000
10.14(2) Tax Sharing Agreement by and between the Registrant and
Siemens Corporation, dated as of July 31, 2000
10.15(2) OEM Software Distribution Agreement for DirX-Metadirectory
Software by and between the Registrant and Siemens AG, dated
as of March 29, 2000
10.16(2) Software Development Services Agreement by and between the
Registrant and Siemens Canada Limited, dated as of May 12,
2000
10.17(2) One Executive Drive Lease by and between MGI Chelmsford
Corp. and Castle Networks, Inc., dated as of February 25,
1999, with respect to property located at One Executive
Drive, Chelmsford, Massachusetts
10.18(2) Lease by and between 235 Littleton Road Associates, Inc. and
the Registrant, dated as of December 15, 1999, with respect
to property located at 235 Littleton Road, Westford,
Massachusetts
10.19(2) Lease by and between Glenborough Fund V and Redstone
Communications, Inc., dated as of February 17, 1999, with
respect to property located at 5 Carlisle Drive, Westford,
Massachusetts
10.20(2) Lease by and between Trustees of Michelson Farm-Westford
Technology Park Trust and the Registrant, dated as of March
31, 2000, as amended, with respect to property located at
Michelson Farm-Westford Technology Park, Westford,
Massachusetts
</TABLE>
II-2
<PAGE> 353
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.21(2) Lease by and between Trustees of Michelson Farm-Westford
Technology Park Trust and the Registrant, dated as of June
30, 2000, with respect to property located at Michelson
Farm-Westford Technology Park, Westford, Massachusetts
10.22(2) Lease by and between 7800 Congress L&C and the Registrant,
dated as of May 9, 2000, with respect to property located at
7800 Congress Avenue, Boca Raton, Florida
10.23(2) Agreement and General Release by and between the Registrant
and George S. Donahue, dated as of July 31, 2000
10.24(2)+ Master Manufacturing and Purchase Agreement by and between
Castle Networks, Inc. and Bull HN Information Systems Inc.,
acting through Bull Electronics Unit (now known as Celestica
Inc.), dated as of September 22, 1999
10.25(2) OEM Agreement for Purchase of Products by and between Castle
Networks, Inc. and Siemens Information and Communication
Networks, Inc., dated as of December 23, 1998
10.26(2) Purchase Order by and between Siemens Telecom Innovation
Centre and Redstone Communications, Inc., dated as of
October 1, 1999
10.27(2) Preliminary Unsupported Software License Agreement by and
between the Registrant and Fujitsu Siemens Computers, dated
as of August 7, 2000
10.28(2) Engineering Services Agreement by and between the Registrant
and Siemens Information and Communication Networks, Inc.,
dated as of October 2, 2000
10.29(2) Assignment and Assumption Agreement by and between the
Registrant and Siemens Information and Communication
Networks, Inc., dated as of April 1, 1999, as amended
10.30* Master Purchase Agreement by and between the Registrant and
Siemens SAS, ICN fixed Networks, dated as of December 15,
2000.
21.1(2) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
23.4 Consent of PricewaterhouseCoopers LLP
23.5 Consent of Arthur Andersen LLP
23.6 Consent of Arthur Andersen LLP
23.7* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
99.1(1) Opinion of W.R. Hambrecht + Co. LLC
99.2* Form of Proxy Card of BroadSoft, Inc.
</TABLE>
---------------
(1) Attached as an Annex to the proxy statement/prospectus, which is part of
this Registration Statement.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-43144), as amended, and incorporated herein by reference.
* To be filed by amendment.
+ We have sought confidential treatment from the Securities and Exchange
Commission for selected portions of this exhibit. The omitted portions have
been separately filed with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
II-3
<PAGE> 354
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) That every prospectus (i) that is filed pursuant to the
immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to this registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such
post-effective amendment 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.
(3) 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 foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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.
(4) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of this registration statement through the date of responding to the
request.
(5) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in this registration statement when it became effective.
II-4
<PAGE> 355
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Chelmsford,
Massachusetts on December 20, 2000.
UNISPHERE NETWORKS, INC.
By: /s/ JAMES A. DOLCE, JR.
------------------------------------
James A. Dolce, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
--------- ------ ----
<C> <S> <C>
/s/ JAMES A. DOLCE, JR. President, Chief Executive December 20, 2000
--------------------------------------------------- Officer and Director
James A. Dolce, Jr. (Principal Executive
Officer)
/s/ JOHN J. CONNOLLY Chief Financial Officer and December 20, 2000
--------------------------------------------------- Treasurer (Principal
John J. Connolly Financial and Accounting
Officer)
/s/ ANTHONY T. MAHER Chairman of the Board of December 20, 2000
--------------------------------------------------- Directors
Anthony T. Maher
/s/ CRAIG R. BENSON Director December 20, 2000
---------------------------------------------------
Craig R. Benson
/s/ DIETRICH A. DIEHN Director December 20, 2000
---------------------------------------------------
Dietrich A. Diehn
/s/ STEPHAN D. HOWALDT Director December 20, 2000
---------------------------------------------------
Stephan D. Howaldt
/s/ PETER T. MORRIS Director December 20, 2000
---------------------------------------------------
Peter T. Morris
/s/ DANIEL E. SMITH Director December 20, 2000
---------------------------------------------------
Daniel E. Smith
</TABLE>
II-5
<PAGE> 356
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Unisphere Networks, Inc.:
Under date of October 16, 2000, we reported on the consolidated balance
sheets of Unisphere Networks, Inc. and Subsidiaries (an indirect majority-owned
subsidiary of Siemens AG) as of September 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from January 12, 1999 (date of inception) to September 30, 1999 and
for the year ended September 30, 2000. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule listed in Item 16(b). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Boston, Massachusetts
October 16, 2000
UNISPHERE NETWORKS, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIODS EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
For the period January 12, 1999 to September
30, 1999.................................... $ -- $ -- $ -- $ --
For the Year Ended September 30, 2000......... $ -- $ 827 $ -- $ 827
Reserve for sales returns, allowances & other:
For the period January 12, 1999 to September
30, 1999.................................... $ -- $ -- $ -- $ --
For the Year Ended September 30, 2000......... $ -- $1,267 $ (204) $1,063
</TABLE>
T-1
<PAGE> 357
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1(1) Agreement and Plan of Merger by and among the Registrant,
Pitcher Acquisition Corp. and BroadSoft, Inc., dated as of
October 20, 2000
3.1(2) Amended and Restated Certificate of Incorporation
3.2(2) Amended and Restated By-Laws
4.1(2) Specimen certificate for shares of common stock
5.1* Opinion of Hale and Dorr LLP
10.1* 1999 Stock Incentive Plan, as amended
10.2* 2000 Employee Stock Purchase Plan
10.3(2) Amended and Restated Employment Agreement by and between the
Registrant and James A. Dolce, Jr., dated as of July 31,
2000
10.4(2) Employment Agreement by and between the Registrant and John
J. Connolly, dated as of June 16, 2000
10.5(2) Employment Agreement by and between Castle Networks, Inc.
and Thomas M. Burkardt, dated as of March 7, 1999
10.6(2) Employment Agreement by and between Redstone Communications,
Inc. and Kurt A. Melden, dated as of March 14, 1999
10.7(2) Employment Agreement by and between Redstone Communications,
Inc. and Jeffrey P. Lindholm, dated as of March 14, 1999
10.8(2) Employment Agreement by and between the Registrant and
Martin C. Clague, dated as of April 1, 1999
10.9(2) Severance Agreement by and between the Registrant and Martin
C. Clague, dated as of January 31, 2000
10.10(2)+ Custom Sales Agreement by and between Redstone
Communications, Inc. and IBM Corporation, dated as of
January 1, 1999
10.11(2)+ Manufacturing Services Agreement by and between Redstone
Communications, Inc. and ACT Manufacturing, Inc., dated as
of December 3, 1998
10.12(2)+ Software License Agreement by and between Trillium Digital
Systems, Inc. and Castle Networks, Inc., dated as of
February 25, 1998
10.13(2) Master Purchase Agreement by and between the Registrant and
Siemens AG, dated as of August 1, 2000
10.14(2) Tax Sharing Agreement by and between the Registrant and
Siemens Corporation, dated as of July 31, 2000
10.15(2) OEM Software Distribution Agreement for DirX-Metadirectory
Software by and between the Registrant and Siemens AG, dated
as of March 29, 2000
10.16(2) Software Development Services Agreement by and between the
Registrant and Siemens Canada Limited, dated as of May 12,
2000
10.17(2) One Executive Drive Lease by and between MGI Chelmsford
Corp. and Castle Networks, Inc., dated as of February 25,
1999, with respect to property located at One Executive
Drive, Chelmsford, Massachusetts
10.18(2) Lease by and between 235 Littleton Road Associates, Inc. and
the Registrant, dated as of December 15, 1999, with respect
to property located at 235 Littleton Road, Westford,
Massachusetts
10.19(2) Lease by and between Glenborough Fund V and Redstone
Communications, Inc., dated as of February 17, 1999, with
respect to property located at 5 Carlisle Drive, Westford,
Massachusetts
</TABLE>
<PAGE> 358
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.20(2) Lease by and between Trustees of Michelson Farm-Westford
Technology Park Trust and the Registrant, dated as of March
31, 2000, as amended, with respect to property located at
Michelson Farm-Westford Technology Park, Westford,
Massachusetts
10.21(2) Lease by and between Trustees of Michelson Farm-Westford
Technology Park Trust and the Registrant, dated as of June
30, 2000, with respect to property located at Michelson
Farm-Westford Technology Park, Westford, Massachusetts
10.22(2) Lease by and between 7800 Congress L&C and the Registrant,
dated as of May 9, 2000, with respect to property located at
7800 Congress Avenue, Boca Raton, Florida
10.23(2) Agreement and General Release by and between the Registrant
and George S. Donahue, dated as of July 31, 2000
10.24(2)+ Master Manufacturing and Purchase Agreement by and between
Castle Networks, Inc. and Bull HN Information Systems Inc.,
acting through Bull Electronics Unit (now known as Celestica
Inc.), dated as of September 22, 1999
10.25(2) OEM Agreement for Purchase of Products by and between Castle
Networks, Inc. and Siemens Information and Communication
Networks, Inc., dated as of December 23, 1998
10.26(2) Purchase Order by and between Siemens Telecom Innovation
Centre and Redstone Communications, Inc., dated as of
October 1, 1999
10.27(2) Preliminary Unsupported Software License Agreement by and
between the Registrant and Fujitsu Siemens Computers, dated
as of August 7, 2000
10.28(2) Engineering Services Agreement by and between the Registrant
and Siemens Information and Communication Networks, Inc.,
dated as of October 2, 2000
10.29(2) Assignment and Assumption Agreement by and between the
Registrant and Siemens Information and Communication
Networks, Inc., dated as of April 1, 1999, as amended
10.30* Master Purchase Agreement by and between the Registrant and
Siemens SAS, ICN fixed Networks, dated as of December 15,
2000.
21.1(2) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
23.4 Consent of PricewaterhouseCoopers LLP
23.5 Consent of Arthur Andersen LLP
23.6 Consent of Arthur Andersen LLP
23.7* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
99.1(1) Opinion of W.R. Hambrecht + Co. LLC
99.2* Form of Proxy Card of BroadSoft, Inc.
</TABLE>
---------------
(1) Attached as an Annex to the proxy statement/prospectus, which is part of
this Registration Statement.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-43144), as amended, and incorporated herein by reference.
* To be filed by amendment.
+ We have sought confidential treatment from the Securities and Exchange
Commission for selected portions of this exhibit. The omitted portions have
been separately filed with the Securities and Exchange Commission.
